Race Vs. Class At College

David Leonhard found that elite colleges have very little economic diversity.  At elite schools, only a little over 10% of the student body comes from families below the median income.

William Bowen, …was a co-author of a study several years ago that found that elite colleges gave zero credit in the applications process to students from low-income families. All else equal, a poor student who scored, say, 650 on a standardized test had no better chance of being admitted than an affluent student who also scored 650 — despite all the obvious advantages that the affluent student had.

Currently there is race-based affirmative action to benefit disadvantaged races, but not class-based affirmative action to benefit disadvantaged economic classes.  This is likely to change soon because the Supreme Court has been moving towards eliminating race-based affirmative action as it again signaled last month in the University of Texas case.  Kevin Drum notes that class-based affirmative action will probably be the replacement and it achieves very similar goals:

 In a study of elite universities, Anthony Carnevale and Stephen Rose concluded that class-based affirmative action would probably produce student bodies that were about 10 percent black and Latino, compared to 12 percent with purely race-based affirmative action. Taking wealth into consideration might boost that a bit more, as would policies that take account of whether a student lives in concentrated poverty, a partial proxy for racial housing discrimination.

Still, there’s no question that in practice, even well-designed class-based policies would probably represent a net loss for minority representation. But it’s a fairly modest loss, and class-based policies also have some advantages.

Even without the fact that racial affirmative action will likely soon be illegal, class-based affirmative action have some important advantages.  They help poor people who are not getting much help and they deserve more help.  One of the biggest problems of racial discrimination is that it results in poverty.  The reason class-based affirmative action creates results that are so similar to race-based affirmative action is that racism creates adverse economic consequences.  But some individuals are able to transcend the difficulties of race by ‘passing as white’ or by focusing on economic niches where their particular race is not a handicap.

One of the huge problems of racism is that it is impossible to measure precisely.  Do the Obama children face more discrimination and prejudice than poor redneck whites in Appalachia?  Obama’s children may face more racism, but poor rednecks also face discrimination and prejudice, and it is impossible to really know who faces worse.  There is prejudice about class and accent and education (which is the most socially accepted prejudice in America today) and there is no reason to valorize racism over other forms of prejudice.   Obama himself said, “My daughters should probably be treated by any [college] admissions officer as folks who are pretty advantaged”.

Did Barack face less discrimination than Michelle Obama because he is male and his mother was white?  Would have have faced even less discrimination if three of his grandparents had been white and only one black?  It is impossible to know.  We cannot even concretely define race because it is an artificial construct whereas we can measure class relativley precisely.  Some people whose parents are both black insist that they are white and some people who 99% of Americans would think look white identify as black (photos here).  The main way that we measure racism in societies is by measuring its economic consequences and the economic consequences of race vary a lot across individuals depending on their circumstances. Why not just measure the economic consequences directly instead of trying to measure race?

I have lived and worked in places where I was in the minority and I have been discriminated against, but I have also had economic advantages and that greatly cushioned the microaggressions and other difficulties that I faced (including getting demoted at work explicitly because I was the wrong race). I don’t mind being called racial epithets as much if I my economic situation gives me many more choices and comforts than the name callers can afford.  Similarly, there is discrimination against Jews, but discrimination against wealthy Jews doesn’t seem to be as onerous as it is for poor minorities in the US today since wealth .  Since Jews are already about the wealthiest group in the nation, most people don’t think there is need to give them race-based affirmative action just because a lot of people are prejudiced against them.  One of the effects of race-based affirmative action is that it disproportionately benefits individuals who are already pretty well off because they are much more likely to go to college anyhow.  Nearly three-quarters of Black and Latino students at Harvard came from very wealthy families in 2018 because the real injustice at Harvard is strong affirmative action for the children of wealthy donors and affirmative action for student athletes who play expensive sports like golf, rowing, sailing, and fencing combined with race-based affirmative action.  Does it really advance social justice when Harvard admissions formula greatly prefers the Obama girls over equally talented inner-city white girls who grew up in a single-parent home on welfare?

One of my college friends got a scholarship for Native Americans even though her family was rich and nobody who knew her would have guessed that she had any Native American ancestry because only one of her grandparents (at most) had any Native American ancestry.  I never saw any sign that she had ever experienced racial discrimination and she seemed embarrassed about her race-based scholarship. I don’t see how her scholarship advanced social justice, but I can’t blame her.  If someone offered me money because of the identity of one of my ancestors, I’d probably take it too.

Kevin Drum  (op. cit.) argues that class-based affirmative action helps under-served races almost as well as race-based affirmative action in the short run and may have even greater benefits in the long run:

As Richard Kahlenberg, a tireless one-man advocate for class-based policies, points out, race-based admission policies are supported by only about a quarter of the population. Conversely, class and income-based policies are supported by upwards of two-thirds of the population. That represents a far stronger foundation for keeping diversity policies thriving over the next few decades.

And there’s more. Carnevale and Rose concluded that class-based policies produce higher graduation rates than either a pure merit-based system (test scores and high school GPAs) or a traditional affirmative action program. And eliminating race-based policies would also put an end to the suspicion that continues to dog black and Latino college graduates from employers who wonder if their degrees were really fairly earned.

