Progressive fines and deterrence

Here is a question to ponder:

The idea behind fines is mostly to deter unwanted behaviour: ranging from graffiti to oil spills. In this sense, they are distinct from compensation payments, which are intended primarily to restore the victim of an inappropriate act to some semblance of their former state.

Given that the aim of fines is to deter, it seems that their size should be calibrated so as to have a comparable effect on all people. The effect of a $50 fine on someone earning $25,000 a year is different from the effect on someone earning $75,000 a year.

The question then is whether it is appropriate to index fines to some measure of a person’s monetary status? If so, is it more fair to base the level on income or on wealth? Each could produce injustices. In addition, should there be bounded maximums and minimums for fines, even after monetary considerations are taken into account? Also, should there be any distinction between fines levied on individuals, when compared with organizations?

Nixon and Gorbachev

Here’s a bit of Cold War role reversal for you:

Which US president cancelled America’s offensive biological weapons program? Richard Nixon, in 1969, three years before the Biological Weapons Convention.

Which Soviet premier ordered Biopreparat, the Soviet bioweapon program, to weaponize smallpox? Mikhail Gorbachev, in the Five Year Plan launched in December 1987. He also ordered the production of mobile production centres for biological weapons, to try to retain such offensive capabilities despite inspections of suspected bioweapon facilities.

For me, at least, this sits awkwardly with my general perceptions of the two men: Nixon the amoral schemer and Gorbachev the unintending architect of the end of the Communist system.

Canada’s climate plans a flop

As discussed in a post of the Pembina Institute’s blog Canada’s record of failure in dealing with climate change continues to worsen. While the government once promised that Canadian emissions would peak forever sometime between 2010 and 2012, they now expect them to rise all across that span.

Policies the government expected to reduce emissions by 52 million tonnes (megatonnes) of CO2 in 2010 are now expected to produce reductions of just 5 megatonnes. Furthermore, the $1.5 billion Clean Air and Climate Change Trust Fund, distributed to provinces in 2007, did not produce the expected 16 megatonne reduction. Now, the government claims it cut emissions by just 0.34 megatonnes, with 3 more to follow by 2015.

These lackluster results, coupled with ever-rising emissions (especially from the oil and gas sector) demonstrate convincingly that Canada just isn’t doing its part on climate change mitigation. Future generations are likely to see this quite correctly as evidence of short-sightedness and irresponsibility.

The credit crunch, bailouts, and moral hazard

Why did governments bail out failing financial institutions?

They said it was because banks and insurance companies were so interconnected with the rest of the economy that, if they failed, they would cause a cascade of other failures. If the banks went broke, firms that actually have sound businesses would fall as well. That supposedly risked turning the credit crunch into a general depression.

Assuming this argument is correct, the natural question is what we should do to eliminate that vulnerability, termed ‘systemic risk’ by economists. It is as though we are mountain climbers attached by a tether to the banks. When they start to slip, we need to save them, in order to keep from being pulled over ourselves. Once we have done that, however, we need to start thinking about how to get rid of tether.

According to the argument that politicians are making, we got dragged to the edge of the cliff this time. To experience that and not think seriously about how to get ourselves untethered is stupid and irresponsible.

1) Make banks smaller

No single bank should be large enough that its collapse could threaten the economy as a whole. Banks should be small enough to fail.

2) Make finance more boring

Get rid of complex new products like collateralized debt obligations and credit default swaps. Treat new financial products like new pharmaceuticals, with the onus on those developing them to show that they are safe, and with tough oversight and regulation.

These things seem to spread risk around in the financial system in ways that make it possible for relatively minor players (even non-banks) to really screw things up.

3) Separate the safe and risky sides of banking

There should be two sorts of banks.

The first sort will take deposits and make very safe loans, like well-secured mortgages or loans to businesses with a strong plan for paying them back. These banks should be insured, so that if they fail the depositors don’t lose their money.

These banks should be allowed to call themselves ‘safe banks’ or ‘guaranteed banks’ or something similar, so it is clear to everybody that they are in a special category that excludes the second type.

The second sort can basically do whatever they like. They can invest in all sorts of unusual financial instruments, and try to make profits. When they fail, their depositors get nothing. The only things they cannot do are get too big (see point 1) or sell products that threaten the system (see point 2).

