The Yellowstone Effect

In yesterday’s Wall Street Journal, Mark Spitznagel draws an interesting parallel between forest management and economic management.

English: A fire in Yellowstone, Wyoming, Unite...

We learned that putting out small fires can lead to huge fires.

Suppressing fire, creating the illusion of fire protection, leads to the wrong kind of [forest] growth, which then invites greater destruction. About 100 years ago, the U.S. Forest Service took a zero-tolerance approach to forest fires, stamping them out at the first blaze. Fast forward to 1988 when a massive wildfire at Yellowstone National Park wiped out more than 30 times the acreage of any previously recorded fire.

What obviously occurred was that the most fire-susceptible plants had been given repeated reprieves (bailouts, in a sense), and they naturally accumulated, along with the old, deadwood of the forests. This made for a highly flammable fuel load because when fires are suppressed the density of foliage is raised, particularly the most fire-prone foliage. The way this foliage connects the grid of the forest, as it were, has come to be known as the “Yellowstone Effect.”

A far better way to prevent massively destructive fires is by letting the fires burn. Human intervention in nature’s cycles by suppressing fires destroys the system’s natural homeostatic forces.

Strangely parallel to the Yellowstone catastrophe was the start of the federal government’s other fire-suppression policy with the 1984 Continental Illinois “too big to fail” bank bailout. This was followed by Alan Greenspan’s pronouncement immediately after the 1987 stock market crash that the Federal Reserve stood by with “readiness to serve as a source of liquidity to support the economy and financial system,” which heralded the birth of the “Greenspan put.” The Fed would no longer tolerate fires of any size.

I remember looking up in the night sky and seeing the haze from the smoke of that big Yellowstone fire.

Why do you stop at red lights?

I recently asked a co-worker this question when we were talking about law.  It went something like:

Me:  Why do you stop at red lights?

Her:  Because it’s the law.

Me:  You mean the law as in the rules on the books?

Her:  Of course.

Me:  Do you drive the speed limit?

Her:  Well close to it.

Me: But over it, right?

Her:  Well, yeah, doesn’t everybody?

Me:  Okay. Are you still sure that you stop at red lights because it’s a rule that’s written down?  You just admitted that you don’t follow another written down rule.

Her:  Not really.  So, why do I stop at red lights?

Me:  I’m going to give you a choice.  I can give you the answer and the way you look at the world may change.  Or, I will not give you the answer and you can go on believing the world around you behaves in a way that it does not.

Her:  Okay, quit the Matrix b.s. and tell me for crying out loud.

Me:  Well.  There’s a couple reasons you stop at a red light.  One is your own safety.  You know that you don’t stop at green lights.  And you know that nobody else does either.  So, if you ran red lights, the direct consequences could be great and you could do you and others serious harm.  The main reason you stop at red lights is because it pays off well for you to do so.

Her:  Okay.

Me:  Another reason is that at some point in time, the color red became associated with stopping in traffic.  No central body sat around and said red lights will be the standard for that.  It emerged somewhere as a practice and stuck.  As far as I know, most traffic laws are passed by city and state governments.  Yet, somehow, without a centralized standards committee on traffic signaling, red emerged as the signal for stopping and green for go.  And it’s just not in the U.S.  It’s pretty much everywhere there’s traffic — other countries, railroads, airport runways, boats and so forth.  So, that’s why you stop at the color red.  (This website claims that the traffic signal was adapted from the railroad by an innovative officer in Michigan).

Her: Okay.  So what’s your point?

Me:  My point is that you, like most people, think you stop at red lights because “it’s the law”.  It is in a sense, but not the sense you are thinking.  You are thinking of legislation, or the law that some governing body has written down on paper.

However, if we investigated all legislation, we’d probably find many “laws” that we break.

You stop at red lights because “it’s the law” in the sense that it’s an evolved social norm.  This norm evolved to help keep us safe.  And it works.  Do you know how I know it works?

