Unemployment Game Theory

So I'm unemployed and I've been looking at a couple of small contract jobs to earn some money while the hunt for more stable re-employment continues.

This is small-time work, nothing compared to my original salary, or even compared to my current unemployment benefits. In fact, my unemployment benefits will be reduced by 75% of the amount of my side-job earnings. So, if I do $400 worth of work, I end up $100 richer... and then I pay taxes on the $100 I've got left.

So my choice here is 1) spend some time working to earn a small amount money, or 2) spend my time playing video games or hanging out at the beach and end up with almost as much unearned money.

A: "It's Complicated"

Q: "How would Facebook describe the relationship between health care and government?"

So... why is HR 3200, "America's Affordable Health Choices Act," 1017 pages long?

Stakeholders. The "HR" means that the bill has to answer to a majority of the house. The Senate will eventually have to reconcile, and the President will eventually have to sign, so it's going to have to answer to them too.

Congresspeople, Senators and Presidents have campaign promises to keep. The Legislators have lobbyists to answer to.

Finally, there are already scads of laws on the books that address the health care system. It's not like the government is out of health care presently. We've got Medicare and Medicaid already, and tax breaks for businesses who provide health care to employees, and probably a few dozen initiatives in that you and I have never heard of.

In the face of this kind of complexity, folks need to fall back upon simpler heuristics in order to make sense of what's going on.

At a basic level, you'll see those who simply believe, a priori, that government intervention is either good or bad. They don't need to know anything more to make up their minds.

At a secondary level, there are those who might note that other nations have attempted similar plans in the past. These folks would want to compare major parts of our bill with systems in Canada or Britain or elsewhere abroad.

Spend enough time studying comparative politics though, and you'll run into a chaos theory mindset. It's very difficult to measure the interactions between institutions, laws, culture, and economy. You just don't know.

One thing that I do know is that 1) laws usually have unintentional consequences, and 2) it's far easier to pass a law than it it is to change one or repeal one.

Of course, NOT doing anything ALSO has unintended consequences.

Anyone who believes that they really know, to a certainty, what will happen when 1017 pages of legal code are or are not released upon a country of 300 million citizens and hundreds of billions of dollars of health care spending is not to be trusted.

So, I guess we'll just have to see what happens.

Dope on the table

So the US is a world leader in incarceration rates. Drug convictions aren't the only reason, but they're a big reason.

The Portugese, it seems are on to something. Anyone want to convince me why decriminilisation couldn't work in the US too?

On entitlements

"keep your government hands off my Medicare."

ht: Tyler Cowen @ Marginal Revolution

On capital punishment

How sure can you be?

Don't just stand there, regulate!

Okay, so the novice left-wing attempt at single-factor explanation of our recent crisis might be that de-regulation caused it (the equally wrong novice right-wing attempt would probably blame the CRA or something).

The smarter kids, they'll say we just didn't have the RIGHT regulation. Well, yeah. So... what would that look like? Depends on what you think went wrong...

There are basically two things that had to happen for the melt down to occur:

1. Investors had to model risk improperly
2. Those modeling mistakes had to be leveraged, i.e., amplified.

All the focus on (1) is a red herring. Fighting the last war. Arguing about loan fraud enforcement or the CRA is great, but those are the WHAT, not the HOW. The "what" was tulips once, another time it was dot com stocks, another time it was sub-prime mortgages. It's going to be something else next time. I don't see why regulators would be any more likely to see the next bubble coming before the investors. They sure didn't this time around.

Leverage, that second one, that's where the fight should be. There were trillions of leveraged assets involved in the most recent crash. The troubled banks held leveraged obligations measuring huge multiples of their actual assets. Mess up in the millions and the feds probably won't ever notice. Mess up in the trillions and now we're talking about real money.

One way to take prevent excessive leverage is to change accounting rules. Of course it's just such a group of rules that the whole collateralization thing was designed to circumvent. Investors are too clever for their own good, so new regulations will need to avoid actually promoting riskier behavior as investors attempt to engage in creative arbitrage. That might not be impossible, but it will be hard.

Another way to prevent excessive leverage is to take away the money. If your kids keep getting an ice cream headache by scarfing down the chunky-monkey... well, what would you do? Yes, this is the Ron Paul argument (i.e., the Austrian School argument). Banks were taking advantage of low interest rates, borrowing the money that they were investing in this crap. It's never good to have too much money chasing too few solid investments.

