Because most philosophies that frown on reproduction don't survive.

Monday, June 16, 2008

When to do Nothing

Many column inches have been spent in recent months asserting that the Republicans are out of ideas. Reading up about McCain's "cap and trade" global warming proposal, I could almost wish that were the case.

It is one of the facts of human nature that we often feel we must "do something" even if we don't actually know what, if any, action would be helpful. It is painful and difficult to sit still and do nothing when you know that there are things going wrong. Often this is a good urge, but sometimes it gets us into trouble, especially when we don't actually have any idea how to remedy the problem in question.

I encounter this pretty often at work. When the business is behind and not making it's financial forecast, everyone becomes very urgent to "do something". As an analyst, it often falls to me to point out that one or another of the proposals which is suggested to "do something" won't actually help, and may make things worse.

"Let's do fifty percent off on product X." Sorry, the data for the last year shows that product X is not price elastic. All you will do is cut our revenue on that product by 50% while zeroing out our profit on it entirely.

"Let's do buy-one-get-one-free." When we do buy-one-get-one-free on a proprietary product, we just flood ebay with resellers offering out product at below market prices. We'll see depressed demand for the next month or two. I've got the data to prove it.

However, almost invariably, we do these things anyway. Why? Because people always want to be able to say that they're doing something about the crisis. No one wants to tell his boss, "We're missing our number, but we're not doing anything about it, because none of the ideas we've had would help any."

(If the above makes it sound like there's nothing we can do to increase sales, it's because our extant marketing plan generally has all the price elastic products as heavily optimized for volume as possible -- such that only cost concessions from our suppliers could allow us to be more aggressive than we're already being. Those kind of cost negotiations are the responsibility of another group in the company. So when our specific group gets told to "do something", it's often the case that we're already doing basically everything that's likely to work.)

In a "change election" like this one, we effectively have a country-wide demand that "somebody do something". It's not necessarily an unreasonable demand. We're spending money we don't have, health care is definitely a problem for many Americans, we have a set of immigration laws that we lack the ability or will to enforce, etc. Certainly, people would like to see solutions to those problems. But that does not necessarily mean that doing anything is better than doing nothing.

On health care, for instance, the current American system clearly has problems which are causing a lot of people a lot of pain. I'd like to see reform on that. However, I very strongly do not think that single payer health care run by the Federal government would be an improvement. So while I may not be crazy about the status quo, I'll certainly settle for that as compared to the "change" options currently on the table.

The question is not so much whether one has ideas, or is out of ideas, but rather whether the ideas one has are any good.


Patrick said...

I agree in general that "don't just do something, sit there" can be the best policy, but I think that the cap-and-trade system is actually a good idea. It worked for sulfur dioxide emissions, didn't it?

Anonymous said...

I'm mostly with patrick. Cap-and-trade really is a virtuous idea, and is probably the second-best thing we can do to encourage conservation and reduce carbon emissions. The best thing we can do on that front is a carbon tax, but that's impossible. Politically speaking.


Darwin said...

I would tend to think that one of the better things we could do in the short term is drasticly reduce the litigation and regulation barriers to building new nuclear plants, and agressively work to get old fossil-fuel burning power plants shut down.

On transportation fuel, I suspect that price will take care of itself.

My big concerns on going into cap and trade now are two:

1) If we don't reduce the difficulties associated with moving to cleaner technologies (of which the most scaleable is probably nuclear that the moment) cap and trade will just penalize and not help.

2) As of right now the longer term goals strike me as just plain insane. We simply don't have line of sight to making the kind of reductions that are being called for in the 20+ year range, and it strikes me as irresponsible to build so much of the change into periods so far out.

As for the sulfer dioxide analogy -- so far as I can see CO2 is a much harder thing to avoid putting out than sulfer dioxide.