One of the main advantages of race-based policies is that they help create social awareness of racism and demonstrate that it is a priority.  The ongoing problem of racism is denied by a significant segment of the US population.  But they are hard-core racism deniers most of them are probably going to just get even more resentful about race-based policies. They are much more tolerant of the kind of class-based policies that happen to achieve very similar ends.

Historically, race has always served as means of social control that works by dividing lower-class groups.  Dividing the majority of people into racial tribes makes them easier for the elites to control.  Focusing on race may serve to breed resentment and maintain class divisions which could be more counterproductive at helping minorities than helpful at this point in history.  Anti-racists should support class-based affirmative action because it might actually do more to reduce the problems of racism than race-based affirmative action because class-based programs help a super-majority unite over common concerns rather than split over divisive tribal issues.  Racism is real and a huge problem, but affirmative action that benefits relatively wealthy minorities is a recipe for breeding resentment in the majority that earns below the median. That is one reason why Martin Luther King’s 1964 book, “Why We Can’t Wait” advocated for helping the disadvantaged of all races rather than just focusing on helping African Americans.

A focus dividing privileges based on race is more likely to turn people towards zero-sum thinking where if someone else gets something I lose something.  Assigning privileges based on class is more universal because everyone has some chance of needing class-based help because of the potential for class mobility (which should be encouraged!!) whereas racial mobility is stagnant.  But economists largely agree that reducing racism and increasing the equality of opportunity is a positive sum game that increases the size of the pie and can make everyone better off.  It is easier to for most people to see how class-based policies can get us there.  Only minorities favor race-based policies and there is a lot of rivalry about how to divide the spoils between the various racial groups.  Also rich elites have self-interest in preferring race-based policies because

  • race-based polices are much less popular which makes them less likely to get enacted and if they are enacted, they are more likely to be underfunded and get repealed sooner.
  • In the off-chance that a race-based redistribution policy gets enacted, it often cheaper to just help a minority group than to help all needy Americans.  Rich people care about keeping the price tag low because they pay a lot of taxes and fees and they are the only group that sees little chance of personally benefiting from class-based programs.
  • race-based polices make the masses more politically divided which makes them easier to control.
  • race-based polices directly benefit those wealthy elites who are themselves racial minorities (as in the Harvard admissions example).

One under-reported transformation of America is that, “Hispanic high school graduates surpassed whites in the rate of college enrollment!”  If that trend continues, affirmative action for Hispanics will need to be curtailed at some point and proponents of race-based affirmative action do not have a formula for how to do that just like they have gotten into trouble by discriminating against Jews and Asians because they are already “over-represented” in college enrollment.  Switching to class-based affirmative action would be one way to make the adjustment automatic as the relative status of different races changes over time.

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Posted in Discrimination, Labor

Guns don’t kill people. Alcohol kills people.


Ok, so my title is goofy sloganeering, but it isn’t any goofier than the common slogan it is based upon. Although the US could certainly save lives by copying some of the gun restrictions that all other industrialized nations use, I don’t care that America’s gun culture is more extremist than anywhere else on earth because other issues are more important than gun violence in America and guns are politically untouchable due to the gun lobby and the passionate minority of American voters who want us to have more guns and gun freedoms, not less.

Guns simply aren’t as important as lots of other public health issues. For example,  Tyler Cowen makes the case that alcohol policy is much more important.

We take [the free availability of alcohol] for granted, but so many lives are lost each year, so many careers ruined, so much productivity lost. One of my personal crusades is, we should all be more critical of alcohol. People will pull out a drink and drink in front of their children. The same people would not dream of pulling out a submachine gun and playing with it on the table in front of their kids, but I think it’s more or less the same thing. To a lot of liberals, the drink is okay and the submachine gun is not. I think, if anything, it’s the other way around, and I encourage people to just completely, voluntarily abstain from alcohol and make it a social norm.

Alcohol control would do more for Americans than gun control because, as German Lopez says, alcohol is much more dangerous than guns:

As of 2010, the Centers for Disease Control and Prevention (CDC) estimated that excessive drinking causes 88,000 deaths each year in the US… alcohol’s annual death toll is higher than deaths due to guns, cars, drug overdoses, or HIV/AIDS ever have been in a single year in America. There’s a good chance that the CDC’s estimate is an undercount. It’s eight years old at this point, and since then, at least some kinds of alcohol-related deaths have increased too. Some experts have told me that they would not be surprised if the annual death toll linked to alcohol is now above 100,000. And the death toll only captures part of the concern with alcohol. Addiction, domestic violence, sexual assault, and other linked crime and health problems are also significant.

One reason alcohol is more dangerous than guns in America is that drinking alcohol causes a lot of violence. If you love guns, then you might want to get on the alcohol-restriction bandwagon because restricting alcohol would make America safer for more guns and better gun safety would make them more popular! German Lopez again:

A new study, by researchers at the Violence Prevention Research Program at the University of California Davis, found that alcohol may be a much better predictor of future crime, including violent acts, than whether you have a criminal record at all. The National Council on Alcoholism and Drug Dependence estimates that alcohol is a factor in 40 percent of violent crimes. Other research has consistently found that alcohol abuse and crime are closely linked… A 2010 study even found a strong relationship between the presence of alcohol stores and gun assaults… while the connection between mental illness and carrying out violent acts is shoddy, the research suggests that alcohol abuse is a very strong predictor of violent crimes.