Forget ice cream. Easy money is like a flame thrower If you're kids have been operating one of those willy-nilly around the house, do you come up with a complicated set of rules for where they should point it, and when, and at what power, and at what times of day and all that? Or do you just take it away? The Fed and Congress have been falling over themselves to give the kids in the financial sector more propellant than ever before. For the last year or so, the kids have just been hoarding it. For now...

As noted elsewhere, Krugman and his friends worry that if the money isn't easy enough, we'll run into a deflationary liquidity trap. How do we avoid AND avoid blowing another bubble?

Doctoring the Doctrine

Given:

• one percent doctrine
• global climate change might have some yucky side effects
• Bush "un-signed" Kyoto
  

It follows that:

• p (global warming is real, in Bush administration's eyes) < 0.01
  

Really?

Seriously guys, this is a serious problem... or it isn't. Is Waxman-Markey (cap-and-trade carbon permits bill) a serious response?

Bonus question: does it matter if the permits are initially given away or sold, provided that they can be re-sold in either case? EMH + Coase says no, right? Or do one or more fail to apply in super-regulated "markets" like energy?

Helicopter to nowhere

The new bridge to nowhere is apparently a helicopter. Congresscritter from NY funds a new 834 million dollar chopper for Obama. Obama, attempting to convince the innumerate that he's making a good faith effort to respond to looming deficits by shoring up spending, ommits the chopper from his budget proposal. Hilarity, politics, and rent-seeking ensue.

Spending 834 million on a chopper that isn't needed is, of course, what one might call a misallocation of resources. Sure, we'll use the chopper, and sure there were some side benefits like whatever Lockheed learned in building it, but the opportunity cost is the issue here. What else could have been done with that money and that labor? Just paying the 834 million in ransom to Hinchley and his lobbyists would have been a superior alternative. The cost is wasted production from the taxpayers who foot the bill, but why double the folly by wasting the labor of the chopper manufacturers? Maybe that labor could produce something that people actually want. Or maybe the workers would just take the money and retire, spending it on leisure, which is something that they probably prefer to building helicopters.

This is just one more example of kicking the structural employment can down the road. In economic terms, if what you're making isn't something that anybody wants... STOP MAKING IT. MAKE SOMETHING THAT PEOPLE... DO... WANT. You don't get that lost labor back, ever.

Still, lest we get carried away, I've made a little chart to put things in perspective. In the likely event that you can't read the legend, the costs going left to right are: AIG Bonuses (the Financial Services ones that I posted about earlier), the chopper, the overall AIG bailout, the 2008 regular defense spending (not including wartime supplements), the overall cost of the bailout (AIG included), and the overall cost of the Iraq war (aggregate, not annual).

If you look really closely, you'll notice that the AIG bonuses and the helicopter don't seem to have bars. That's not a mistake. Actually, it's the point of the exercise. They're so small that you can't even see them. For more on this, see this video.

If companies are too big to fail, that means we're in a spot where we're privatizing profit and socializing risk. That kind of spot is a great place to be if you're a stock holder (although, as we've learned recently not THAT great a place), but it's a crappy place to be if you're a taxpayer.

We learend recently that AIG was too big to fail, and AIG wasn't even the biggest corporation around. If it's bad for a company to be that big, what can we do to encourage companies to be smaller?

We also mentioned around here that marginal costs are better for smaller companies, and fixed costs favor larger companies. So, if we want companies to be smaller, we should look to reduce the fixed costs associated with being a company.

What are some of those costs?

Well, compliance with regulation is one. Lobbying the government (a.k.a. "rent seeking") is another.

If we really decide that economies of scale aren't enough to make up for the instability that comes from super-complicated mega-conglomarates, we should do whatever it takes to make compliance and lobbying costs stay high for big corps while reducing or eliminating them for smaller companies.

Low cost of entry is what made Silicon Valley possible. Granted, that industry crashed too, but it was nowhere near this bad.

Now, look around. Does it seem like we're doing all we can to reduce corporate rent-seeking, too-big-to-failness, and fixed compliance costs for smaller firms? If not, why not?

