Category: Current Affairs

Decentral Intelligence Agency

I have yet to see a good argument for creating a new director of intelligence. It’s true that the intelligence agencies failed to share information. But an epi-central director of intelligence doesn’t solve that problem and may make it worse. The implicit model of the 9/11 Commission is command and control – move all the information from the roots of the tree to the top of tree and then one all-encompassing-mind will evaluate it and make the right decision. Does that model sound familiar? Sure it does, that’s the model of economic planning that is currently lying on the ash-heap of history. It’s the model that Mises and Hayek subjected to withering criticism in the socialist calculation debate of the 1930s.

In brief, consider the following two defects of the economic Czar model. First, even if the information were to make it all the way to the top it would be difficult, well nigh-impossible, for a single mind to grasp it all and make it useful. This is especially true when there are no prices and hence no way of aggregating the information into a common unit (the so-called terror market was one way of alleviating this problem). Second, information is lost as it moves up the hierarchy – it has to be because not all information is easily communicable, bandwidth isn’t infinite, and the people at the top demand information loss because as you move up the tree the amount of information becomes overwhelming.

An intelligence-Czar faces exactly the same problems. So what can be done? The intelligence agencies need tools that can spread information rapidly and widely and that are open to anyone with information whether they are at the bottom or the top of the hierarchy…Sound familiar? Yes, blogs and wikis are the right idea. And no I am not being flip. A central information repository that everyone can access may be part of the solution but centralizing information is not the same as centralizing decision making authority (remember “groupthink?” – the solution to our intelligence problems must face the problems of 9/11 and the problems of Iraq which are not the same.) Other ideas are to reward information sharing instead of hoarding – we should probably classify less information not more – and to rotate staff across bureaus in order to encourage collaboration and informal information sharing. Others more expert in this area will have more specific suggestions but my primary suggestion is that the models to follow are those of markets, webs, and networks.

Addendum: See also Tyler’s related and important discussion.

Has there been a free trade breakthrough?

Remember that old saying, something like “Things are never as bad, or as good, as they seem.” It applies to international trade as well.

Numerous reports suggest that the WTO has achieved a breakthrough. The core deal appears to suggest that many poor countries will lower their tariffs on manufactured goods and the rich countries will limit or eliminate export subsidies and protection for agriculture. But there is more here than meets the eye.

The first worry is an obvious one. There is no date given for the change in agricultural policies. Keep in mind that the rich countries are masters of obfuscation and delay on this issue, if not outright obstruction. Plus the rich countries can exempt “special” products, if they so choose.

Arvind Panagariya suggests that our concerns should run deeper:

Current production and export subsidies flood world markets with the subsidised products and drive their prices down. The removal of these measures will raise the prices of the products in question. This will benefit the exporters and hurt the importers of these products. Food products happen to be among the most heavily subsidised items and as many as 45 of the world’s least developed countries are net food importers, according to calculations by the economists Alberto Valdes and Alex McCalla. Even when we consider all agricultural products, 33 least developed countries are net importers.

A counter-argument may be that, once the subsidies are eliminated and world prices increase, the least developed countries will become net exporters of the products. But this is doubtful for two reasons: such a change can turn at most only a handful of these countries into net exporters and the switch from net importer to net exporter status by itself is not enough to bring an overall benefit. As food prices rise, so will losses on food imports. Only if a country becomes a sufficiently large exporter will it be able to offset these losses.

In other words, even if reform comes about, the main beneficiaries will be the taxpayers in the rich countries. Export subsidies benefit consumers abroad, even if they do not maximize aggregate value.

Nonetheless it is trickier than Panagariya indicates. Many agricultural interventions keep world prices up, not down, by preventing the reallocation of farming to its most productive geographic venues. Nonetheless it is not obvious that the very poor countries would be big winners in any competitive reshuffling of sectoral specializations. In fact we might expect technology to make agriculture increasingly high-tech. We are then back to the case where export subsidies hurt taxpayers in rich countries but help consumers in poor countries.

Also keep in mind that many poor countries already enjoy free bilateral access to EU markets for many agricultural commodities, with rice, sugar, and bananas being prominent exceptions. So if liberalization causes food prices in Europe to fall, agricultural exporters in the poor countries may again be worse off.

I am all for free trade, as loyal readers of MR will know. But it is a common myth to think that agricultural free trade will cause say, Africa, to blossom or achieve significantly greater gains from world markets. Even if African consumers end up paying lower prices for food, African producers will see very mixed results. And how effectively do we expect the damaged producers to be reallocated to other sectors? Africa as a whole could still benefit in the longer run, given the theory of comparative advantage, but this is hardly the scenario that everyone has in mind.

