The terrible cost of free doughnuts

During the Second World War, the Red Cross provided free doughnuts to US troops fighting in Europe. Then they started charging 2¢ for a doughnut and coffee. 70 years later, veterans still haven’t gotten over that betrayal. NPR Planet Money explain why: basically, it comes down to the special nature of “free”, and the fact that the change altered the perceived relationship between the Red Cross and the veterans, from “friendly charity” to “money-making business”.

It seems to me that this issue of categorical change vs price change is part of the reason why I am so vehemently against the TSA’s policy of charging for security screening that hasn’t been deliberately slowed down. Getting security screened as fast as possible was a free service, and it’s not part of what I’m paying for when I book a plane flight. Being charged extra to not get deliberately and unnecessarily delayed at the airport is a categorical change, right? Meanwhile, while I don’t like baggage check charges, they don’t fill me with the kind of furious rage that the TSA does.

There’s a lesson for Internet companies too. Facebook’s attempt to charge for sending a message to someone you don’t know? Their attempt to charge for having your update be seen by all your friends? Categorical changes, very unpopular.

The future of Bitcoin

[One of a series of articles.]

So far I’ve talked about Bitcoin myths and how Bitcoin is in a speculative bubble. In this article I’m going to discuss Bitcoin’s future.

My view regarding the long term future of Bitcoin is fairly simple: I maintain that it doesn’t have one. And not just because there are pre-existing superior digital cash systems. No, the fact that better digital cash systems were invented in the 90s points at the fact that there are specific reasons why they haven’t taken off, and that it’s not to do with technology.

Put simply, the adoption of digital cash is limited because of economic problems, not technical ones.

The first problem is that digital cash isn’t in the consumer’s interest. It’s more complicated to deal with than a credit card, and doesn’t give you any of the associated benefits (cash back, reward points, extended warranties, ability to get the card company to make a seller take back a faulty item, and so on). In addition, in the case of Bitcoin, you’re out of luck if your money gets stolen — which is currently becoming increasingly likely. DigiCash was a lot more resistant to theft and fraud, but it still didn’t seem a compelling value proposition to consumers, even though it was launched in the middle of the .com boom.

The second problem is that digital cash isn’t in the store’s interest. They love being able to track purchasers by credit card number or check account number. Many stores go to the extra step of having loyalty cards, so they can track you even if you pay with cash. So the anonymity of digital cash is a minus to retailers. There’s also a technological issue — US stores don’t even have NFC deployed widely yet, as I’ve discovered by trying to use my phone to pay for stuff digitally. (Here in Austin, Texas, H-E-B has NFC terminals, but they deliberately turn the digital payment functionality off!)

Problem number three: Digital cash isn’t in the bank’s interest, again because of the anonymity. Your credit card account is a rich data source the bank mines in order to sell you add-on services or other bank products. Banks also make a lot of money from the transaction fees that people would be able to sidestep if there was a global digital currency.

Finally, digital cash isn’t in any government’s interest, because it makes it a hell of a lot harder to control the economy, control money flow, catch drug dealers, and audit people’s tax returns. No government is ever going to voluntarily recognize secure anonymous digital cash.

I haven’t seen any proposals that would even begin to deal with (or sidestep) all the economic disincentives I’ve just listed, for Bitcoin or any other cryptocurrency. I suspect that’s because the people who are into Bitcoin are computer programmers, and computer programmers tend to blindly see everything as a technological problem, and dismiss economics as a pseudo-science that has nothing to say about the real world.

Notice that the situations where you see Bitcoin actually being used for commerce are exactly those where it has economic benefits — situations where everyone involved has a compelling desire to want everything to remain anonymous. You know, sale of illegal drugs, procurement of assassinations, that kind of thing.

So all in all — and speaking as someone who met David Chaum and had brochures about DigiCash and loved the idea and has therefore seen it all before — I rate the chances of Bitcoin going mainstream as zero. It’s a fad and a speculative bubble. Of course, you can still make some money off of it, but don’t stay in it for the long haul expecting to gain.

Next: Other dissenting voices…

Bitcoin and quantitative easing

[Part of a series of articles]

It’s frequently stated that Bitcoin is finite, that there can be exactly 21 million Bitcoins, and that’s it. Bitcoin fans like to point this out to distinguish it from normal currency, where the central bank can just print more money.

The claim that Bitcoin is finite is technically correct, which as we all know is the best kind of correct. However, it’s seriously misleading, to the point of not really being true at all. To understand why, you need to have been following the Bitcoin saga for a while.