Whereas Americans irrationally obsess about avoiding people with criminal records when hiring and restricting the freedoms of people with mental illness to prevent violence, alcohol abuse predicts crime better than a record of crime or mental illness. Alcohol is particularly dangerous for youths because people who begin drinking younger are more likely to develop an alcohol problem during their lives and as with any health problem, the later in life that an illness strikes, the less tragic the harm.  Furthermore, young people are far more prone to violence than people over 30.  For example, the peak rate of homicide is committed by Americans in their early 20s.  The incidence of binge drinking has a similar age profile.


Parents may have a big impact on their kids’ alcohol consumption too.  As Lauren Sausser wrote, even moderate parental alcohol use has an impact on their kids:

study published last year by the Institute of Alcohol Studies in the United Kingdom found that children may be distressed, embarrassed or otherwise negatively impacted when parents drink even a “low level” of alcohol.  “That this effect starts at the stage when parents are tipsy, rather than being drunk, is possibly a surprising finding…  However, it suggests that the way in which parents and their children view episodes of ‘tipsy’ drinking is quite different.” Further research shows that parents who exhibit favorable attitudes toward drinking alcohol will more likely raise children who will begin drinking as adolescents.

There are lots of ways to reduce violence without gun control such as better policing methods, and regulating alcohol is  so counter-intuitive that few people think of it.  As German points out at the above links, there are lots of practical ways to reduce alcohol use that would save more lives than the kind of gun control that is politically feasible in the US. There is no need to go all the way to prohibition of alcohol to be effective just like there is no need for gun regulations to go all the way to prohibition. Sensible alcohol regulations may be politically difficult due to opposition from the alcohol lobby (much like gun regulations are opposed by the gun lobby), but hardly any groups are pushing for alcohol restrictions.  Perhaps it is because people aren’t as frightened by alcohol as they are by guns and so alcohol produces a lot less emotional salience than guns.  

Guns are a lot scarier looking and dramatic than alcohol, but you should be more frightened of alcohol.

Of course, if your real goal is to repeal the Second Amendment, then focusing on the dangers of shooters and especially mass shooters has repeatedly proven to be an effective way to get countries to restrict gun access.  The gun industry thinks that fear of gun violence will increase gun sales, but it also provided the impetus for all developed nations (except the US) to restrict gun access by requiring a license to buy or operate a gun.  The same kind of fears of violent deaths in the streets led to mandatory driver’s licenses and numerous other restrictions on driving.

So maybe fear is the real reason why we irrationally focus on guns.  The gun lobby likes to scare people with stories of violence to encourage people to buy guns for self defense because they like the short-term boost in gun sales.  On the other side of the political aisle, the anti-gun movement also likes to focus on scary gun violence because they think the fear of gun violence will create momentum towards restricting guns in the long term.

But most people are scared of strangers and the fear of being shot by a stranger is misplaced because it is exceedingly rare.  You are the most likely to be shot by the people you know.  The more time you spend with someone, the more likely they are to shoot you.  The biggest danger is that you will shoot yourself. There are more than twice as many suicides as homicides just about everywhere in the world.  The next highest danger is being shot in the home either by accident or by a temporarily homicidal family member. The next most dangerous people are your friends.  Strangers are the least likely to try to kill you.  Of course, there are a lot more strangers out there than acquaintances, so family members only account for about 25% of all known murder victims and known murderers who kill their acquaintances only account for about 54% of the total.  (Caveat: 44% of murder victims have an unknown relationship with their murderer mostly because the murders are unsolved.)

The US is an extreme outlier in the suicide rate by guns so there is plenty of room for improvement and there is an intriguing libertarian movement to allow individuals more freedom to restrict guns from themselves and on their property.  Right now, it is effectively illegal for individuals with a history of suicidal episodes to put themselves on a list of people who have a mandatory waiting period before they can buy guns because the gun lobby doesn’t want any restrictions on guns.

Although guns are correlated with suicides in the US, the suicide rate could also be reduced by restricting alcohol. About 30% of US suicides are associated with alcohol use and there is also a correlation between alcohol use and suicide in many countries.

Cars are also more dangerous than guns. People who do not own a gun should really be far more scared of cars than guns because drivers are much more likely than gun owners to kill a stranger. Gun owners are far more likely to kill themselves or family and friends than to kill a stranger whereas drivers are more indiscriminate in who they kill and are particularly deadly for pedestrians. It goes without saying that cars are safer when there is less alcohol flowing through the brains of drivers. Alcohol restrictions have helped a lot, but much more could be done. In some states, it is legal to have drive-through liquor stores where drivers can discretely buy liquor without getting out of their cars! I kid you not. Here is a photo of one in a college town near me:

This scene should be as scary as guns!

Posted in Public Finance, Violence & Peace

An unearned wealth tax would help stop rising inequality.