Addendum: Ben Muse offers an analysis and extensive links.

Profits and an Independent Press

He who pays the piper, picks the tune. In China, that moral has proved to be a surprising link between economic reform and political reform.

More than a quarter century after China launched economic reforms while continuing to restrict political freedom, the government still owns and controls all of the country’s newspapers and television stations. But journalists have fought off party censors in one sensitive subject area after another, and they are waging a daily battle for even greater freedoms.

This push is driven in part by economics. In a sweeping industry overhaul, the government is withdrawing subsidies from state media outlets, holding them responsible for their own profits and losses and opening the door to private investment. The market has led newspapers to set aside propaganda and deliver stories that readers are actually interested in. Many have turned to gossip or entertainment, but there is also a financial incentive to produce a scarce commodity: journalism that challenges the government.

That’s from a very good Washington Post story about a courageous newspaper editor in China, jailed for questioning the local police.

Facts about Orkney

Sorry, no links in this post, but I am sticking to the local sources that sound credible:

1. The richest man in Orkney is (was?) a fisherman. His large net turned out to violate EU regulations, so he received $20 million from the British government to stop fishing. He is now building a house that overlooks the entire town of Stromness from above. The townspeople are not happy.

2. One-third of the employment in Orkney stems from an NHS hospital on the main island. Waiting times are significantly lower here than elsewhere in Britain and the service is correspondingly better.

3. Much of the labor force switches jobs over the course of the year. They serve tourists for three months in the summer, and pick up odd jobs the rest of the year. Work is easy to come by, careers are almost impossible to develop.

4. There have been only two murders in Orkney in the last two hundred years. One happened about two hundred years ago. The other is about ten years old; a waiter was shot and killed in Kirkwall’s Indian restaurant. Neither crime has been solved yet.

5. Orcadians eat pickled herring in oatmeal, smoked fish with scrambled eggs, and fried haddock with chips. For dessert they have Orkney fudge or Orkney ice cream. Haggis is nowhere to be found.

Here is a a tourist introduction to Orkney. Here is historical information. The islands are among the most beautiful spots in Europe and remain largely unspoilt, go if you can.

Osama by November?

There’s nothing like an election to concentrate the mind, or so says The New Republic.

This spring, the administration significantly increased its pressure on Pakistan to kill or capture Osama bin Laden, his deputy, Ayman Al Zawahiri, or the Taliban’s Mullah Mohammed Omar, all of whom are believed to be hiding in the lawless tribal areas of Pakistan. A succession of high-level American officials–from outgoing CIA Director George Tenet to Secretary of State Colin Powell to Assistant Secretary of State Christina Rocca to State Department counterterrorism chief Cofer Black to a top CIA South Asia official–have visited Pakistan in recent months to urge General Pervez Musharraf’s government to do more in the war on terrorism….

This public pressure would be appropriate, even laudable, had it not been accompanied by an unseemly private insistence that the Pakistanis deliver these high-value targets (HVTs) before Americans go to the polls in November….The New Republic has learned that Pakistani security officials have been told they must produce HVTs by the election. According to one source in Pakistan’s powerful Inter-Services Intelligence (ISI), “The Pakistani government is really desperate and wants to flush out bin Laden and his associates after the latest pressures from the U.S. administration to deliver before the [upcoming] U.S. elections.”

Is more Congressional oversight good?

The bipartisan committee on terrorism has argued that Congress did not exercise sufficient oversight of the CIA and other intelligence agencies. For a pithy analysis read Daniel Drezner here and here.

More oversight will make the intelligence agencies, however they are structured, more risk-averse. The President or Congress will peep in every now and then, and the agencies will scurry to respond to the emergency of the day. They will work harder not to look bad. This is hardly the best way to encourage imaginative, long-run thinking in defense of our nation.

Excess risk-aversion already happened with Iraqi WMD. One CIA analyst noted: You have to understand,” he said. “We missed the Indian and Pakistani nuclear tests last spring. We’re under a lot of pressure not to miss anything else.”

Now you might think that risk-aversion in intelligence is a good thing. Should we not take all possible care to protect America against foreign threats? But bureaucratic risk-aversion is not the same as a secure national defense. It brings groupthink, excess formalism, protecting against yesterday’s threat, and an unwillingness to take responsibility for mistakes. Furthermore it can make effective pre-emption virtually impossible; decisionmakers and their allies will no longer trust their intelligence communities.

