Bootleggers & Baptists: XVI: Terrorism and Prediction Markets

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The program was derided by Democrats and Republicans in Congress, some of whom called it “bizarre,” “unbelievably stupid” and “offensive.” Rumsfeld himself said he canceled the program “an hour after I read about it.” ( Wired ,July 2003)

Commonly, government programs engender partisanship and opportunism. Political actors are more successful to capitalize on such initiatives are controversial. This effect is only magnified when the program is headed by a polarizing figure. One prevalent example of this was DARPA (Defense Advanced Research Projects Agency) used Prediction Markets to gather intelligence on future geopolitical events. Once more contentious questions such as terrorist attacks and assassination attempts ended up being addressed, the program began to be publicly criticized.

 PAM (Policy Analysis Market) implemented by the Information Awareness Office, a counter-terrorism project ran by DARPA. PAM operated like a future exchanges market for predicting the likelihood of geopolitical events. Including but not limited to terrorist attacks. At various phases of the program, participants (consultation firms, colleges, think tanks) were provided a sum of money to “wager” on the likelihood of certain political events happening (p.77). Those with accurate answers were awarded a larger sum of money.

Figure 1

E.g.) Phase I: Participants were provided $100,000 by the IAO to wager and awarded $750,000 for accurate predictions (p.77).

Mirroring the model used in both past and future prediction markets. Dating back to Robin Hanson first pioneering prediction markets while consulting on project Xanadu in the late-1980s, these markets have always been an incentive-driven phenomenon. It is one thing to claim certainty, but it is another to be willing to die on that hill. Especially when money is on the line. Effectively aligning incentives towards accuracy and rigorous research versus armchair speculation. The objective being the firm, organization, or government department hosting the market with aggregate a large cache of quality information (p.76).In the field of counter-terrorism having averaging consensus from a variety of sources is crucial to avoid engaging the wrong target. Such mistakes will incur costs much greater than monetary losses.

As groundbreaking and innovative as PAM was invariably the program garnered some criticism that eventually devolved into outright censure. Academics and bureaucrats “betting” on the aptitude of terrorist activities and political revolts transpiring may be unsettling from a prima facie standpoint. Particularly if taken at face value with no further analysis. Arguably the criticism of PAM intensified due to the IAO’s controversial director, John Poindexter. Poindexter rose to infamy from his involvement in the Iran-Contra scandal of the Regan administration. Even though all of the insiders of the project acknowledged that Poindexter had little involvement in PAM (P. 6, footnote 7), most of the backlash was directed at him. The fury of pundits, media outlets, and the general public caused Poindexter to resign in the summer of 2003. Leaving the PAM project permanently defunct.

The advocacy and opposition to the implementation of PAM as a means of aggregating intelligence on sensitive matters is no doubt a complex maze of ethical and pragmatic arguments. The use of prediction markets for gathering information for defense planning is just like another government policy, the impact is not neutral. Meaning that keeping or eliminating the program will create disparate consequences. Typically favoring one subset of economic agents over another. Individuals will bear the “expected costs (p.38) imposed by the impact of the policy. For example, a government program may create jobs for individuals that are politically connected. However, this is generally at the expense of the taxpayer. Vice versa, abolishing a program will eliminate jobs for the clerks and managers operating the department. The impact of policy always affects some individuals positively and others negatively. All political policies involve the transfer of benefits from one party to another.

Considering the non-neutral nature of policy, it would be justifiable to apply Bruce Yandle’s concept of Bootleggers and Baptists to the political pressure to abandon the PAM program. Yes, there were some ethical concerns regarding the prospect of having people “wager” on terrorist attacks. It would be naïve to believe that all the opprobrium was motivated by morality. Much how skilled consultants can profit from participating in a Prediction Market, many actors can also do so by dismantling such a program. Beneficiaries ranging from media outlets to opportunistic politicians. The political opportunism was multilayered including enemies of the Bush administration, the Republican Party, and even direct adversaries of John Poindexter. Proving an opportunity for democrats to temporarily shed their anti-patriotic veneer, to admonish these “conservatives” for making light of national security threats. Yet, the credulous public seldomly questions this moral browbeating. On the surface, these criticisms sound valid. Since when have politicians previously disinterested in national security matters are suddenly deeply invested in the integrity of defense intelligence? As Machiavelli pointed out in The Prince appearances are more important than actual principles in politics (p.42).