O Canadia?

So, do the Canadians have all the answers? Fareed Zakaria reports, I link, you decide.

A few things to think about:

• Canadians don't have our defense budget to worry about, and that leaves a lot of room for universal health care.
  
• Leverage is obviously dangerous, but how much leverage is bad? Why are/were investors investing in firms that were leveraged at 30:1? If they were before, have they learned their lesson? Or is regulation necessary?
• Speaking of reducing leverage, I'm assuming that repealing the mortgage interest deduction will be part of the government's regulatory reform, right? Why on earth are we encouraging young family's to take on tremendous amounts of debt?
  
• Budget surpluses, like universal health care, are easier to afford when you don't have the world's most expensive military.
• We've mentioned immigration laws and brain-drain here before, and we'll likely mention it again. You can't turn around in an American grad school without bumping into a foreigner who will be training up here, but going elsewhere due to an inability to work in the US upon graduation.

AIG

Okay, so apparently folks are upset about how AIG is using its bailout money. AIG of course sponsors Manchester United. And Manchester United just lost badly to rival side Liverpool, despite being at home and strongly favored to win. It seems however that the current cause for concern is elsewhere. Namely, AIG has 1) spent a lot of money on paying back big banks that no one likes and 2) spent a lot of money on paying back executives... that no one likes.

So, by the numbers:

• 173 billion => total bailout to AIG
• 93 billion => total amount of the AIG bailout spent on big banks
• 165 million => total amount of AIG bailout allotted for executive payouts
• ~400 => number of executives among whom that 165 million is spread
• ~750 billion => rough amount of Obama's bailout bill, passed last month
• ~500 billion => rough amount spent on the military, annually, in peace time
• ~600 billion => current cost of the war in Iraq.

Let's ignore the 93 billion in debt payments that have gone to Goldman Sachs, Barklay's, etc. The issue that accounted for *two* front page headlines in the business section of my paper today was the 165 million in bonuses. Why might someone object to that?

Well, one might be really bad at math and fail to realize that while 165 mil is a pretty big number, it's still not even 1/1000th of the overall AIG bailout. In terms of arithmetic significance, we're literally in the realm of rounding error here.

One might also be of the mind that no one, or at least no one who hasn't cured cancer or perfected nuclear fusion, deserves that much money. Such a person should probably prefer that AIG and friends be allowed to go bankrupt, since corporations doing hundreds of billions in annual revenue are inevitably going to make someone rich at some point.

Perhaps one might be motivated by simple vengeance. These executives crashed the economy. If anything, they should be punished not rewarded.

I'm not too worried about any of that though. I'm much more concerned about how AIG is deploying the other 99.9% of the money we gave them, and about why we gave it to them in the first place.

Wealth is something that an economy generates without theoretical limit, not a fixed quantity that can only be distributed in various ways. Therefore, I don't worry if someone has more money than I've got, so long as my lot is improving too.

Vengeance for its own sake seems silly too. It's a clumsy way of dealing with what I actually care about, which is moral hazard and incentives.

Before we get into incentives though, a bit more on these bonuses. The bonuses being paid out are contractually obligated "retention bonuses," that were negotiated prior to the current unpleasantness. Retention bonuses, though often abused, are in theory intended to keep high talent executives from jumping jobs.

The theory here is that even "huge" bonuses are justified if they can attract and retain top talent. In a decent year (i.e., not 2008), a company like AIG is making about 10 billion a year on 100 billion or so in revenue. If the best candidate is going to be even 5% more successful than the second-best, spending a fraction of a percent of revenue on bonuses makes sense. The huge corporations out there all have boards that know this, so the competition for top-flight talent is fierce, similar to a free agent market in sports.

Now, AIG is spending a lot to get the best talent, but are they actually getting the best talent? There's really no good way to know. It's unlikely that all 400 or so executives under consideration were directly responsible for massive losses, but it's quite likely that some of them were. Are we to believe that all available alternative leadership would have lost even more money? How could we ever know? What we do know is that it's relative. An executive has about as much chance of making big profits in an economy like this one as an NBA player has of shutting down LeBron James. The coach is pretty much happy if his defender causes LeBron to score less than usual, and that's pretty much how executives are judged too.