In March 2013, Bitcoin forked. It turned out that versions 0.7 and 0.8 of the software behaved slightly differently, and after a particular block of data the ‘block chain’ (the registry of all bitcoin transactions) split into two: the 0.7 block chain, and the 0.8 block chain.

This was resolved by the community deciding that everyone who had mined or traded bitcoins on the 0.8 chain was out of luck — nobody was going to accept their coins as valid. So not only did Bitcoin turn out to be less finite than people had hoped, it also turned out that people could have perfectly valid Bitcoins taken away from them by fiat.

Of course, taking people’s Bitcoins wasn’t the only option. The Bitcoin protocols could have been extended to include a block chain indicator, which would specify whether each coin was a 0.8 chain coin, or a 0.7 chain coin. But that would have suddenly dramatically increased the number of Bitcoins by over 50%. The Bitcoin community values the idea of there being only 21 million of them, so collectively it decided that a better option was to effectively seize and invalidate the new coins of those who had adopted the new version of the software.

Since Bitcoin is just software, the block chain indicator idea could be extended further. You could start a new block chain each year, just like most national currencies have a year of issue on their coins and banknotes. Each Bitcoin would be labeled with the year of issue, so the software would know which block chain to transact with.

And effectively, this has happened. Except instead of a year of issue or some other numeric version fork of the block chain, people have come up with a new name for their Bitcoin fork, and usually made a few tweaks to the algorithms. Anyone can do it. Already there are dozens of them — Litecoin, PPcoin, Megacoin, Betacoin, AnonCoin, PhenixCoin, and so on. There’s even a satirical Dogecoin. And the Dogecoin community has decided to allow inflation.

Dogecoin

Just as Bitcoin 0.7 only remained limited to 21 million coins as long as everyone agreed not to use the 0.8 block chain, so Bitcoin in general is only immune from currency expansion as long as everyone agrees not to use any of the forked alternative crypto currencies. So far, it doesn’t look like that will be the case — everyone’s hoping that by picking a new fork, they can get in on the ground floor of a bubble just like the Bitcoin one.

Next: The future of Bitcoin…

Perverse incentives

It’s commonly believed by right-wingers that US public radio has a left-wing bias. If you want to hear an example of a program that disproves the assertion, I suggest This American Life episode 490: Trends With Benefits. It has turned out to be somewhat controversial, though TAL are standing by the facts they reported, unlike with the Mike Daisey piece.

As most people know, the US economy has a deficit problem. Part of the reason for the problem is crazy defense spending, yes; but there are two other chunks of the federal government’s budget that are about the same size as the military budget: Social Security and Medicare.

The This American Life show gives some insight into why the Social Security budget is so huge, starting from one simple statistic: That in Hale County Alabama, a quarter of the working-age adults are receiving disability payments, because they have been declared permanently unable to work.

What counts as a permanent disability? Well, the list includes:

  • High blood pressure
  • Diabetes
  • Chronic back pain
  • Sleep apnea

Now, I’ve known people with diabetes who inject themselves with insulin and go to work every day. I have chronic back pain, but I’ve only missed a couple of days of work in the last few years. My father-in-law had high blood pressure for the last couple of decades of his working life. None of these things should be permanent disabilities that render you unable to work.

At this point, the traditional right-wing media narrative is “Look at all these scrounging parasites”. But as is generally the case, it’s a bit more complicated than that.

If you live in Hale County Alabama, and you aren’t highly qualified — which is the case for the disability recipients — then there really aren’t any jobs you can do. Even if you had the time and money to get the necessary education, there aren’t any white collar jobs in rural Alabama. The only jobs on offer involve lifting heavy objects, standing up all day, or other physical tasks. So if you have high blood pressure, well, you probably really aren’t fit to work any of those jobs. Or at least, no company will employ you, in case you drop dead.

So the problem is bad. But then things get farcical. It turns out that when someone applies for disability and is turned down, they can file for a hearing. At that hearing, they can get a lawyer to present the case for why they can’t work. On the other side, the government has … Nobody. There’s nobody whose job it is to explain why the petitioner is actually able to work, or point out jobs they could be doing. So most of the time, the lawyer will get them approved for disability. At that point, the petitioner is liable for back-payment of disability from the time they first applied. The lawyer gets a portion of that back-payment. In fact, the federal government pays the lawyer directly. So if you do a Google search for (say) ‘disability’, you’ll find lots of lawyers ready and eager to take even a pretty marginal case, on a contingency benefit.