The Baptists

It is exceedingly difficult to designate one side of the coalition as a pure Baptist in the public outrage campaign surrounding PAM. The self-interest of the media, politicians, resident experts within the government is glaringly obvious. The potential for Dual-Role Actors (economic agents that benefit materially, but simultaneously sincerely believe the moral argument) in this coalition dynamic exists. However, is muddied by the perverse incentives to use strawman, ad hominem, and other logical fallacies to denigrate the program. The adversaries of PAM had a lot to gain through defaming the program. Not a whole lot of utility to extract from testing the validity of the results. Since the average constituent is not going to care too much about the granular details of the program. Rather be fixated on their visceral reaction to the ethical considerations of “betting” terrorist attacks.

Regardless, of whether moral advocacy is misguided or ill-informed, nevertheless, it is still a normative position. The average citizen happens to be the proverbial Baptist in this coalition dynamic. Any expression of disgust or moral indignation was sincere with little to no observable benefit from ending the program (dispersed costs, concentrated benefits). Even if the public’s concern was stoked by the slanted framing of the program, it still does not lessen make their concerns any less earnest. In the absence of further context, a group of contractors and academics participating in a gambling pool predicting terrorist attacks does sound grotesque. Since gambling is considered a form of entertainment appears to trivialize the severity of contentious situations that could result in the loss of lives. For the honest concern for these moral considerations, the average voter is our Baptist.

One great irony was that one of the academics deeply involved in the project narrowed down the reasonable ethical concerns in a peer-reviewed paper years after PAM had been dismantled. It was none other than prediction markets pioneer Robin Hanson. Hanson citing the following as prevalent concerns of the program:

  • “…The first concern expressed—that of replacing professionals with amateurs..” (p.82)
  • “…The second fear expressed was that bad guys would be willing to make losing

trades to mislead us..” (p.82).

  • “..The third main fear expressed was that bad guys might be rewarded for doing bad things..” (p.83). E.g.) Al-Qaeda’s meddling with airline stocks in the 9/11 attacks.

Hanson tactfully addresses all these concerns explaining how much of these concerns are the result of misconception. Like how the media coverage of the program generated several misconceptions regarding the function and purpose of PAM.

The Bootleggers

Several various individuals and groups stand to benefit from a sensationalized portrayal of the PAM program. One of the more salient examples would be the media. Media outlets are a business much like another, the incentive is to maximize profits. Logically this premise is cogent to anyone with even a small amount of exposure to economics. This controversy emerged in the primordial era of social media (Myspace being founded in 2003). The internet did exist but did not present any true competition to televised and print news media. For media outlets to have a story as jarring as the government funding a macabre gambling bracket trivializing serious events, instant goldmine. That is the type of story that sells publications. It has all the elements of a good conspiratorial techno-thriller. One only needs to consider the success of Tom Clancy to know how stories of geopolitical/government intrigue are lucrative. It could be argued that the media is merely the messenger, if they happen to profit from the event, it is a natural consequence of the event. How the information is presented and sways public opinion. If news reports are worded in a manner that is hostile towards the program, this will influence public opinion. Creating a feedback loop, inciting the ire of the Baptists while concurrently profiting. This would be an excellent example of the Bootleggers tacitly inciting the indignation of the Baptists.

Another subset of Bootleggers would be the politicians who spoke out against PAM. A book could be written about the political motives guiding the strategy condemnation of the program by various politicians. As previously mentioned, the layers of political opposition operate on a continuum of scale. Varying from individual grudges, contention between political factions, and even opposition to the sitting president at the time (George W. Bush). Despite the complexities of various political considerations, speaking out publicly about a controversial government program fosters a positive public image. Especially for politicians who were affiliated with the Democratic party. During the Bush administration, Democrats were perceived as being soft on terrorism. At a time where terrorism was a hot-button issue, speaking out against counter-terrorism measures was tantamount to political suicide. The whole PAM debacle presented an opportunity for a clean slate. An opportunity to capitalize on a misstep made by the Bush administration and to feed into the fears of the public. Paralleling the Bootlegger –Baptist feedback mechanism generated by the media. See below for a shining example of such sanctimonious posturing:

For instance,” Mr. Wyden said, ”you may think early on that Prime Minister X is going to be assassinated. So you buy the futures contracts for 5 cents each. As more people begin to think the person’s going to be assassinated, the cost of the contract could go up, to 50 cents.

‘The payoff, if he’s assassinated, is $1 per future. So if it comes to pass, and those who bought at 5 cents make 95 cents. Those who bought at 50 cents make 50 cents.’ (Senator Ron Wyden (D), NYT July 2003).