The government loves to boast about how well Canada weathered the financial crisis. The basic reason for that seems to be how boring our banks were forced to remain, as the result of heavy regulation. The places with laissez faire regulatory approaches – like the United States, Ireland, and Iceland – are the ones that have had the most to fear from the credit crunch.

4) Accept the drawbacks

This plan has a number of drawbacks.

First, it might make the financial system less efficient at allocating capital. That’s what banks claim is their value added to society: they match up people who have wealth but no ideas for using it productively with people with ideas and talents, but not enough money.

Making the financial industry safer would reduce returns for savers, and reduce the financing opportunities for firms and entrepreneurs. We might be turning a Ferrari into a Volkswagen, but there are good reasons to do so. For one, it is better to ride in a Volkswagen at 90 km/h than in a Ferrari that goes 120 km/h but sometimes explodes and kills everyone inside. For another, banks and bankers will always have the financial means to manipulate politicians. They are well placed to get a good deal for themselves, whereas the general public is in a weaker position. Since there is a built-in bias in politics towards making things easier for the rich, having some special protection for the general welfare of the population seems justified and appropriate.

Second, making the system safer will make it harder for poor people to get credit. The safe banks won’t offer mortgages to people who are likely to default on them, and the risky banks are likely to change an arm and a leg for them. That said, it was probably always a fantasy for people of modest means to buy big houses in cities with overpriced property markets. Also, by reducing the speculative froth in real estate markets, the approach outlined here could end up helping such people in the long run.

That being said, I think a plan basically resembling this one is worthwhile. Most importantly, it would largely eliminate the systemic risk which we are creating right now by bailing out the institutions that have been the least responsible, because of the threat they pose to everyone else. What that approach will ultimately produce is another, larger crisis.

Of course, this is all a pipe dream. Politicians don’t have the bravery or far-sightedness to do any of this, and bankers are clever enough and rich enough to convince them and bribe them into leaving them basically alone. Besides, that next crisis will probably happen when another lots of politicians are in charge, and those who organized today’s bailouts are occupying well-paid seats on the boards of the banks they rescued.

Fair Vote Canada conference

In Canada, our First Past the Post voting system strongly favours the most popular parties and those (like the Bloc) that have concentrated regional appeal. Parties with a good chunk of popular support, but for which it is not concentrated in particular ridings, are excluded from Parliament.

Many proposals have been brought forward to address that issue. For those interested in the topic and living in Ottawa, this Saturday’s Fair Vote Canada 2010 Annual Meeting and Conference may be of interest. It is happening on campus at the University of Ottawa, between 8:30am and 5:00pm. Registration is $35, or $10 for students.

Emissions standards for trucks

In a piece of good news, the Canadian and American governments are rolling out new emissions standards for heavy vehicles, “including full-sized pickup trucks, delivery vehicles, buses, freight vehicles, service trucks, garbage trucks, dump trucks and tractor trailers.”

Trucking is one of the fastest growing causes of greenhouse gas emissions in North America:

The emissions from heavy trucks represent 6 per cent of Canada’s total greenhouse gas emissions. They have been increasing more rapidly than emissions from any other source and grew by 63 per cent from 1990 to 2007 as compared to 26 per cent growth in overall Canadian emissions for the same period.

While regulating efficiency sector by sector risks being more costly than driving economy-wide reductions with a carbon tax, it is nonetheless a welcome measure. Hopefully, the efficiency improvements driven by these new regulations will actually reduce emissions, and not increase them via the rebound effect, by reducing the cost of trucking.

The cost of prison

Apparently, imprisoning someone in Canada costs over $100,000 a year. Right off the bat, that is clearly a substantial investment of resources. It gets even worse when you consider a few further aspects.

Firstly, it seems highly dubious that prisons play a rehabilitative role. Those who are incarcerated will probably deal with a lengthy stigma afterward, perhaps for the rest of their lives. This will worsen their employment prospects and reduce the welfare of their family members. It is also plausible that having a record of incarceration increases the relative appeal of crime as a means of financial subsistence. Before you have such a record, you have a lot to lose from a criminal conviction; afterward, you have fewer legitimate job opportunities and less to lose from a longer record.