The main source of rising inequality in the US has been the rising incomes of the top 1% richest Americans relative to everyone else. Sure, the top 25% highest-income households have been doing fine, but their incomes haven’t been rising much faster than GDP. Only the richest 1% have really seen their incomes soar. This is partly because they get more of their income from owning stuff than from working and this is also one of the themes of Thomas Piketty’s 2013 book, Capital in the Twenty-First Century. The most famous part of the book was this simple equation:


r = rental rate on capital = growth rate of the value of capital

g = growth rate of GDP = growth rate of total income.

Generally speaking, when r>g, capital income is growing faster than total income and in this situation inequality will rise because capital, broadly defined, is simply wealth and wealthy people own most wealth by definition. Thus if wealthy people’s incomes are growing faster than workers’ incomes, inequality will rise.

Piketty’s equation would have been clearer if Piketty had included the major part of the economy that he left out of the equation: labor income. GDP = (income from capital) + (income from labor). This is related to Piketty’s equation because the growth of GDP (g) is equal to the weighted average of the growth of capital income and labor income. When capital income is growing faster than labor income, inequality rises. That is what Piketty’s oversimplified equation actually means.

There is disagreement about whether it is really an inevitable long run law of economics that capital income must grow faster than labor income (r>g), but Piketty shows that capital incomes did indeed grow faster than labor income during most of history (for which data is available) except for a half century or so in the middle of the 1900s and during the aftermath of the black death in the late 1300s.

So for most of history when wealthy people got richer and workers got poorer, it wasn’t because the wealthy were being more virtuous or working harder. The wealthy just got lucky. They weren’t saving more of their wages, they were earning more from their wealth without having to lift a finger. This should be clear for most of history because until the industrial revolution, very little capital was created by labor. It was mostly created by God in the form of land or slaves. This graph shows that in 1770 (the left edge of the graph), the bottom two categories of capital was real estate in the north of the United States.

And in the slave states, most of the wealth was in the form of slaves and land.


In 1770 the biggest fraction of the total value of capital was created by God (or nature if you prefer), not by people because it was mostly agricultural land and slaves.  Of course SOME of the value of agricultural land and slaves is due to improvements people made as they cleared the land and trained their slaves.  But much of the value of housing and other domestic capital is also just natural resources like land. For example, Karl E. Case estimated that between about 20% and 30% of the value of real estate in America from 1975-2005 was due to the value of land, and a significant fraction of the rest of the value of each house is the value of the raw natural resources they are composed of too. For example, a stone house is made out of stone from a quarry which has value in large part because it was created by nature.

Very little capital was created by workers at a sacrifice in 1770. That is best measured by the dark grey area at the top of each graph, and part of this portion of domestic capital is the value of natural resources. For example, when the value of capital rises without the owner lifting a finger, there is little reason why the owner should get the increase in value.

For example, when a new school is built, nearby properties soar in value, but the real creation of value was the school, not anything that the nearby property owners did. Why should the nearby property owners reap additional wealth for the luck of being located near the new school? This is particularly galling when the school is created using tax revenues from renters in the neighborhood who will subsequently have to pay higher rents because of the increase in property value.

Rising rents is the fundamental problem of gentrification and it could be ameliorated by taxing the unearned increase in the value of real estate so that the real estate doesn’t appreciate in value. Then that tax revenue could be used to build more amenities that improve other neighborhoods and generate more revenues from the properties becoming more desirable.

This is the idea that made Henry George by the most famous American economist in history in the decades around 1900. He believed that the value of capital that is created at a sacrifice by labor should not be taxed, but that capital that is created by nature should be so highly taxed that its value falls towards zero. One reason for his logic was that unearned wealth was not created by humans and so humans don’t deserve to profit from ownership. Secondly, there is no civilization without tax revenues and the most efficient source of tax revenues is something that is perfectly inelastic with respect to the tax rate. An inelastic supply means that an increase in the tax rate will not cause people to reduce their supply and if owners aren’t actually sacrificing to supply something, then a tax won’t cause them to supply less. For example, if you tax the value of land, it won’t change the quantity of land because land is not created by humans. On the other hand, our government mainly taxes the wages of workers and that kind of taxation can change the amount of work that people do. If the income tax rate on wages is 100%, people will do very little work, but if the income tax rate on land income is 100% of its imputed rental value, there will still be just as much land for people to use. As Noah Smith says:

Unlike income taxes, sales taxes, or corporate taxes, the Henry George Tax has no chance of choking off economic activity; after all, the amount of land is fixed, so you can’t tax it out of existence. Also, unlike the property taxes we have now, a Henry George Tax actually encourages landlords to build useful, valuable stuff on top of the land they own. Conventional property tax pays people not to build things on their land, since doing so will mean having to pay more tax. But the Henry George Tax—which would replace conventional property taxes—makes buildings and other productive structures tax-free, thus encouraging landowners to build more of them. And, as Henry George himself pointed out, the tax redistributes wealth from the rich to the poor without punishing rich people for creating wealth. …It appeals to our principles of fairness.