Her: I bet you’re going to tell me.

Me: Because we still practice it and it more or less keeps hundreds of millions, if not billions of people safe.  I’m guessing if we looked into history, we might find that there were other things tried, but they didn’t work as effectively.

Roundabouts and cloverleafs, for example, also seem to be effective ways to handle intersections in traffic, the real estate and additional construction cost probably doesn’t make them as cost effective as traffic signals.

Laws are really developed in the crucibles of human interactions and emerge as social norms, customs and practices.

They rarely emerge from legislators or judges, even though most people think that’s exactly where they come from.

Her:  Gee.

This conversation was inspired by this lecture from Don Boudreaux:

The video is worth your time.  If you don’t have that kind of time to sit at the computer, then you can also download an EconTalk podcast from 2006 that’s essentially the same material.

Listen to it if you want to escape the Matrix.

It’s people

Here I wrote about these two observations:

1. Markets fail. Use government.

2. Markets fail. Use markets.

Whether you agree with the first or the second, there’s something that is important to recognize about these words.

The words markets and government describe the interactions of groups of human beings, usually the very same human beings.

We all buy stuff and sell stuff (even the most anti-capitalist of those out there). That’s when you interact with others through markets.

We all get a chance to vote on a number of things at many different levels — Federal, state, county, city, school board, homeowners associations, churches, corporations, clubs and so forth.  That’s when we interact with each other through government.

What people don’t seem to think about often is what makes one preferable to the other in some situations and why.

The 0.000179%…

…is the federal government.  Or, the 535 members of Congress + 1 President.

If my calculations are correct, those few currently “control” about the same amount of income as the 3 million, or so, in the much ballyhooed Top 1%.  Thanks to commenter, Xerographica, for pointing that out.

I wonder why those who fret about 3 million people earning that much money, by and large by producing value, don’t seem at all bothered by the 536 controlling just as much, through taxing and spending.

Because we vote for our elected representatives? Because they’re not spending the money directly on themselves?

These are reasons we should care even more about the 0.000179%, not less.

I believe many people will intuitively defend Congress having so much spending power by saying, but they are held accountable by our votes, we get to choose them.

How has that worked out for us?   Not well.  Public choice economics tells us why our intuition about elections is wrong.  Thomas Sowell explained it well in his book, Applied Economics.   I wrote about it in my post, How to Get People to Respond to Other People’s Desires.   This is Sowell’s key paragraph:

Politics and the markets are both ways of getting people to respond to other people’s desires.  Consumers deciding which goods to spend their money on have often been analogized to voters deciding which candidates to elect to public office.  However the two processes are profoundly different.  Not only do individuals invest very different amounts of time and thought in making economic vs. political decisions, those are inherently different in themselves.  Voters decide whether to vote for one candidate or another but they decide how much of what kinds of food, clothing, shelter, etc. to purchase.  In short, political decisions tend to be categorical, while economic decisions tend to be incremental.

I can also imagine some people defending the immense spending power that has been concentrated into the Federal government vs. the Top 1% by saying, well, they’re not spending the money on themselves.

Milton Friedman explained why this should make us more concerned in his Four Ways to Spend Money.  Government spending falls under Type IV spending — spending other people’s money on other people.  Friedman explained that with Type IV spending you have little incentive to spend it wisely since you don’t pay the consequences if you’re wrong or receive the benefits if you’re right.

Though, sometimes politicians do get benefits.  I get the pleasure of driving over a bridge each weekday named after a still living Senator from my state, for no other reason than he played politics with the rest of the 534 folks in Washington to get enough of them to agree to spend our money on that bridge.

Grandpa’s Lament

Markets fail.  Use government.

This is the underlying belief held by those who think it’s a good idea to expand the role of government to fix problems.

Arnold Kling gets credit for this simple counter:

Markets fail.  Use markets.

