mathbabe

Today I’m going to gush over two excellent blog posts I read recently written over at Interfluidity. But first I’m going to state a pet theory of mine about what units we talk in.

In a mathematical sense, units make no difference. If I give you measurements in inches rather than feet, all I’m doing is multiplying by 12. If I say something in French rather than German, all I need is a translation and we’re talking about equivalent information.

But in a psychological sense, a choice of units can make an enormous different. Things sound bigger in inches, and sometimes you barely understand French and can make bad guesses.

I’d argue that speaking in terms of wealth is a mistake. We should instead speak in terms of risk. It’s a different unit, and it’s harder to quantify, but I think risk is what we actually care about. I claim it’s more basic than money.

For example, why are we afraid of not having money? It’s because we run the risk of not having resources to eat, sleep, or get medicine or treatment when we’re sick. If we didn’t have fears about this stuff then people would have a very different relationship to money. The underlying issue is the risk, not the money.

Financial markets putatively push around money, but I’d argue that why they exist and how they actually function is as a way to spread around risk. That’s why the futures market was developed, for farmers to have less risk, and that’s why the credit default swap market was created, to put a price on risk and sell it to people who think they can handle it.

It also kind of explains, to me at least, the weirdness of super rich people- people who have more money than they can ever use. Why do they continue to collect money so aggressively when they already have so much? My guess is that they are confused about their units- they think all their problems can be solved by money, but their remaining actual problems are problems of risk that can’t be controlled by money. Things like the fact that we all get old and die. Things like that people don’t like you if you’re an asshole or that your wife may leave you. These are risks that most people never get to the point of trying to solve through money, because they’re still stuck in a different part of reality where inflation could screw their retirement plans. But for super rich weirdos, we have the Singularity University where you get to learn how to transcend humanity and live forever.

I’m not making a deep statement here. I’m just suggesting that, next time you hear of a plan by politicians or regulators or Wall Street bankers, think not about where the money is flowing but where the risk is flowing.

A perfect example is when you hear bankers say they “paid back all the bailout”; perhaps, but note that the risk went to the taxpayers and is firmly fixed here with us. We haven’t given the risk back to the banks, and there doesn’t seem to be a plan afoot to do so.

Which gets me to Interfluidity’s first plan, namely to have the government protect up to $200,000 of an individual’s savings from inflation.

Now, on the face of it, this plan is not all that protective of the 99%, because it’s definitely benefiting people who have savings, where we know that the lowest 25% or so of the population is in net debt. Only people with savings to protect can actually benefit.

But if you think about it more, it is good for people like my parents, whose retirement from a state school does not rise with inflation, or more generally for people who have a fixed savings put aside for retirement. And it isn’t at all good for very rich people, who would see a benefit only on a small percentage of their savings (assuming it is possible, as Interfludity says it is, to outlaw the bundling of these inflation-protected accounts like some people now bundle life insurance policies).

Most economic policies in this country are made to benefit rich people, and are defended by saying we need to protect middle-class people nearing retirement with a modest nest-egg. As Interfluidity said, those middle guys are used as “human shields”. Very few policies go into to the weeks sufficiently to figure out how to protect that group without having outsized benefits at the top.

Said in terms of risk, this plan is pushing inflation risk to people who can handle it, and removing it from people who are extremely vulnerable to it.

Which brings me to the second post I want to rave about, namely this one in which Interfluidity dissects the lack of political will in the face of the current depression. From the post:

We are in a depression, but not because we don’t know how to remedy the problem. We are in a depression because it is our revealed preference, as a polity, not to remedy the problem. We are choosing continued depression because we prefer it to the alternatives.

The reason? Because no matter how much someone might say that we care about the middle class, the truth is we are protecting rich people from the risk of getting poor. We have, as he says, a population with individual power roughly weighted in proportion to their wealth (or, to be consistent with my theme, inversely proportional to their risk), and when you take a vote with those weightings, we get a “weighted consensus view,” manifested among the macroeconomists in charge of this stuff, that we should avoid inflation at all costs (ironic that the people with the least risk are also the people with the most influence).

In order to remedy this situation, we’d need to implement something like the inflation-protected bank accounts up to $200,000 for the individual. Then the weighted consensus may change – we might instead actually pull for a policy that would have some risk for inflation and would also possible create jobs.

But of course, in order to implement such a policy, we’d need to have the political will to change the risk profile, which goes back to the weighted consensus thing. Keeping in mind that this policy would push the risk to rich people, I’m guessing they wouldn’t vote for it.

On the other hand, smallish savers would. So it’s not a mathematical impossibility, because there may be enough people in favor of the inflation-protection plan to make it happen, and then the second question, of how to get us out of the current depression, would be easier to address. I’m definitely in favor of trying.