In addition to taxing the value of land and related natural resources like minerals and fisheries, in order to prevent rising inequality we should increase the taxes on other forms of capital that isn’t created at a sacrifice. Inheritance is another form of wealth that is unearned and it is a surprisingly large portion of total wealth according to Piketty’s data:

Inheritance [now] accounts for ~12% of national income annually (compared to ~20% in 1900) and is projected to stabilize at ~15-25%. Most shocking, inherited wealth as a percentage of wealth was 90% in 1900, 45% in 1970, is already back to 70% and projected to rise to 80-90%.

Inheritance taxes could rise back to where they were in 1970 without hurting growth. Indeed, economic growth was faster in America when inheritance taxes were higher and higher inheritance taxes could help rich children work harder because they wouldn’t count on getting a billion dollar welfare check from their parents’ estate upon death.  Taxing inheritance rather than taxing workers would increase work and increase GDP.

When wealth grows in real value, that capital gain is mostly unearned because most wealth is not created at a sacrifice by saving.  Most wealth was either created by nature or was inherited or has been created by the magic of compounding interest.  Wealth simply tends to grow in value at 5% per year without its owners lifting a finger. We need a tax system that can prevent inequality by helping boost the growth of wages, while reducing the unearned income of wealth.  This is tricky to accomplish without reducing the incentives to create capital which would hurt wages, but two no-brainers that would reduce inequality and boost efficiency would be increasing the taxes on natural resources like land and increasing the inheritance tax.

Radical Markets is a book that explains this idea and ways to tax many other forms of wealth like intellectual property. Anyone who owns a copyright or patent should be required to pay annual fees that rise over time to encourage them to pass the intellectual property on to the public domain. Disney shareholders are still reaping profits from inheriting intellectual property that was created nearly a century ago and there is little difference between century-old intellectual property and land at this point because both were inherited, not created. If copyright owners are allowed to keep others from using ideas, they should pay a tax, and the tax should be especially high on century-old intellectual property because no tax could possibly cause it to be destroyed nor would it cause less to be produced.

Paul Heald researched the effect of copyright upon book availability:

I had one of my students write a computer program that would crawl through Amazon.com and pull 2,500 fiction titles at random. … The findings are absolutely fascinating.

We broke these out by decade. … You would expect that if you can crawl through Amazon looking at only new books and only books sold by Amazon …of course, the biggest number of books is from the decade 2000-2010. That’s what you’d expect; they’re more recent, more popular. Drops off really quickly for books in the 1990s, 1980s, 1970s, ’60, 1950, 1940, 1930 — here’s the point in time where books start falling in the public domain. Suddenly it goes up and up and up. There’s as many books [that] Amazon is selling brand new right now from the 1900s to 1910 as from the 2000s to 2010. You go all the way back to 1850 — there’s twice as many books from the 1850s being sold on Amazon right now as the 1950s.


There is a spike for books published before 1922 because copyright ran out for all books published before then. The graph would be even more dramatic if we controlled for the number of books published in each year because there are were far more books published per year after 1922 than before 1922, but most of the more recent books published have been disappeared due to copyright. Although most economists look for problems with the tragedy of the commons, there seems to be a bigger problem with the tragedy of the private in book publishing. Weaker copyright would be better for society and one way to do that would be to increase the tax on copyright owners for every year that they keep it as private property.

Posted in Inequality, Public Finance

Blockchain NFTs have nothing to do with ownership rights. They are merely receipts for donations.

I’m happy to sell you an exclusive NFT to own this digital painting!

 NFTs are not property rights just like Bitcoin is not money.

Property rights are usually described as a bundle of rights, but this is true of nearly every concept which can be described as having a bundle of qualities. But some qualities are more essential to defining a concept than others. For example, money is usually defined as having at least three properties: (1. Unit of account; 2. Medium of exchange; 3. Store of value) as well as many others such as being fungible, easy to transport, hard to counterfeit, and easily divisible. But some properties are more essential than others. For example, most stores of value that are easy to transport, and hard to counterfeit are not money. On the other hand, everything that is used as a unit of account IS called money. So being a unit of account is the most essential function of money followed by usefulness as a medium of exchange. Bitcoin is not money because it is never used as a unit of account and it is rarely used as a medium of exchange except for illegal transactions which are safer when completed using the bitcoin payment system rather than using the banking system.

Blockchain enthusiasts claim bitcoin is a better form of money, but it is not even money at all. It is a fungible collectable that is useful for two things: speculation and facilitating illegal exchanges. Some argue that it is also a good hedge against social collapse which could be true someday but in many scenarios where the monetary system collapses, the internet is also likely to collapse, so bitcoin isn’t the best hedge against societal collapse as demonstrated by the fact that in societies where there is no functioning monetary system the dollar or other foreign cash and commodities like gold are more popular than bitcoin. Bitcoin is simply less convenient as a medium of exchange for most legal transactions and it is impossible to use bitcoin whenever any party to an exchange lacks an internet connection.

NFTs give no property rights over anything.