The Whisk(e)y Wars- A Conflict Fought With Tariffs

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“…When there is no probability that any such repeal [of a tariff in a foreign country] can be procured, it seems a bad method of compensating the injury done to certain classes of our people to do another injury ourselves, not only to those classes but to almost all the other classes of them. When our neighbors prohibit some manufacture of ours, we generally prohibit, not only the same, for that alone would seldom affect them considerably, but some other manufacture of theirs. This may no doubt encourage some particular class of workmen among ourselves, and by excluding some of their rivals, may enable them to raise their price in the home market. Those workmen, however, who suffered from our neighbors’ prohibition will not be benefited by ours. On the contrary, they and almost all the other classes of our citizens will thereby be obliged to pay dearer than before for certain goods. Every such law, therefore, imposes a real tax upon the whole country, not in favor of that particular class of workmen who were injured by our neighbors’ prohibition, but of some other class…” (Bk. 4, Ch. 2)

 The Wealth of Nations- Adam Smith

The Biden Administration’s commitment to free trade is questionable at best. The extent to which he will champion laissez-faire policies is a difficult determination to make in the nascent period of his presidency. Biden being a centrist is more concerned with appeasing the median voter than taking principled policy positions. Only time will tell whether or not he will capitulate to the anti-market sentiment of the vociferous and passionate populous wing of the Democratic party. Epitomized in the heated rhetoric of elected officials such as Elizabeth Warren and Alexandria Ocasio-Cortez. However, there may be some light at the end of the tunnel. Free trade may not necessarily be dead in the water. Despite the multitude of flawed policies that have so far been supported and promulgated by the Biden Administration they may have done one thing correctly. Repeal some of the Trump-era tariffs. Arguably one of the most disturbing aspects of the Trump administration was his hostility towards foreign trade. Biden has taken one small step to repair America’s tarnished image in the arena of international trade. This attempt at redemption has manifested itself in an unlikely form, the abolition of the importation tariff on Scotch Whisky

The previous statement is not wholly accurate. The United States agreed to relinquish all tariffs on goods imported from the United Kingdom. Responding to the UK’s lift all of its tariffs on US imports back in January. Scotch Whisky is one of Scotland’s most highly esteemed exports. Making it an iconic symbol of the UK’s presence in the arena of global trade. Considering back in 2012 the United States was estimated to be the largest export market for Scotland’s prized spirit, it stands to reason that the tariffs were detrimental to United Kingdom’s economy. Even in light of the Trump tariffs the United States still maintained this position as top consumer nearly a decade later in 2020. Despite the United States remaining big-time scotch imbibing nation the tariffs still sent shock waves throughout the industry. It projected that since the 25 percent tariff was imposed back in 2019, Scotch producers lost an aggregate “$682 million (£500 million)” in sales. In 2019, the United States imported $2.07 billion worth of distilled spirits from the U.K., the majority of it being scotch whisky. The year 2020, delivered a two-punch blow to Scotland’s whisky producers. The COVID-19 pandemic also eroded profit. Leading to an overall 23 percent dip in global scotch sales. The US tariffs have been attributed to a 32 percent decline in overall whisky exports. As recent as last month the losses incurred by the tariffs have been described as “unsustainable” for some producers.

The United States did not escape with impunity from retaliatory tariffs being imposed by the United Kingdom. It should not be ignored that the UK is a significant trading partner of the United States. Approximately 20.3 percent of all agricultural exports from America to the UK were alcoholic beverages. The United Kingdom slapped a 25 percent tariff on American whiskey after Trump applied tariffs on steel imported from the UK. As predicted by several experts and commentators American whiskey serves as a salient target for reciprocal tariffs. The United Kingdom was previously viewed as the largest market for bourbon exports. Since the application of the tariffs overall exports declined by 35 percent. Overall, bourbon sales in the United Kingdom decreased by a staggering 50 percent. The United Kingdom did relax tariffs on American Brandy, Rum, and Vodka. However, the UK and other European Union countries will continue to maintain tariffs on American whiskey as a result of a “two-year trade war on steel and aluminum”. 

