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Broken Windows versus Banking

Several days ago I wrote about the broken window fallacy. Tonight while listening to Barack Obama address Congress, I grew troubled when he argued for supporting failing banks because “getting lending going again” would provide benefits that essentially mirrored what the broken window fallacy talks about: a young family that otherwise couldn’t would be able to obtain a loan to buy a house; some company would hire workers to build the house; the workers would have more money to spend in their communities; and so on.

Recall what the broken window fallacy says:

The basic idea is that it is temping to think that a hoodlum breaking a baker’s window stimulates the economy because the baker must go buy a window from the glazier, who then can go buy additional things from others in the community and so on.

It sounds strikingly similar, doesn’t it? I don’t think it is a coincidence. So, I immediately started wondering, where is the broken window in the lending example? When a bank creates money through a loan, whose window is metaphorically broken?

My guess is that there is no specific victim, which is why this is so insiduous. Instead, the loser is, in some way that I don’t fully understand yet, a large group of us — perhaps all of us, and the winner is a small group. I am beginning to belive that the only way to not be hurt by the banking system, in aggregate, is to be partaking of loans yourself — to be leveraged yourself. Suddenly, it doesn’t seem too strange that this nation is addicted to debt.  It is simply the best response to a set of incentives enshrined in law by our government.

Doing Something About the Financial Crisis

My good friend Scott has some good advice on what to do about the financial crisis: vote with your dollar and take your money out of the banks that helped get us into this mess.

Both of my banks (JPMorgan, formerly Washington Mutual, and U.S. Bank) have recieved TARP money, so I will be moving my money out of these banks and into a well-run bank, perhaps Charles Schwabb, following Scott’s lead.

On Broken Windows

The Broken Window is both a fallacy and a truth. In economics, it refers the Parable of the Broken Window, also called the Broken Window Fallacy, and it deals with hidden opportunity costs.

The basic idea is that it is temping to think that a hoodlum breaking a baker’s window stimulates the economy because the baker must go buy a window from the glazier, who then can go buy additional things from others in the community and so on.

However, the fallacy part of it is that forcing the baker to buy a window has the hidden cost of the baker not buying whatever it was that the baker might have wanted to buy in the first place — perhaps a suit. So the extra money to the glazier actually comes at the expense of the tailor, and on top of it, the baker is out a window. So when hidden opportunity costs are accounted, the net effect of a broken window is negative, not positive.

There is also the broken window theory of crime, which basically states that criminal activity tends to congregate towards lesser-maintained areas of a city, perhaps because the look of dereliction makes a criminal feel less likely to be caught. A recent article that I picked up of via Bruce Schneier’s Security Blog discusses a recent student on the broken window theory. The conclusions are interesting:

The results, just now circulating in law enforcement circles, are striking: A 20 percent plunge in calls to police from the parts of town that received extra attention. It is seen as strong scientific evidence that the long-debated “broken windows” theory really works—that disorderly conditions breed bad behavior, and that fixing them can help prevent crime.

[…]

Many police departments across the country already use elements of the broken windows theory, or focus on crime hot spots. The Lowell experiment offers guidance on what seems to work best. Cleaning up the physical environment was very effective; misdemeanor arrests less so, and boosting social services had no apparent impact.

Nevertheless, I still wonder whether the broken window theory is actually a type of fallacy. For example, it is true that a single person can stand up at a sporting event to get a better view, but this does not generalize well: if everyone stands up, it is decidedly not true that everyone gets a better view. Does the same apply to broken windows? In other words, does fixing broken windows in one area correspond to a single person standing up at the sporting event? If all broken windows were fixed, would crime actually diminish or would it sustain at current levels?

Regardless of the answer to that question, I think the last sentence — and especially the last clause — is worth repeating:

Cleaning up the physical environment was very effective; misdemeanor arrests less so, and boosting social services had no apparent impact.

Sorry social scientists.

A Wonderful Life

Today I woke up after a wonderful night’s sleep to the sound of a bird chirping and to the sight of a absolutely goregeous Seattle winter morning. What a way to live!

Tuesday and Wednesday I was suffering from a cold, but Thursday I was on the uptick and today I feel even better. I mananged to finish in my programming languages assignment that I started yesterday and was due yesterday, my Game Theory class is still awesome, and I have a great partner for my security lab which is pretty fun.

I have some laundry to fold, some homework to get a head start on, and some working out ahead of me today.

Life doesn’t get much better than this.

A Necessary Resolution — A Necessary Revolution

Despite constant setbacks to freedom, it it reassuring to see that there is still the occasional freedom-loving person in a place of political power in this country. Personally, I would like to see something similar to this resolution enacted in every state in the union. It is well worth the read.

