Archive for September, 2008

Urban Wildlife

I think of myself as living in a city. It’s an easy walk to two supermarkets, a dozen restaurants, four movie theaters, four bookstores, public transportation. I commute to work on a combination of bicycle and bus. I don’t live in a dense part of the city, to be sure; I live in a neighborhood of detached houses, where every house has a small yard. But it still seems to me like a city.

But at the same time we have a family of feral cats living in our yard (we are going to try to have them neutered when they are old enough). We have three very large racoons who come by; when I tried to chase them away from the food we put out for the cats they stood their ground and growled at me. A fawn who slept in our yard when tiny is now a full grown buck who has yet to understand the difference between eating the blackberries (good) and the roses (bad). I see hawks every week or so, skunks and wild turkeys every few months. And of course there are plenty of smaller animals.

To me it feels like animals are adapting to us more and more. We’ve put them under an enormous selection pressure, and many species can’t adapt at all. But some are doing well, and they aren’t all living off of our leavings. They are living around us. We’re facing a huge collapse in biodiversity around the world, but at the same time life is adapting to us as best it can.

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Failout

The bailout has failed for now. Of course they will try again after Rosh Hashanah, so this is by no means over. But let’s think about what will happen if nothing gets passed. Not that I know what I’m talking about.

What pushed Paulson and Bernanke to seek the bailout was the freezing up of the credit markets. Banks started to refuse to lend short-term money to each other or to anybody else. The TED spread, which essentially measures the risks of lending to commercial banks, went over 3%. This is a huge number, and means that the people with money have little faith that the banks are going to survive. With the failure of the bailout, the TED spread is now over 3.5%.

In a nice piece of timing, a hedge fund redemption date has arrived—one of the four times a year when people can withdraw money from most hedge funds. Most hedge funds are still doing OK during this crisis—at least, as far as we know, given the limited amount of information which hedge funds supply to the public. But you have to think that a lot of people are going to be sufficiently nervous to want to transfer at least some of their money into U.S. Treasury bonds or under their mattress. If a run on hedge funds forces them to start selling assets into this market, the bottom is going to fall even farther.

So, anyhow, what happens? The cost of short term money goes up enormously. The cost of long-term money—mortgages—may or may not change significantly, though certainly only people with strong credit records will be able to borrow. When the cost of short term money goes up, businesses can not afford to get loans, which means that they can not afford to expand. Some businesses finance their day-to-day operations with short-term paper; those businesses are in huge trouble. It’s hard to raise prices significantly in today’s environment, so they lay people off. Those people have less money to spend, so they stop buying things. The economy goes into a recession. With the economy in a recession, people are unwilling to make large purchases, and housing prices continue to fall. Foreclosure numbers increase.

Obama gets elected president—there’s no way McCain can win under these conditions. Pragmatic center left politician that he is, he starts a New New Deal for the economy. He appoints Robert Rubin as Treasury Secretary. He increases the deficit to pay for infrastructure and cleaner energy, putting the construction workers back to work. The government creates its own temporary commercial paper market.

After a year, the economy starts to grow again. Housing prices remain depressed compared to their peak for many years, and many people lose money on their houses. The unemployment rate remains high for several more years.

One interesting question is: does China continue to buy U.S. Treasury bonds and thus finance the deficit spending which Obama will put in place? Or does the U.S. have to pay higher interest rates and thus sink even deeper into a long-term hole?

Regardless of all this, my guess is that they will manage to pass some sort of bailout this week.

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Complexity

Is there such a thing as irreducible complexity? Our current society is some orders of magnitude more complex than a hunter-gatherer society. What I mean is that the basic requirements of life: food, water, shelter; are provided by organized systems which require the labor of thousands of people and which no single person fully understands. These systems have evolved over millenia, though the complexity started increasing rapidly in the last two hundred years.

Although I said that no single person understands these systems, I think we all tend to believe that it would be possible if one tried. The systems are mostly designed to be decomposable, so that one part can change without affecting other parts, and they are mostly designed to fail safe, so that the failure of one component may cause degraded service but does not cause the system to stop working. Obviously in saying this I am using the language of programming, which is appropriate in that some computer programs are probably the most complex objects which humans have designed and built.

The significant difference, however, is that computer programs were in fact designed, and they were designed with an awareness of complexity. The systems which form our society were not designed; they evolved. Evolution can and does produce systems which are more complex than ones that humans would design. My question for today is whether evolution produces systems which are more complex than people can understand.