But that’s not the worst part. See, once you get disability payments, you no longer qualify for unemployment benefit. And whereas unemployment benefits are paid by the individual states, the Social Security disability system is a Federal program. So get this: States actively hire companies to go through their lists of the unemployed, spot any who might be persuaded to qualify for disability, and encourage and assist them with the process.

But even that’s not the craziest part. It turns out that children can qualify for disability payments too, for things like learning disabilities. Dyslexic? You might be able to get your parents a nice Social Security check each month. Of course, in time your parents will come to rely on that check, and they’ll only get the check as long as you continue to do badly in school. Once you reach adulthood, well, you can either stay on disability — or you can try and get a job which might not work out, and in the mean time lose your steady disability benefits.

Because the disabled don’t get unemployment benefits, government excludes them from the unemployment figures. Which might seem reasonable enough, but unfortunately right now there are more people being added to the disability benefits list each month than there are new jobs being created. So the actual percentage of people who could be doing some sort of job, but are not doing so, could be way bigger than the official unemployment figure of 7.7%. And we’re still sliding backwards.

So, what’s the solution? Well, there’s one radical theory that has been proposed for decades, under titles like “Universal Living Wage”, “Subsistence Allowance” or “Basic Income Guarantee”. It’s pretty simple to understand: You put together a minimal subsistence payment, enough to cover basic food, shelter and other bare essentials — and you give it to absolutely everyone. You filed a tax return? Here’s your subsistence payment.

This immediately eliminates a ton of bureaucracy. No application process, no means testing, no medical tests, no appeals process, no judges needed, very little chance of fraud. It also eliminates the problem of potentially losing the steady income you need to live by risking taking a job. Hence, hopefully nobody will ever feel like it isn’t worth taking on a job. Even a part-time, temporary or seasonal job will boost your income without the risk of reducing your subsistence payment.

Obviously, there are naysayers. The most common objection is that if nobody is absolutely forced to work in order to afford a roof over their heads and food to eat, why, surely nobody will work at all? Personally, I find that argument incredibly patronizing and offensive. Nobody who has earned more than a couple of million dollars needs to work, but there are plenty of millionaires who do carry on working. And we’re not talking about a luxury subsistence here; if you want a mobile phone, TV, PlayStation or car then you’re going to have to go out and get a job to pay for it, like the rest of us. If you want your own space, rather than a run-down government-run shared apartment space, you’re going to have to work hard.

Still, many doubt that such a scheme could ever work. Except it turns out that one country tried it. From 1974 to 1979, Dauphin Manitoba ran an experimental basic income program known as “Mincome”.

Mysteriously, the Canadian government locked away all the data that was collected, and prevented it from being analyzed. The astute reader can probably guess why. When academics finally managed to get access to the documents in 2009 and analyze the results, it turned out that the whole scheme worked pretty well. Rather than everyone sitting around idle on welfare, the only people who worked less were mothers and teenagers. Graduation rates for teenagers, not surprisingly, went up. Hospital visits dropped. There were fewer work-related injuries.

So, how about it, America? The current system is clearly a disaster, and an inefficient one at that.

Regarding Rush Limbaugh and contraception

Rush Limbaugh’s comments on contraception have shown that he doesn’t understand how people respond to basic economic situations.

The contraceptive pill is something you have to take every day. You don’t only use it when you have sex. So if you think you might have sex once, you need to go on the pill and stay on it.

This means that the cost of contraceptive pills purchased by the user is what economists call a sunk cost. Humans are loss-averse, so when they are faced with a sunk cost, they tend to try and make more use of whatever incurred the cost, so as to minimize the perceived loss.

This is most often encountered when considering transport. Suppose I spend $6,000 per year to maintain an automobile so that I can commute to work. Now suppose I’m faced with the desire to go to a restaurant downtown. I could pay a couple of dollars to get the bus, but since I’ve already paid the six grand to have a car available, chances are I’ll go by car in order to get more use out of it.

So if people have to pay for contraceptive pills, then economics tells us they’re likely to view the sunk cost that way. In other words: if you have to pay a fixed amount per month for contraceptive pills, chances are you’ll want to have more sex, so as to reduce the apparent cost per sexual encounter.

On the other hand, if contraceptive pills appear to cost you nothing, because you get them covered by insurance, there’s no motivation to have more sex.

So if conservatives wanted to encourage people to have sex more, making them pay for contraceptives would be the perfect way to do so.

There are similar economic motivations around condoms, of course. If you buy a box of 12 you have an economic incentive to use them up before they expire. If you get them for free, you don’t care if they go unused.