STATE OF OKLAHOMA

1st Session of the 52nd Legislature (2009)

HOUSE JOINT RESOLUTION 1003

AS INTRODUCED

A Joint Resolution claiming sovereignty under the Tenth Amendment to the Constitution of the United States over certain powers; serving notice to the federal government to cease and desist certain mandates; providing that certain federal legislation be prohibited or repealed; and directing distribution.

WHEREAS, the Tenth Amendment to the Constitution of the United States reads as follows:
“The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”; and

WHEREAS, the Tenth Amendment defines the total scope of federal power as being that specifically granted by the Constitution of the United States and no more; and

WHEREAS, the scope of power defined by the Tenth Amendment means that the federal government was created by the states specifically to be an agent of the states; and

WHEREAS, today, in 2009, the states are demonstrably treated as agents of the federal government; and

WHEREAS, many federal laws are directly in violation of the Tenth Amendment to the Constitution of the United States; and

WHEREAS, the Tenth Amendment assures that we, the people of the United States of America and each sovereign state in the Union of States, now have, and have always had, rights the federal government may not usurp; and

WHEREAS, Article IV, Section 4 says, “The United States shall guarantee to every State in this Union a Republican Form of Government”, and the Ninth Amendment states that ”The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people”; and

WHEREAS, the United States Supreme Court has ruled in New York v. United States, 112 S. Ct. 2408 (1992), that Congress may not simply commandeer the legislative and regulatory processes of the states; and

WHEREAS, a number of proposals from previous administrations and some now pending from the present administration and from Congress may further violate the Constitution of the United States.

NOW, THEREFORE, BE IT RESOLVED BY THE HOUSE OF REPRESENTATIVES AND THE SENATE OF THE 1ST SESSION OF THE 52ND OKLAHOMA LEGISLATURE:

THAT the State of Oklahoma hereby claims sovereignty under the Tenth Amendment to the Constitution of the United States over all powers not otherwise enumerated and granted to the federal government by the Constitution of the United States.

THAT this serve as Notice and Demand to the federal government, as our agent, to cease and desist, effective immediately, mandates that are beyond the scope of these constitutionally delegated powers.

THAT all compulsory federal legislation which directs states to comply under threat of civil or criminal penalties or sanctions or requires states to pass legislation or lose federal funding be prohibited or repealed.

THAT a copy of this resolution be distributed to the President of the United States, the President of the United States Senate, the Speaker of the United States House of Representatives, the Speaker of the House and the President of the Senate of each state’s legislature of the United States of America, and each member of the Oklahoma Congressional Delegation.

Poetic Justice: Fighting Bureaucracy with Bureaucracy

While munching on my post-lunch cup of ice in the Hub today, I saw a set of posters I have seen many times before. The posters look similar to the following:

Along with the images go catch phrases like “Too Fast and Furious — Need Legal Help.” The posters are advertisements for “Student Legal Services,” one of many underutilized (I am sure) services paid for by Washington State Taxpayers and UW students. Normally I don’t pay much attention to these posters, but now I am in legal trouble, so this time I did.

It turns out the the office is not far from where the posters are, so I paid them a visit. I filled out a green sheet with the information about my legal troubles, and I now have an appointment to meet with Devin and Ivy, two student lawyers (I believe) tomorrow.

I plan to ask them about:

  1. Advice on challenging the ticket
  2. Whether the police officer issuing the ticket acted appropriately in “kind of” demanding my license (his intent was clear, even if he was trying to dance around the question legally)
  3. What, in general, the law requires of police and myself during this kind of stop and other kinds of common police-civilian interactions. For example, can IDs be demanded? What if I refuse to give identification?

It will be interesting to see how it goes.

Oh, by the way, Washington State taxpayers: this and many other departments like it all around the UW and throughout the state government would be a great place to get back a good chunk of the 5.7 billion dollar deficit.

I Oppose the Economic Stimulus Plan

I received an email today encouraging me to voice my opinion about the proposed economic stimulus plan. Although I do expect the plan to pass, I agree that it helps to voice opposition. Just as I opposed the boondoggle that was once called “The Bailout”, I want to be totally clear that I am firmly opposed to the idea and the implementation of the current economic stimulus plan.

I recognize that the free market suffers from market failures, and as such I am generally in favor of well-crafted Pigovian taxes. However, it never makes sense to send gobs of someone else’s money towards politically-chosen goals. This always leads to bad situations, as we have seen with the bailout money, and as we will soon see with the stimulus money. Mark my words.