Here's what we do know. Executives are paid a lot of money just to hang around, irrespective of how well they do. They're also paid a lot more money if the company does well, either directly in bonuses or indirectly in reputation which can lead to bigger contracts in the future. This incentive structure seems to encourage shooting for the moon. If you take some risks and get crazy numbers, you'll get crazy rich. If you play it safe and get mediocre numbers (like, I dunno, 5 billion a year in PROFIT), you'll get passed by in favor of the risk takers. Since a failed risk still leaves you pretty comfortable, it's worth the shot.

How do you fix this problem? Well, one thought is to remove the safety net. Two of the more famous CEOs out there, Steve Jobs and Warren Buffett, get paid almost entirely in equity. Jobs makes one dollar a year (as he itemizes it: "I get 50 cents a year for showing up, and the other 50 cents is based on my performance."). Buffett makes 100K, and has indicated to the board that "he would not expect or desire it to increase in the future." Apple and Berkshire seem to be doing just fine, but it's worth noting that Jobs and Buffett created those companies and have devoted their lives to them. They weren't just mercenaries brought in to manage an already existing fortune 500 firm.

Another thought is that the "too big to fail" problem is really a "too big to manage" problem. Corporations like AIG are attempting to safely direct hundreds of billions of dollars in a very complicated economy. Part of the complexity comes from the sheer scale. Part comes from regulatory arbitrage. Part comes from the desire of smart executives to out-smart their rivals (perhaps there is such a thing as too much cleverness). It might be that the objector above who thinks no one should earn that much money is right, just for a different reason. There might be a limit to how big things can get before the entire endeavor is too complicated to reliably predict and you end up with a crap shoot. Boards probably have really bad heuristics for finding the "best" CEOs, and really bad metrics for determining if the ones they've got are actually performing better than the alternatives. It's entirely possible that no one can really understand something so big, so they just cross their fingers, sign the checks, and hope everything works out.

How do we encourage corporations to be smaller and more straight-forward? Well, we can start by only investing in things we understand, as Buffett suggests. There are probably other things that we can do too, but that's probably something for another day.

Overkill... 2

A bit more on military spending...

1) Apparently the contract for new Presidential helicopters has gone over budget. The previous budget, was $6.1 billion. For reference, the budget for Iran's ENTIRE MILITARY is $6.3 billion. The current estimate on the project is $11.2 billion, which would put us at #20 on the world list, below Spain and above Taiwan. If the Pentagon bought nothing else and paid no one else, all year.

2) The military did not invent Tang or velcro. If wikipedia is accurate (and when is it not), both were private sector inventions (Tang in the US, velcro in Europe), and both were popularized by NASA. Those who credit military R&D for things in private use usually point to GPS, the internet, Hummers, things like that. Then again, the military didn't invent most of the things we use daily. Imagine what the private sector could do with $500 billion a year. I guess we can find out - that's what the rest of the world will be working on while we're buying more and bigger guns.

Overkill...

Get it? Overkill? Nothing new, but bears repeating. Image credit mises.org.

Annual Military Spending

Over-stimulated

Lots of stimulus in the news, if you know what I mean. Assuming it passes, let's look at possible outcomes:

• Quick recovery: good thing we passed the bill - otherwise it would've been longer.
• Not quick recovery: good thing we passed the bill - otherwise it would've been longer.

The Great Depression was 10 years. How long do we figure that it would've run if not for the New Deal? Who knows?

I've said this before, but it's a good thing we bailed out Bear, Freddie and Fannie, since we otherwise might have lost Lehman, or needed to bail out AIG. And it's a good thing that we bailed out AIG since we might otherwise have needed 700 billion in TARP spending. And it's a good thing that we spend 700 billion on TARP, since otherwise the auto industry might have flopped and we might be considering 800 billion in Keynesian demand-side stimulus. And here's hoping that the 800 billion passes, because if it doesn't, then we might have to.... uh... what goes in the blank? Start teaching HS students the ins and outs of subsistance farming?