In addition to claiming to have revolutionized money, blockchain enthusiasts also now claim to have reinvented property rights using “non-fungible tokens” or NFTs. Again this is wrong because NFTs have almost nothing to do with actual property rights. It is a total sham. Property rights can entail a complex bundle of rights, but the one essential feature of every property right has is the power to exclude other people from doing something. A property right is essentially a right to restrict the freedom of everyone else and because an NFT doesn’t give anyone any power to exclude others from anything (except an encrypted number that has no intrinsic value), it is nothing new. It is just an property right to an encrypted number. That’s it. There is nothing revolutionary there.

The advent of NFTs is a logical conclusion of cryptocurrency evolution because every cryptocurrency mostly has value from being a kind of collectible. Collectibles get their value from speculation and from an underlying value of ownership. The wild swings in the prices of collectibles is due to the crowd psychology of everyone speculating about what other people will pay for them. Plus, there must be some underlying use. There must be a scarce (very inelastic) supply or else there is no point speculating because a rise in price will simply cause more supply which will limit the price rise.

Most collectibles are aesthetically pleasing for a large population, and some collectables have practical uses too. For example, gold is both an aesthetically beautiful metal and it has industrial uses. Bitcoin gets it value as a collectible from the fact that many libertarians have political values that appreciate the aesthetic dream of replacing government-run monetary systems. Bitcoin also has a use value because it is the best way to facilitate many illegal transactions. Bitcoin thus gets underlying value from both its aesthetic value and its practical use value.

NFTs clearly have the same kind of aesthetic value as cryptocurrency, but unlike cryptocurrency which are useful for facilitating illegal transactions, NFTs currently have zero practical use value because they do not confer any more rights than any unit of cryptocurrency confers. Both NFTs and cryptocurrency only give the property right to exclude others from an encrypted number. The sellers of NFTs CLAIM that an NFT gives the property right to something—usually something aesthetically pleasing like a digital artwork–but because an NFT does not give anyone any exclusive power over anything but the token, this is a false claim. It is certainly possible to own an NFT, but that is just a number which gives zero property rights over anything else.

The idea that an NFT gives power over whatever is named on the token is a bit like the idea some tribal peoples have about cameras. They think that when a photographer takes their picture, the photograph takes part of their soul and achieves some ownership over part of their being. But owning a photograph doesn’t really give any power over whoever is pictured any more than owning an NFT gives power over anything named in it unless we all believe that it does. But it is the shared belief in property rights that gives them power and there is no more reason to believe in the power of an NFT than to believe in the power of a photo.

Six ways to justify property rights.

There are various ways to justify property rights and Michael Heller and James Salzman argue that they all fit into six fundamental stories that are traditionally used. The use of an NFT doesn’t fit into any of these stories:

  1. attachment, “My home is my castle, and anything attached to it is also mine.”
  2. first-in-time, “I was first.”
  3. possession: Nine-tenths of the law. Mine because I’m holding onto it.
  4. a labor claim.: “It’s ours because we worked for it.”
  5. self-ownership, “It’s mine because it comes from my body.”
  6. family – “it’s mine because I’m in the family”

Ultimately, most property rights in capitalism are created by government and IF governments start using NFTs to keep track of property rights much like they use legal deeds today, then NFT’s may someday actually confer the right to exclude people from something much like a copyright gives owners the right to restrict everyone else’s freedom of speech. But until governments give NFTs some legal weight, the whole concept is just a sham and the people who have paid over $1.5 billion for NFTs in the first three months of 2021, mostly for “ownership” of artwork are a bunch of suckers. That money gives them zero rights except the right to brag about buying an encrypted number for a ridiculous price. Anyone can enjoy the digital artworks that the NFT buyers think they bought just as much as the suckers who really did buy the NFTs.

An NFT is a receipt for patronage, not ownership

NFT enthusiasts like Chris Berg are confusing ownership and patronage. These are two completely different things.

[NFTs] offer ownership – cryptographic, certain, secure ownership – but none of the exclusive rights we usually associate with ownership. You can freely stare at my two miserable CryptoKitties [that I ‘bought’ NFTs of] as easily as I can explore Beeple’s $69 million “EVERYDAYS.”…

To buy an NFT of a piece of art is to own something without having the means of excluding others from enjoying it… The pleasure a buyer gets from owning something is the experience of ownership itself… [It is] ownership-as-consumption.

This is wrong. The pleasure an NFT “buyer” gets is the pleasure of donating money to the “seller”. It is patronage-as-consumption, not ownership-as-consumption because ownership confers rights over something and NFTs don’t confer rights over anything except the token itself.

So until governments start giving legal power to NFTs, lets call them what they really are. An NFT is a unique receipt for a donation. It is just a mechanism for giving money to someone and getting an uncounterfeitable proof of that donation. Those receipts may be worth money because they might get collected by others, but they are just receipts for donations and their value has very little to do with the amount of the original donation and nothing to do with ownership of anything other than the receipt itself.

The future of NFTs is brighter than the future of cryptocurrency

Whereas crypto currencies are not money because they suck as a unit of account and as a medium of exchange, NFTs could be useful for keeping track of ownership if a government recognizes their legal legitimacy. NFTs might be a better than a paper stock certificate for trading shares of stock and better than a paper deed for keeping track of ownership and other contractual debts like bonds. (These are sometimes called “security tokens“.) This seems reasonable in theory, but time will tell if there is really any advantage over traditional receipts for ownership and government will have to decide what kind of receipts have legal authority over any real property for NFTs to confer any real ownership.