Rather than making intelligence agencies more accountable, how about making them more independent? Create some small, elite groups and staff them with the best people we can find. Pay them well. Give them arsm-length protection from political pressures. Treat them like the Federal Reserve, an independent agency renowned for the quality of its staff. Give them a culture of internal pride. Richard Clarke reminds us that: “It is no accident that the only intelligence agency that got it right on Iraqi weapons of mass destruction was the Bureau of Intelligence and Research at the State Department – a small, elite group of analysts encouraged to be independent thinkers rather than spies or policy makers.”

Sometimes the way to get what you want involves less control, not more control.

Us and the heart of civilization

Blogging about the convention, William Saletan hits on a profound point. It’s not just Democrats, however, the framing of “us” and “them” is perennial and it’s the expansion of “us” that is at the heart of our civilization.

Obama, like other speakers at this convention, complains about “companies shipping jobs overseas” and workers “losing their union jobs at the Maytag plant that’s moving to Mexico.” At the same time, Obama holds himself out as a symbol of a diverse, welcoming America. How can Democrats be the party of diversity at home but xenophobia abroad, the party that loves Mexican-Americans but hates Maytag plants in Mexico, the party that thinks Obama’s mom deserves a job more than Obama’s dad does? I understand the politics of it. But what about the morals?

Double Jeopardy Disaster

Getting a new drug or medical device approved by the FDA is a long and expensive process. The FDA is risk-averse and pays much more attention to the risks of approving a bad drug than to the risks of failing to approve a good drug. As a result, every economist who has ever written a serious analysis of the FDA has come to the conclusion that less regulation would mean more new drugs and more saved lives. (See for more information. Gary Becker offers a recent statement.).

Approval, however, does not end a firm’s problems because even then it faces the risk of a debilitating lawsuit. Consider how bizarre this is: A team of statisticians, physicians and medical researchers pores over years of clinical data to pronounce a product safe (always noting that this means safe relative to the product’s expected benefits) and then a jury of 12 randomly selected Joes and Janes second guesses them, awards plaintiffs billions of dollars and drives the firm into bankruptcy. This has happened more than once.

FDA approval ought to be a “safe harbor.” Many states already have laws along these lines but they have been weakly enforced. The Bush administration’s efforts to limit lawsuits against firms that have passed FDA approval is a therefore a necessary and welcome piece of common sense. This doesn’t mean that you can’t sue a drug manufacturer. If the manufacturer lies to the FDA or to your physician or if they don’t produce the drug according to specification then by all means sue away. Every drug, however, has side-effects and every drug works differently in different people. That means that there has to be some sort of cost-benefit test to decide if a drug should be marketed. There is an argument for using tort law instead of the FDA to do this test – an argument that gets weaker the more out out-of-control the courts become – and there is an argument for using the FDA instead of tort law but there is no argument for adding tort law on top of FDA regulation, that is a double jeopardy disaster.

Terror Betting Markets and the 9/11 Commission

Remember “terrorism betting markets”? The program was killed one day after it made headlines – so much for democratic inertia! Opponents plausibly argued that these markets made terrorism pay. According to a press release by Senators Wyden and Dorgan:

Terrorists themselves could drive up the market for an event they are planning and profit from an attack, or even make false bets to mislead intelligence authorities.

Of course, you hardly need terrorism betting markets to make money from terrorism; all you need to do is short the stocks of firms that will be adversely affected (say… airlines?). So if betting on terrorism scares you, you should still be scared! But before you start losing sleep, check out the findings of the 9/11 Commission. They find no evidence of 9/11-related stock market manipulation. Here are the two key passages:

There also have been claims that al Qaeda financed itself through
manipulation of the stock market based on its advance knowledge of the 9/11
attacks. Exhaustive investigations by the Securities and Exchange Commission,
FBI, and other agencies have uncovered no evidence that anyone with advance
knowledge of the attacks profited through securities transactions. (pp.171-2)

Highly publicized allegations of insider trading in advance of 9/11 generally rest on reports of unusual
pre-9/11 trading activity in companies whose stock plummeted after the attacks. Some unusual trading did in fact
occur, but each such trade proved to have an innocuous explanation. For example, the volume of put options–
investments that pay off only when a stock drops in price–surged in the parent companies of United Airlines on
September 6 and American Airlines on September 10–highly suspicious trading on its face. Yet, further investigation
has revealed that the trading had no connection with 9/11. A single U.S.-based institutional investor with no
conceivable ties to al Qaeda purchased 95 percent of the UAL puts on September 6 as part of a trading strategy
that also included buying 115,000 shares of American on September 10… The SEC and the FBI, aided by other agencies and the securities industry, devoted enormous
resources to investigating this issue, including securing the cooperation of many foreign governments. These
investigators have found that the apparently suspicious consistently proved innocuous. (p.499)

It is worth pointing out that even if the 9/11 Commission had found evidence of a terror/stock market connection, there would still be almost no case against the original plan for terrorism betting markets. The maximum bet was under $100. I like the economic theory of suicide as much as the next economist, but I still can’t imagine any would-be terrorist changing his mind over a Benjamin.