~p

Single Payer (ugh)

Single-payer is a tough one for me. For the doctrinaire liberals and libertarians, it's an easy call: ideology allows a side-step of the trickiness. Anyhow, I'm far from edumacated on the matter, but I was reminded of the matter just recently, and Obama's promised action, so might as start working those public policy muscles... Anyway, stream-of-consciousness style:

• A huge selling point of single-payer is the Wal-Mart effect. When a buyer is a sufficiently high portion of a vendor's business, that buyer can drive prices very low. Although liberals tend to be mixed in their views on Wal-Mart, the things that bug them are labor laws and romanticized boutiques. I don't see liberals worrying about doctors or pharmacies in the same ways.
• Markets clear best when transaction costs are low and things aren't "sticky." Employer-mediated healthcare makes job transitions trickier, tends to penalize workers who would rather work part-time, etc. For libertarians, anything that can reduce the transaction costs for hiring/firing is, cetrius paribus, a good thing. Liberals probably wouldn't be convinced by this line of reasoning.
• Health care is a lot of things. It's insurance, in the case that any of us can come down with a strange unknown disease or break a leg in a freak accident. Mostly, though, a health "insurance" plan is more similar to a buyer's club where consumers combine for greater bargaining power. Preventative care comes to mind here. It might be that the insurance and group discount components of health care can or should be separated.
• One explanation for rising health care costs might be that the job is getting harder. When the life expectancy is 40, you can go a long way just by handling infections and infectious diseases properly. Once you get past 70, you move from accute, narrowly treatable ailments into direct consequences of aging. Beating Alzheimer's, MS, cancer, Parkinson's, and many of the other degenerative diseases will really require a fundamental hack of the body's cellular biology. The research that goes into studies, tests, treatments and drugs will be expensive. Kicking all of those will just open up even hairier problems, possibly leading to an (undoubtedly pricey) assault upon mortality itself.
• One component of health care costs is labor. Doctors in particular. The opportunity cost of being a doctor is huge: roughly a decade of schooling and tens of thousands in debt. Doctor's salaries remain decent, but the combination of a decade of tuition and a decade of lost earnings is hard to overcome. Obama's plan to make federal tax rates slightly more progressive will have an impact here, on the margin. The rhetoric will point at executives, but it will be professionals (doctors, lawyers, etc) that bear a large part of the burden (SS minimums, for example). Anecdotally, the lost decade, the debt, and taxes were all factors in my decision to not pursue med school.
• Our military spending is single-payer and I'm suspicious that we might still be overpaying. Will we create a new corporatist healthcare-industrial complex? Or, perhaps more accurately, further stimulate the one that we already have?
• The stand-by libertarian argument: what happened to the efficient market hypothesis? What makes health care special here? Is it that consumers are making stupid decisions, with negative externalities? If so, what guarantee do we have that the government won't make equally stupid decisions, with equally negative externalities? Why pay billions for e.g., the SEC and FDA when I or some other private actor could have ignored Madoff and salmonella for a tenth of that?
• There will be economies of scale (aka Wal-Mart effect), and possibly other policies taken to address the supply side, but ultimately, if we're aiming to provide helathcare to more people than currently consume it, and more healthcare to those already consuming it, we're going to end up spending more money. From whence do we draw that money? Taxes? Deficit? Spending cuts elsewhere (hey, it could happen, right? Right?)?

Anyhowz, that's a start. Perhaps more to come. Perhaps not. We'll just have to wait and see.

Rents, Rand, and Rants

Okay, so this isn't the first time I've said it, but I'm concerned that Atlas Shrugged is being reenacted on our national stage, and it sometimes bums me out when Rand turns out to be right. (I feel the same way about Orwell, btw). Anyways, let's talk about rent-seeking.

For those of you who don't remember your Atlas Shrugged that well (and it's not like I've read it too recently), much hay is made in the book about having a "man in Washington." Rearden, one of the characters sympathetic to Rand's viewpoints, regards this necessity with alternating apathy and antipathy. The fear, Rand offers us, is that it's all too easy for the success of a company to depend not on the quality of its product, but on the influence of its lobby.

How, now, do we suppose that Bear, AIG sould live, and Lehman Bros should die, and upon what mechanism do we predict that the fate of GM and Chrysler will depend?

Imagine perhaps a car company whose business model actually relies upon the manufacture of cars that people want to buy. How might such a company compete with a GM that is backed by the full faith and credit of the US of A?