The question become what was the impetus behind this fatuous trade dispute between the US and the UK? It all came to a head in 2019, after a 16-year dispute between aerospace rivals Boeing and Airbus. The UK applying tariffs on up to $4 billion worth of goods over subsidies received by Boeing. The United Kingdom started to ratchet down the conflict by easing tariffs on some US goods and Biden reciprocated by lifting tariffs on UK imports. While Biden is not a perfect free trader, this was a shrewd decision on his part. Not from the standpoint of political strategy, but the point-of-view of sound economic theory. The words once-famous uttered by Ronald Regan ring true here: “If you want more of something, subsidize it; if you want less of something tax it”. Here is the crux of the idiocy of protectionism. Proponents seek to limit imports to encourage domestic consumption-based out on a sense of nationalism. However, they ignore the fact that their hostility towards foreign goods may stir the ire of lateral trade partners. Resulting in defensive actions that will result in the decreased consumption of American goods globally. Wouldn’t a proud nationalist prefer to see American goods consumed all across the world? After all, the two best-selling whiskies globally in 2019 were Jack Daniels and Jim Beam. This was not the byproduct of using taxation to punish Americans who enjoy drinking imported whiskies, but through many years of savvy marketing, product consistency, and rightfully earned brand recognition. 

Is Free Trade Dead?

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The Wealth Of Nations, Book IV Chapter II, pp. 456-7, paras. 11-12.

“By means of glasses, hotbeds, and hot walls, very good grapes can be raised in Scotland, and very good wine too can be made of them at about thirty times the expense for which at least equally good can be brought from foreign countries. Would it be a reasonable law to prohibit the importation of all foreign wines, merely to encourage the making of claret and burgundy in Scotland?”

The Trump era will forever be distinguished by its notable shift away from free trade economic policies. Generating a resurgence passionate resurgence in the advocacy of protectionism. This rhetoric was salient even in the nascent period of the Trump phenomenon, dating back to his iconoclastic speeches on the campaign trail in 2015. Championing a quasi-neo-mercantilism that challenged the decades-long conventional wisdom of the Republican Party. This prevalent truism being that liberalized trade is a core component of any sound economic platform. Taking into account the modest reforms we saw under the Regan Administration. The wave of neoliberal trade policy continued through the 1990s with the bipartisan support of the NAFTA bill. It seemed as if the trend towards globalized trade was seemingly unstoppable. Until right-wing populism swept the United States indicating a change in public perception of moderately unfettered international free trade.

The Trumpian position on international trade dates back to the years of the NAFTA bill of the 1990s. Vocal high-profile opponents of the bill included columnist and former Presidential aide Pat Buchanan and Ross Perot. Expressing concern over the outsourcing of production and its direct impact on the American economy. Mainly, all of the U.S. workers have been displaced by outsourcing jobs to foreign countries. From a prima facie standpoint, this argument seems sound. However, after closer examination, it becomes quite clear that economically it is profoundly flawed. There is a moral dimension embedded in this argument because people do suffer from losing their jobs. The unfortunate economic vicissitudes of the American Rust Belt can be speculated to have been greatly impacted by the outsourcing of domestic labor.

On a deeper level, most of the variable causing the shift towards foreign production of goods has been engendered by faulty economic policies. Economic behavior is guided by the unwavering laws of economic exchange. Analogous to the laws of physics they cannot be indefinitely contradicted without serious repercussions. Since each economic agent acts in their self-interest they respond accordingly to government initiatives and laws that violate these immutable laws and informal laws guiding commerce. Domestic regulations laws governing minimum wage, production, transportation, and taxation become so onerous that firms become incentivized to move to manufacture abroad. While policies such as minimum wage laws are billed as means of improving the quality of life for low-skilled workers, it tends to have the opposite effect. Such measures only serve to benefit a few while harming many through increasing the unemployment rate. Raising the price floor for labor will impact profitability that leaves employers with a difficult choice. Either cut labor expenses through automation, outsourcing and working with a skeleton crew or succumb to bankruptcy.

Driving the shift to off-shore production is the comparative advantage that many countries have over the United States when it comes to manufacturing and other services. Classical economists such as Adam Smith and David Ricardo believed that it was more advantageous for each economic unit (whether it be an individual worker, firm, or national economy) to focus on the goods and services they produced most efficiently. In a sense comparative advantage logically extends the anything else that can be obtained through various trading partners.  For example, it is well known that Adam Smith was a big fan of Claret wine, a beverage fermented in France. The soil in Scotland is not generally unsuited to winemaking, therefore it would not be sensible to produce Claret in the United Kingdom. But Scotland does have climate amendable to the production of some of the world’s finest Single Malt whiskies.