Posted in Culture, Macro, Philosophy and ethics

How many lives did social distancing save?

Although we’ll never know exactly how many lives our masking and other social distancing saved from Covid, it is pretty sure that it saved over 30,000 lives from dying of the flu because the fatality rate from the flu dropped to practically nothing.  That is an amazing result.

According to the CDC, so far we have had a total of about 500 deaths from the flu this season compared with a usual average of over 35,000. This graph compares overall mortality from respiratory illness over time (red line) with just influenza mortality (orange shading and right-axis scale):

We’ll always think about respiratory illnesses differently in future years. For example, I expect to see a lot more routine mask wearing during influenza season like common practice in several Asian nations.

The first time I wore a mask in public, I was at a supermarket at the beginning of the pandemic back when the CDC was still saying that masks weren’t necessary because of the mistaken belief that the virus was not airborne and I got strange looks from almost everyone in the nearly empty store.  They probably wondered if I was infected because the CDC was telling people to reserve masks for sick people and healthcare professionals at the time.  One guy walked up beside me at the milk shelf and when he suddenly noticed my mask, he jumped back with an expression of horror as if I were wearing a super-scary Halloween costume.  He immediately wheeled around and scurried away.

That won’t happen again in my lifetime because most of us are used to masks now.  Although masks make some people furious for political reasons, my guess is that it will cease to have political valence as time goes by.  It is shocking how much passion mask mandates have caused for a small percent of Americans, but it is probably mostly because of political thought leaders who have been stoking anti-mask sentiment and they will turn to other causes as people have gotten accustomed to masks.  It isn’t an issue with partisan valence in Asian countries where public mask wearing has been normal for decades already. 

My wife sat next to a man on a flight who was not wearing his mask and when she asked him to please use the mask, he retorted, “Shut up you stupid bitch.”  It could have been worse.  There has been a surge of assaults when flight attendants ask passengers to follow the mask-wearing rules that they agreed to when they purchased their tickets. 

Here are the counties with the highest willingness to wear masks (darker shading) according to surveys.


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Posted in Health

VAERS has reported a huge spike in vaccine-related deaths. Is VAERS overstating the risks?

My sister informed me that she and the people she trusts are worried about new data coming from the Vaccine Adverse Event Reporting System, or VAERS, an official CDC database. There have been over 4,000 deaths within 30 days of a Covid vaccine dose reported on VAERS so far which would seem like a dramatic spike in deaths from the Covid vaccine if you don’t understand what the statistics mean.

The VAERS mortality numbers are completely misleading and I’m confident that the preponderance of evidence will show that none of the covid vaccines given so far has caused a mortality rate that is larger than say the risk of deaths due to the birth control pill per year which is about 5 per million.  I have a friend whose young sister tragically died from blood clots caused by birth control pills just before getting married.* The risk of clots from the birth control pill seems like an apt comparison with the risks of Covid vaccines since society has been freaking out about a possible association of less than 1/million deaths from blood clots due to the J&J vaccine which is much less than the risk of similar clots from birth control even though the birth control pill is mainly taken for recreational lifestyle purposes whereas the Covid vaccine has already saved tens of thousands of lives.  Nothing is completely without risk, and we don’t freak out about all the deaths that are directly caused by aspirin or vitamins or birth control given the other benefits of these drugs.

About 8000 Americans die every day and mostly due to illness.  That is the baseline daily mortality rate without Covid and well over 2,000 Americans have died per day from Covid diagnosis on average since the first vaccine was approved.  We have given 260milliion doses of the vaccine which is over 75% as big as the population of the US.  Given that the doses are disproportionately given to the elderly and none to children, the baseline mortality rate of the Americans who have gotten the vaccine is probably on the order of twice the rate for the Americans who haven’t gotten the vaccine.  Anyhow, let’s just round down and say that the age-adjusted mortality rate of people is only 33% higher than the American average.  Thus, there should have been about 8,000 Americans who died in the 24 hours after they got the vaccine.  If the VAERS reporting period for time between deaths and the vaccine is 10 days on average, then there should have been at least 80,000 deaths within ten days of getting a Covid vaccine and probably a lot more because I’m being fairly conservative in my estimates. Heck, there have probably been more Americans who died of Covid after getting vaccinated (and before the vaccine takes effect) than the total number of reported VAERS fatalities.

8,000 reported deaths sounds like a crisis, but this is an example of the base-rate fallacy because it is out of a total of 260 million people. Bayesian statistics teaches that whenever you have such a tiny fraction of the base rate, small amounts of noise in the data will completely swamp any signal. Every diagnostic system has a certain number of false positives and if our VAERS system only had a false positive rate of 5% in misattributing deaths to the vaccine, that would explain every single report.