Now, look. The market sucks sometimes at allocating resources (tulip bubble?). We know this. That doesn't mean however that the government is any better. Heck, democracy sucks at picking leaders (Dubya?). Churchill reminds us though that suck though it might, democracy's the best we've got.

Just something for us to consider as Congress deliberates on the stimulus package, AKA rent-seeker's dream. With our noses in our newspapers and our eyes on our RSS readers, we'll have a front-row seat as state governments, corporations and federal agencies fight over their share of the trough. Upon whom will the lucre be dropped? Those who would martial resources to the best benefit of society collectively, or those whose "men in Washington" are better connected? I know what I'm betting on.

Obama Macht Frei

Obama has kept his word and will shut down Guantanamo. It shouldn't be a controversial for modern nation states to hold among them as understood that you don't fucking disappear people. The rights to charge, trial and habeas corpus, those are fundamental rights. Yeah, they're guaranteed to us Americans under our Constitution and the folks in Gitmo aren't American, but that doesn't make a fundamental right any less fundamental.

It appears that we don't actually have a case against most of the folks there anyhow, but that's ancilliary. Even if they're as guilty as the frickin' wingnuts say they are, they deserve to be charged, tried, and convicted (or not) in a fair court of law (not the kangaroo court crap that Bush put forward). The Constitution, their citizenship, and the nature of their crimes don't enter into it. We'll do it because we're Americans, and that's the way we roll. Well, it's how we've been rolling since last Tuesday anyhow. McVeigh got a jury of his peers, same as Socrates, and so does every rapist, murderer and pedophile that finds himself in the care of US law enforcement. Terrorism is a law enforcement problem like any other. Treating it any differently doesn't do anything but distract from the issue and pump up the egoes of the terrorists themselves.

Anyhowz, props to Obama for doing the right thing. The Fox News crowd is probably stewing a bit, but it's not like they were in his corner anyway.

Don't let the door hit you on the way out

It's certainly a welcome thing to see W go. I remember watching with a sense of foreboding as he stumbled through the litigation to take the throne a little over 8 years ago. I don't know how many views I held then that I would now agree with completely, but my views on W haven't changed in the least.

W's failings were legion. He conflated "serious foreign policy" with "killing people and blowing shit up." His cowardice prompted sniveling, "creative" interpretations of the legal and moral guidelines regarding torture, eavesdropping, and general abuse of state power. Worse yet, the contagion of his cowardice spread from his office throughout the nation. Terrorism isn't among the top 10 most likely causes of death in America, nor the top 20. Fear-mongering on the part of the Bush Administration generally and the Sec. Treasury in particular lead to the passage of TARP. Fear-mongering on the part of the Bush Administration generally and the Sec. State in particular lead to our invasion of Iraq.

Then there's the "unsigning" of Kyoto, the huge deficits, Katrina (do we suppose that Obama would appoint a Michael Brown?), the well-meaning but fiscally questionable Medicare prescription coverage, the slipshod attempt at reforming social security. Guantanamo (Obama will have to straighten that out). Abu Ghraib (where was personal accountability on that one?). Scooter Libby (pardoned). NSA eavesdropping (another one for Obama). Political smothering of scientific evidence within Interior, EPA. Questionable firings of DOJ employees.

This is our country - Dubya was just renting it, and it's for damn sure that he's not getting his deposit back.

I haven't been entirely bullish on Obama either, but he's surely in an entirely different class from the menace we've just sent back to Texas. I'll have more to say about Obama soon, hopefully.

Borrowing, Lending, and Voting

Proverbs, 22:7

The rich ruleth over the poor, and the borrower is servant to the lender.

So Dubya was a big time deficit spender. Tax cuts, massive military spending. Obama is promising a giant (~700 bil) "stimulus" package.

Who's picking up the tab? Rich Americans who invest in US Treasuries, the British, the Japanese, the Chinese, etc.

I'd better not hear any complaints about China's ascendancy from anybody that pulled the lever for Dubya or Obama.

On Externalities

There was a recent post on Slashdot, where a submitter suggested that compact fluorescent light bulbs, though advertised as environmentally beneficial, were actually harmful given the carbon and fossil fuel use of transporting them. In the event, the claim looks to be false (incandescent bulbs must also be shipped, and the efficiency gain far outweighs the fuel cost within a few days). What if it wasn't, though? Some smart people seem to think that the ethanol push is at best an expensive wash, and at worst a waste of money, energy, and resource allocation. Does the production of a Prius battery harm the environment more than the excess fuel consumption and carbon production of a conventional auto? As consumers, do we have to Snopes all of this?