Thanks to my colleague and terrorism betting market lightning rod Robin Hanson for the 9/11 pointer. See also Alex’s short piece In Defense of Prediction Markets, kindly made available by Mahalanobis.

Slow medicine

Here’s another death of common sense story:

Would-be California medical students with learning disabilities filed a discrimination suit Monday saying their prospects of becoming doctors are being thwarted because they aren’t given enough time on the medical school entrance exam.

Do you remember the episode on ER where a patient was rushed into the hospital with severe head trauma and Doctor Green had to go to a quiet room to think about what to do? No, me neither.

(Not every doctor works in an ER but even general practioniers must think quickly if they expect to see enough patients to earn a good living.)

Even more shocking than the lawsuit is the response of the American Association of Medical Colleges. Instead of making the obviously correct argument that time is a legitimate testing hurdle for a physician they argue that the students involved are not disabled enough! If only they had failed more of their undergraduate classes then the AAMC would give them special accomodation. Really, I’m not making this up.

About the only saving grace in these stories is that the underlying assumption is usually wrong. Fact is, there just aren’t that many slow geniuses. Speed and quality of thought are correlated. (How else to explain my co-blogger? See here for more systematic evidence.) If there are other hurdles, these same students will soon be selected out. As a professor, I have seen this many times. Of course, that just means more lawsuits.

Thanks to Right Side of the Rainbow for the pointer.

Socking it to us

The Bush administration has decided to consider a request from the domestic sock industry to impose quotas on imports of Chinese-made socks and will make a final decision on the matter just before the November presidential election, the Commerce Department said Wednesday…

“Urgent, significant action is needed immediately to save the domestic sock industry, the most competitive sector remaining of the once flourishing U.S. domestic apparel manufacturing industry,” wrote Charles Cole, chairman of the Domestic Manufacturers Committee of the Hosiery Association, and three other industry executives…

Cole, of the Domestic Manufacturers Committee, owns Alabama Footware in Ft. Payne, Ala.

From a CBS MarketWatch story. The administration has already imposed quotas on bras from China, despite the fact that there is no domestic bra industry to protect.

China is selling us a lot of socks (22 million pair in 2003 up from just 1 million pair a few years ago) for which I am grateful. I find that they go great with shoes from china.

Thanks to Marc Andreessen for the pointer.

Diamonds are Forever…Not

How long can the diamond cartel last? I remember, as a kid, watching Milton Friedman tell us that the New York Stock Exchange was the only longstanding market monopoly he could think of. The NYSE has lost much clout, but why isn’t the diamond sector more competitive? Diamonds are found in many countries but the De Beers cartel has been dominant for much of the twentieth century.

But things are now changing:

…this stable, established and monopolistic system is now falling apart…other big miners got hold of their own supplies of diamonds, far away from southern Africa and from De Beers’s control. In Canada, Australia and Russia rival mining firms have found huge deposits of lucrative stones: BHP Billiton, Rio Tinto and Alrosa have been chipping away at De Beers’s dominance for two decades.

De Beers once controlled (though did not mine directly) some 80% of the world supply of rough stones. As recently as 1998 it accounted for nearly two-thirds of supply. Today production from its own mines gives it a mere 45% share. Only a contract to sell Russian stones lifts its overall market share to around 55%.

An Israeli named Lev Leviev has been instrumental in breaking down the old system:

Mr Leviev recently moved into diamond retailing. He claims that he is the only tycoon with interests in every stage of production from “mine to mistress” (a canard in the industry holds that men buy more diamonds for their mistresses than for their wives). But his real power lies in the cutting and polishing businesses. He has factories in Armenia, Ukraine, India, Israel and elsewhere. These give him power to challenge De Beers’s central clearing house and seek instead to channel stones directly, and at a lower price, to his own polishers.

The price of diamonds, however, has yet to fall. My more fundamental question is why these supply-side developments have taken so long.

Perhaps synthetic diamonds will put the market under for good. Few people if any can tell the difference. The diamond industry is spending large amounts to tout “the real thing.” But will a generation used to reproduction and “multiples” buy this line? And will men manage to move to a lower-cost signaling equilibrium in the marriage (and mistress) market?

The bottom line: File this one under “Markets Economists Do Not Understand.” But if there was one commodity I would not want to be holding today, it is diamonds. Someday students will wonder why they ever called it the “diamond-water paradox.”