Our tools for understanding complexity amount to 1) building an abstract mathematical model of the system and learning how to manipulate that model; 2) breaking the system into smaller components, understanding the components individually and understanding how they fit together. Nobody has any idea how to apply a mathematical model to a biological system, but there has been considerable progress in breaking them up into components. It is still theoretically possible that some parts of a biological system are too complex to understand; perhaps the neurotransmitter system that presumably underlies consciousness can not be broken up into components in any reasonable way. However, while that is a theoretical possibility I’m not sure that many people truly believe it. Scientists do continue to make steady progress in understanding biological systems.

Biological systems are limited in their complexity by their size, by the constraints of their evolutionary history, and by the rigorous constraints of survival in an uncaring world. None of these limitations apply to systems created by humans. Human systems are limited in that any individual part must be comprehensible by a human, but the interconnection of those systems has no inherent limit in complexity.

So while it is clearly impossible for us to design a system which is too complex to understand, is it possible for one to evolve out of our society? Does the fact that economics is a failure as a predictive science suggest that that has already happened? Is it possible for us to develop more powerful tools of comprehension? If we did develop those tools, would we somehow use them to make systems still more complex?

What are the consequences of living in a system which is too complex to understand, if such a system is indeed possible? One of the lessons of state socialism was that planned economies don’t work. Was that only due to pervasive cynicism and opportunism among the bureaucrats, or was the problem really that no single person could grasp enough to plan the economy reasonably, or was the problem simply that they did not have the tools to do it? The market fundamentalists would say that a free market never fails, but anybody reading the newspaper today can see that that is not true, at least not in the short run which is what really matters for humans with a limited lifespan. I think that shows that while free market theory is a way to understand the complexity of our society, it simplifies too much, and fails to represent some significant aspects.

How do we benefit from the complexity of our society? Would it be better to make it simpler, or would we lose too much by doing so? Is it even possible to make it simpler without resorting to draconian coercion? Is there any natural limit to the complexity of society, other than the number of people involved?

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Home Bailout

The root cause of the troubles in the financial system is the severe decline in housing prices. Financial companies bet that this would not happen. So how about, instead of bailing out the financial companies by buying their bad mortgages, we bail out the homeowners by buying their houses? The government would buy houses for the list value of the mortgage, thus paying off the mortgage holders. The government would then sell the house back to the owner at a significantly reduced price, retaining an interest in the house. If the house were later sold, the government would take, say, 75% of the profit up to the amount which the government lost buying the house. If this did not pay the government back, the remainder would be carried over until the next sale.

Giving the mortgages their book value should let the financial companies price their assets and get the credit system going again. Getting distressed homeowners out of their current bind would let them continue to enjoy the benefits of home ownership. Holding a delayed lien on the house would mean that the government would eventually get paid back for most of its outlay, though admittedly this could take quite some time.

This is more complicated than the proposed bailout, but it seems fairer to me. It’s still a bailout, no question, but at least it directly helps the people who are hurt, rather than piping the money directly to the financial services companies.

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Testing Schools

Parents want to be able to tell which elementary and high schools will be better for their children. Society wants to be able to reward good teachers and move bad ones into different roles. I don’t know how we should do that effectively, but I do know that what we’re doing now is a bad idea.

Today most schools make the students take tests every year. The results of those tests are reported and are used to compare schools against one another. The teachers have strong incentives to ensure that their students do as well as possible. This leads to a predictable bad effect: teachers teach students to do well on the tests, rather than teaching them something useful.

That would be fine if success on the tests equated to some metric of success in life. Unfortunately, they do not. Life outside of school is really nothing like taking a test. Children in school should learn a set of basic facts and they should also learn how to apply their knowledge, how to know whether they are right, and how to know when to seek more information. The tests are probably OK on basic facts, but they are terrible on the more important aspects of education.

I’ve always done very well on standardized tests: I have a good memory, I can focus well, and I’m good at figuring out not so much the right answer, but the answer which the writer of the test is looking for. That is, fairly early on I developed a meta-theory of tests which served me well. However, I recall an eye-opening experience in high school in competition to get on the Math Olympiad team. There were two levels. The first was a standardized test, which I did very well on—I think I was in the top 100 in the country that year, or something like that. The second was a set of freeform math problems to solve; I couldn’t solve a single one, or really even make any progress on understanding them. Actually doing math turned out to be very different from any multiple choice test. And it turns out that that is not exclusive to math: everything is like that. Everything.

Teaching students to do well on tests is not completely wasted time, as they are bound to pick up some real information along the way. But it’s definitely wasted time compared to the more useful work they could be doing.

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