Anonymous said...

darwin, nuclear power isn't going to get us out of this mess. While I agree that excessive regulation strangled nuclear power in the past, there are other inherent barriers that hinder the construction of nuke plants. The biggest barrier is that nuclear plants need HUGE quantities of water for cooling, which is why the American Southwest is nearly devoid of nuclear plants and always will be. This is a bummer, since the two fastest-growing cities in the US are Phoenix and Vegas. Some other energy source is required.

The cap-and-trade system adds an economic incentive to develop other energy sources sooner than would happen naturally. A worthy goal, since global warming has no cost associated with it (yet) on any corporation's or government's balance sheet.

Darwin said...

Nuclear power could get us a long way forward, though. We could definitely be getting the same 50% of our power generation from nuclear that France is. Though as you point out it has limitations. (The southwest has a better shot at solar and wind than most areas -- but there aren't huge barriers to setting those up as is the case with nuclear, and indeed they're already heavily subsidized.)

I'd kind of question whether cap and trade will be all that efficient at motivating new technologies, especially in the short term. And it brings with it a huge consumer cost and regulatory overhead.

I wouldn't be surprised if there was more real effect in putting out some appropriate research grants and major prizes for making certain technologies viable. (Some one billion or even ten billion dollar prizes a la the X Prize would not be a bad idea at all, and on the government scale would be dirt cheep.)

Basically, I'm at root very skeptical of cap and trade because I'm skeptical of our ability to do a good job of artificially create a market the mirrors reality better than... reality.

Kyle R. Cupp said...

Who was it that said if there is no solution, there is no problem?

Anonymous said...

The Blackadder Says:

The problem with both Cap and Trade and a Carbon Tax (or one of the problems, anyway) is that they only apply locally, that is to say, inside the United States. Making it more expensive to emit in the United States won't reduce total emissions so much as encourage them to move offshore. My understanding is that the effects of acid rain tend to be more localized (i.e. emitting sulfur in China won't cause acid rain in Ohio) so to the extent the Acid Rain Program did work (and I would need to know more before I could say for sure), that may be why.

In terms of the general problem, if nothing you can do will make things better but there is a felt need to "do something" then the best thing might be to find the "solution" which does the least harm, and do that. Having some sort of rain dance to generate sales probably wouldn't be convincing, but I'm sure you could think of something along those lines.

Anonymous said...

Perhaps the best illustration for your post would have been the "housing crisis". when McCain proposed doing nothing, he was roundly criticized for being out of touch, unfeeling, etc. In fact, doing nothing would be the best solution since it would allow the natural consequences of people's actions to occur. This would have discouraged future irresponsible behavior and encouraged responsible behavior. Our society would have become more virtuous and better all-around.

That situation seemed so obvious that it was inarguable in my eyes. The cap and trade, carbon tax, warming/cooling, peak oil, situation is not nearly as well defined.


Darwin said...

Good point, Marc. The "housing crisis" is definitely an example where doing nothing (or at least, very little) is probably the right answer.

Patrick said...

Agreed on the housing crisis, and on removing our irrational resistance to nuclear power.

The problem with both Cap and Trade and a Carbon Tax (or one of the problems, anyway) is that they only apply locally, that is to say, inside the United States.

Well, yes, but the EU is starting to do cap and trade with carbon already. The sooner we get on board, the sooner we can press China and others to do the same.

Yes, in the short run it will disadvantage our economy, but as the EU is showing, it won't cripple it.

Basically, I'm at root very skeptical of cap and trade because I'm skeptical of our ability to do a good job of artificially create a market the mirrors reality better than... reality.

Artificial constraints like these don't strike me as much different from artificial constraints on the labor force, like child labor laws. As a society, sometimes we do have to limit the market or change the incentives for the common good, because the unregulated market has a very narrow optimization criterion. The market usually shows tremendous ability to cope with such constraints at moderate levels.

Anonymous said...

The Blackadder Says:

The EU does have a cap and trade program in place. It hasn't ruined European economies (though they generally weren't much to brag about to begin with) but neither have they done much to reduce emissions.

The idea that China will adopt emission restrictions if we do first is, I'm afraid, wishful thinking. We would be better off just giving China the technology to run cleaner plants and factories.