Secondly, it seems clear that the government could spend that sum of many in a great many more productive ways. You could probably finance someone’s entire undergraduate degree for that amount, or provide an apprenticeship program for a trade. You could do a lot of preventative medicine, or invest a fair bit in deploying improvements in energy efficiency or renewable energy generation.

It seems particularly absurd to imprison people with a non-violent involvement in the drug trade. It is a normal characteristic of human beings to want to experience altered states of consciousness. It is one that we positively encourage in some cases, such as the thrill from athletic exertion or Hollywood movies, and tolerate and regulate in others, such as with alcohol and tobacco. It seems utterly foolish to imprison those who seek to alter their mental state in unauthorized ways, or assist other people in doing so, when that choice is costly to everyone in terms of lost opportunities, and especially costly to the person being punished, in terms of future prospects.

John Kerry on the new senate climate bill

Over on Grist, there is an article written by Senator John Kerry about the new climate legislation being introduced in the U.S. Senate. His message has a sobering but pragmatic tone:

A comprehensive climate bill written purely for you and me — true believers — can’t pass the Senate no matter how hard or passionately I fight on it. No, it’s got to be an effort that makes my colleagues — and that has to include Republicans so we can get to 60 — comfortable about the jobs we’re going to create and the protection for consumers and the national security benefits — and it has to address those pieces on their terms. The good news: I think we got that balance right.

It is hard to know whether he is right about that, and I felt similarly ambivalent about the previous Waxman-Markey climate bill. That said, Kerry’s argument does highlight the trade-off the frequently exists in policy-making between how well designed a policy is, to reach its objectives, and how well crafted it is from the perspective of political possibility. It’s a shame that what is necessary in the real world can be impossible in the political world, but that is a reality that must be incorporated into our strategies.

Given the series of blows against good climate policy recently, having some sort of legislative success in the United States could be very important. It could help drive Canada towards finally doing something about climate change, and it could help revive the moribund UN process internationally. Also, like many other weak pieces of domestic climate legislation passed before, it could always be strengthened after the fact.

For what it’s worth, here’s hoping the US manages to do something, if only so as to stop providing the rest of the world with such a convenient justification for doing nothing.

Perverse effects from police statistics

An article in the Village Voice describes how police officers in one New York precinct routinely downgraded crime reports, in order to make their statistics look more favourable. A whistle-blowing police officer revealed with, with evidence from covert audio recordings.

Indeed, the whole situation is deeply reminiscent of police work as portrayed on the television show The Wire. In particular, it matches up with two quotes from that series:

  • “But the stat games? That lie? It’s what ruined this department. Shining up shit and calling it gold so majors become colonels and mayors become governors.”
  • “Robberies become larcenies oh so easily. And rapes, well they just disappear.”

It’s a tricky problem to deal with. I have defended standardizes tests as protection against grade inflation, but they can clearly create similar perverse incentives. When people start chasing a number that is intended as a proxy for a good outcome, they can begin to produce worse outcomes in ways that flatter the particular figure you are looking at.

It’s not an easy problem to solve, allowing discretion while maintaining high standards. Clearly, part of all statistics-based systems must be an audit and oversight capacity that retains a sense of the importance of the real outcomes being sought, and a level of independence that prevents it from becoming just another political tool. Of course, the same political pressures that seem capable of turning police forces into factories for dodgy statistics apply just as strongly to any such oversight bodies. They also make it highly likely that whisteblowers will be ostracized, with everything possible being done to discredit them.

The market knows best, except when it comes to green technology

In another demonstration of how many conservatives are hypocrites when it comes to the environment, we have the sorry example of Canada’s billion dollar green energy fund.

Contrast these two situations:

  1. You oblige people to pay a fee when they emit greenhouse gases, and pay other people a reward if they can remove these gases permanently from the air.
  2. You set up a giant fund of cash, and give it away to some companies because they think they might find a costly way to maintain business as usual (carbon capture and storage) and then give the rest to whoever can get the most political traction.

The former approach demonstrates faith in innovation and market mechanisms. The latter approach suggests that the indefinite combination of government analysis and lobbying can somehow do better.

If we want to address climate change in a fair and effective way, we should be making firms and individuals pay the true costs of what their actions impose on everyone, while banning the most destructive activities. We should not be setting up weird mechanisms for political patronage.