Well, yeah, the Libertarians want you to take charge here as a consumer. If a company does something you don't want, quit paying them to do it. If you don't know, look to a watchdog group that can figure these things out for you. And so on.

The Democrats naturally look to the government to look out for us, regulating or taxing away the bad stuff, subsidizing the good stuff, etc.

The Republicans, far as I can tell, don't care and want you to shut up and keep buying stuff from their donors.

What's going on here?

For starters, the vocab: in a transaction between two parties, any side-effects felt by third parties are known as externalities: effects that are external to the transaction. If the power company sells you power that was produced by a polluting factory that's in my backyard, I'm suffering from an externality. Externalities can be positive or negative.

There's a cool theory, called Pigovianism after the economist that crafted it. The way the theory goes: government should tax transactions that produce negative externalities, in proportion to the value of the damage that they do. The taxed producers will pass that cost onto the consumers, who now find the previous externality "internalized," that is priced into their transaction. In our CFL vs incandescent scenario above, Pigovian taxes on carbon and fossil fuel consumption would factor in the cost to society of shipping bulbs. A consumer wouldn't need to educate himself, read slashdot to get the math on the matter, or anything. Just buy the bulb that does the job, using price as a consideration.

Like I said, it's a pretty cool theory. There is however a pretty big hole - how the heck do we know what shipping a CFL bulb from China costs society in terms of pollution and non-renewable resource consumption? How do you put a dollar amount on that? It depends on who you ask, no? Ask a global warming skeptic, and he'll place way less value on the carbon expenditure. The matter of fossil fuels depends on whether you think we've hit peak oil production yet.

Any government agency that gets involved in Pigovian taxes will find itself highly susceptible to regulatory capture. That is, the folks doing the regulating will come largely from the regulated industry. They'll have friends in that industry, and they'll most likely plan on working in the industry after they finish government service. The costs to the regulated industry will dwarf the salary of the civil servants imposing those costs by such a margin that corruption becomes awfully tempting - spend a few grand here and there on gifts, or suffer millions in extra taxes, paperwork and regulatory hassle? Finally, industry players will waste resources on regulatory arbitrage, engaging in inefficient behavior in order to navigate through tax loopholes, etc. We see this all the time, from pharmaceutical companies to defense contractors to wall street bankers. Suffice to say that while the government might help here, it won't be a perfect solution. Government is large, slow, inefficient, and frequently at a game theoretical disadvantage in these situations.

So, it's back on us consumers again. To the extent that we as consumers worry about the environment, or the fate of the whales, or whatever the externality of the day might be, we need more information than price when evaluating products. Will that laptop leach chemicals into the ground after you're done with it? Were the metals in it excavated by child minors in Africa, working under apalling conditions? This is simply too much for us to handle.

So we turn to the watchdogs. Sierra club, PETA, Cato, you name it, there's a group for it. The watchdogs have some inefficiencies too. Their leaders for instance tend to fight hard enough and long enough that they become radicalized, opposing policies because they dislike the actors, rather than opposing actors because of sensible objections to policies. Organizations are also in competition for donations, and no one donates to a cause when everything is going pretty well, so there's a strong incentive to exaggerate claims and engage in sensationalism. That sensationalism then emboldens opponents, radicalizing them in the fight as well.

We count on Sierra and PETA to do the research that we don't have the time or expertise to do for ourselves, in the name of keeping government and corporate actors honest. But who keeps Sierra and PETA honest? Do we need a non-profit watchdog? If so, who would watch them?

Should we just watch documentaries like Inconvienient Truth and Sicko, running with whatever makes sense to us? How in that system do we guard against sophistry and demogoguery?

This is a tough problem, and much as your Republican friends might poo-poo it as the moaning of a wealthy liberal elite with nothing better to worry about, it's important. Global warming might well be a big deal, the oil isn't going to last forever, and as more and more countries industrialize, we have to recognize that the current American way of life probably won't scale from 300 million Americans to 6 billion (and growing) world citizens.

This is something we should all be thinking about.