The comparative advantage that countries such as China as over the United States are lower labor costs and fewer regulations. Due to measures such as minimum wage laws operating as price controls (functioning as a  price floor), they are bound to create disruptions in the labor market. Tempting producers to take actions such as outsourcing jobs to curtail losses. A sensible reaction to policies that effectively undermine the core purpose of prices. That purpose is to serve as a quantifiable signal that communicates the market supply and demand of a commodity. Suppliers and producers need to respond to the inflated value of labor accordingly to stay solvent. That unfortunately requires workers to be laid off and to find more affordable labor alternatives. To quote Milton Friedman manipulating prices is never a “free lunch”! The disutility of mandating a higher minimum is evident not only from the qualitative reason of human nature but also in quantifiable data. While estimates suggest that raising the national minimum wage to $15/hr would lift 900,000 Americans out of poverty. Simultaneously, such a change would also be projected to put 34 million Americans out of work. Demonstrating how the costs of raising the national price floor outweigh the minor benefits.

From a superficial standpoint, it is easy to label the competition of foreign as being the taproot of our economic woes. It makes for wonderfully succinct bumper sticker slogans that are catchy and fun to chant at rallies and protests. The protectionist approach of blaming others for our economic problems ignores the inherent issues with our domestic policies. Its restrictive regulations and high corporate tax rates drive businesses to go abroad. There was a lot of social currency in placing the blame on other countries for our inefficiencies in production during the Trump years. These admonishments of free trade are predicated upon economic fallacies and illusory thinking. For a politician, it is easier to play the blame game than to encourage innovation to stay competitive. It is also much quicker to mobilize crowds through economically illiterate bluster than to tell them to take control of their destiny.

Starve The Beast- Does this Method Really Cut Spending?

 

 

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What it means to be a political conservative has drastically changed throughout the course of American history. The meaning in a political context has even shifted from the defining proclamations of Barry Goldwater in The Conscience of a Conservative. Arguably a seminal pamphlet in defining conservative values in the 20th Century. I personally feel that conservatism much like any other body of ideas has its advantages and drawbacks. One value of conservatism that has been slowly eaten away by political opportunism has been fiscal responsibility. While not personally a conservative, this is a conservative value I am fully on board with.

 

The irony is that in the modern era of the 21st century even purported conservative politicians are not fiscally conservative. Making this virtue a relic of a bygone era. Profligate spending was a  policy fixture of both Bush administrations and even prevalent in the Regan administration. It appears as if President Trump will also follow suit with veering away from budgetary constraints.

 

Interestingly enough Libertarian/ Conservative icon the economist, Milton Friedman, felt as if he had found the solution. This remedy is referred to as a Starve the Beast policy. Which is based upon a rather linear concept, simply cut taxes as this will discourage spending. Certainly, a novel postulation that appears to have been underneath our noses this entire time. Does this theory hold water upon the scrutiny of empirical analysis? This question has been highly debated among scholars of all stripes. Not to mention fiercely defended by Friedman-fanboys. As brilliant as Friedman was it does not make him infallible. There is sufficient evidence to suggest that Friedman was dead wrong about the overall impact of the Starve the Beast method of cutting spending.

 

One fact that should be noted is that while many conservative Republicans have anointed Regan with the status of a demigod, this is to some extent a shallow perception. The beloved cherub of the conservative shrine was not the most fiscally responsible president. It turns out while Regan may have cut taxes, he actually increased spending. These findings represented in a 2009 study published by the Cato Institue.  The study found overall that cutting government tax revenue created the illusion of decreased spending. A firm nod to my previous blog entry addressing Fiscal Illusion. Overall, based on the result of the cited research it does not appear as if the data backs up Friedman’s claims.

 

From the standpoint of science, replication of results is the validation of the data obtained. It veers away from the potential of findings being an anomaly caused by sampling error. Thankful for our friends over at the Cato Institue have conducted further studies pertaining to Starve the Beast policies. Researcher Michael J. New conducted a regression study of the relationship between expenditures and taxation from 1981-2005. It was found that even when adjusted for wartime spending, limiting tax revenue did not effectively curtail discretionary spending. Substantiating the previous research of William Niskanen.

 

It is excellent that these studies have exposed the numerical shortcomings of simply cutting taxes. However, what is causing the profligate spending to continue even when tax revenue is decreased? Now it is time to applaud the advocates of the Austrian School of Economics and Public Choice Theory for acknowledging the role of inflation. If the printing presses are running the possibility of funding without direct tax dollars is on the table. This is a massive blindspot in Milton Friedman’s thinking, but an understandable one. Utilizing inflation for financing expenditures is circuitous means of procuring funding. Not an obvious means of generating revenue. Also, it is important to remember he was a proponent of monetarism making him less apt to question the government’s role in controlling the currency supply. However, considering the disastrous economic effects inflation can bring it is something that should always be questioned.