Kling calls this Masonomics, after the classical/libertarian economics department of George Mason University.  As Kling explains:

Masonomics worries much more about government failure than market failure. Governments do not face competitive pressure. They are immune from the “creative destruction” of entrepreneurial innovation. In the market, ineffective firms go out of business. In government, ineffective programs develop powerful constituent groups with a stake in their perpetuation.

In the Wall Street Journal this week, David Malpass wrote about why we should pay some heed to Masonomics as grasshopper governments are looking for ants to bail them out, so they can keep acting like grasshoppers:

Across Europe and the United States, the fiscal crisis is setting up an epic battle among government services, pensioners, government employees, creditors and taxpayers. There is simply not enough money coming in to pay all the promises politicians have made. The shortfalls and fights are challenging our democracies and shifting wealth from the private sector to ever bigger government.

The hope has been that Europe’s debt crisis would force government downsizing in time to meet cash flow requirements. Newfound fiscal discipline would provide a silver lining to the debt crisis. But that’s not working out.

Germany’s insistence on centralized fiscal discipline for the euro zone will lead to a massive expansion of bureaucracies in Brussels, Frankfurt and Berlin. They’ll include temporary and permanent bailout funds, dangerously intrusive powers for the International Monetary Fund and the European Central Bank, endless summits, new taxes on property, and recessions.

With Europe’s government structures assured of getting even bigger, the U.K. reacted immediately by opting out. U.S. lawmakers are already objecting to the European plan to expand the IMF. As in Greece, IMF programs are antigrowth, imposing austerity on the private economy, not the government. Greece has raised value-added and property taxes, then projected revenue increases that never materialize in order to keep payments flowing to creditors and the government’s entourage.

Governments on both sides of the Atlantic are trying to use the crisis to grow rather than shrink. News of Europe’s fiscal incompetence abounds, but Washington had no budget at all in 2010 or 2011 and the federal deficit grew at record pace. President Obama sailed through 2011 without any significant spending cuts or government downsizing.

It’s a shame that the U.S. government has been turned into a grasshopper government.  My Grandpa used to express his concern for the future:

If these kids are going to be our next leaders, we’re in trouble.


What is the Eurozone crisis?

You have a few grasshoppers looking for a lot of ants.

When those grasshoppers and their bureaucrats throw in words like debt, sovereignty, Euro, ECB, crisis, default, system collapse and so forth they hope to confuse and scare some ants, or their bureaucratic queens, into giving up some of their winter food stores.

Invariably some of these ants start thinking that if the grasshoppers stop singing and start working on building their own food stores for the winter, that the the ants may somehow be putting their own food stores at risk.

Good Reading

P.J. O’Rourke asks, If the 1% had less, would the 99% be better off?  I think the answer is no.  At the end, O’Rourke writes:

Yes, it’s upsetting that some people have so much while other people have so little. It isn’t fair. But I accept this unfairness. Indeed, I treasure it. That’s because I have a 13-year-old daughter And that’s all I hear, “That’s not fair,” she says. “That’s not fair! That’s not fair!” And one day I snapped, and I said, “Honey, you’re cute, that’s not fair. Your family is pretty well off, that’s not fair. You were born in America, that’s not fair. Darling, you had better get down on your knees and pray that things don’t start getting fair for you.”

Thomas Sowell explains why gridlock is good:

The media and the intelligentsia seem obsessed with the idea that government intervention is necessary to get the economy out of the doldrums. This is certainly the prevailing dogma but it is contradicted by history. Yet who reads history any more?

If you look back through history and compare what happens when the federal government intervenes during a downturn in the economy with what happens when the government leaves the market free to work its own way back, doing nothing has by far the better track record.

First of all, this country existed for a century and a half without the federal government intervening to save the economy. No downturn in all that time was as severe or as long-lasting as the downturn that persisted throughout the decade of the 1930s, when both the Hoover administration and the Roosevelt administration intervened on an unprecedented scale.