VAERS reports have historically had a high false positive rate since anyone can submit reports and the false positive rate is undoubtedly higher than usual for Covid because there is much more hysteria about vaccines now than ever before due to hype on social media and Fox News.  Given the self-selection bias that ANYONE can report to VAERS including the wingnuts, and  I’d guess that there are more than 4,000 wingnuts in America, so a significant fraction of the VAERS number is going to be submitted by the crazies.  I mean, if mainstream media stars like Tucker Carlson started talking night after night about how aliens are killing people through mind control and named a website for reporting, I bet we’d get more than 8,000 reports of alien-mind-control deaths.  So until there is some analysis of the VAERS data to look for some plausible theory of how the vaccine could be killing people, I am not going to be worried about it.  I prefer to trust the numerous scientific studies over crowdsourced numbers.  VAERS is not a random sample. It has always been highly biased by reporting errors and now it has become more like an extension of social media so it is nearly impossible to make inferences from the raw VAERS numbers without a lot more analysis.

It is understandable that liberals wouldn’t trust a vaccine effort that Donald Trump deserves a  lot of credit for overseeing, but I haven’t seen evidence that he messed this up.  To the contrary, this is the one part of the Covid response that the US has succeeded at better than anywhere else in the world except Israel. So go get your #MAGAvaccine.

*Although the birth control pill elevates the risk of lethal blood clots, it reduces other health risks (like the risk of dying in pregnancy) and it reduces all-risk mortality, so it saves lives overall. I was ignoring the benefits side of the ledger above and just focusing on the mortality caused by the pill’s blood clot risks kinda like many of the anti-vaxers. So go ahead and get the pill too! It is so safe it really should be an over-the-counter medication. In countries where it is available without a prescription, they have health outcomes that are at least as good if not better than in countries where the pill is hard to get like in the USA.

Posted in Health

Bitcoin is not money. Therefore it cannot replace the dollar which IS money.

UPDATED on 4/24/21

Bitcoin is not money.  There are three main functions of money: 1) a unit of account (a measurement of value); 2) a medium of exchange; and 3) a store of value.  The most important and unique function of money is to serve as a unit of account and because bitcoin is not a unit of account, bitcoin is not money.

If bitcoin is not money, what is it?  Bitcoin is mainly a store of value like stocks, bonds, rare baseball cards, and lottery tickets.  None of these are money because they do not serve the first two functions of money.  Bitcoin is closer to a form of money than stocks because bitcoin is also occasionally used as a medium of exchange, and this is where bitcoin is unique.  All other mediums of exchange are also used as primary units of account, but bitcoin, uniquely, is occasionally used as a medium of exchange that is never used as a unit of account.  Every bitcoin transaction uses prices not in bitcoin, but in dollars (or another money).  Bitcoin’s failure at the primary function of money is why bitcoin is not money and no economy could operate on bitcoin alone. Capitalism needs money to function and the most fundamental function of money is to serve as a unit of account.

Only the first two functions are really unique to money. Lots and lots of things serve as a store of value and money is one of the worst stores of value, so although this is a function of money, it is a distant third-place function. There is an inherent tension between the store-of-value function and the medium-of-exchange function because you can’t store your money and exchange it too just like you cannot have your cake and eat it too. Anything that is a good a store of value stops being used as a medium of exchange if there are any alternatives for exchange. That is the point of Gresham’s Law which says that whenever there is a choice between different currencies, everyone will hoard the one that is a better store of value and only the worst store of value will circulate as money. If everyone thought that the value of bitcoin was going to steadily and slowly drop whereas the value of the dollar was going to start a long-run appreciation, then people would start hoarding dollars and using bitcoin as money instead, but that isn’t going to happen because we have a competent central bank that will never let dollars appreciate in value.

(Aside:  The last time the dollar appreciated dramatically was the Great Depression and it was the rise in the value of the dollar that was a major that made it so “Great”.  If the central bank had kept the value of the dollar from appreciating, it could have been a Little Recession instead of a Great Depression.  When the dollar started rising in value, people started hoarding dollars rather then spending them which meant that spending plummeted as everyone tried to buy as little as possible which caused incomes to plummet more in a vicious cycle.)

Bitcoin is more like gold than money and neither are money for the same reason. Both gold and bitcoin have very volatile values because they are both mainly used as speculative stores of value. If bitcoin continues to grow in popularity, it won’t replace money, but it could become an increasing substitute for investing in gold and cause the value of gold to drop!  Bitcoin is a fantastic substitute for gold because both are used to hedge system failure.

Goods that are primarily used as a speculative store of value have volatile prices because speculators capriciously speculate about future values rising which drives up prices, or they sell when they think future values will fall which drives prices down out of pure speculation.  In fact, the more that something comes to be seen as primarily a store of value rather than as something that is valued for its intrinsic usefulness, the more volatile its price becomes. For example, housing bubbles are not caused by people who just want use a house as a place to live, but by speculators who see housing as a growing store of value and are hoping to resell at a profit in the future.  Housing bubbles pop when speculators suddenly think that housing prices will fall and they all try to sell before the price falls farther. 

Although bitcoin proponents like to tout bitcoin when it is rising in value as a sign of success, that appreciation causes a major problem for bitcoin as a medium of exchange because nobody wants to exchange anything that it rapidly rising in value.  They want to hoard it and if they need to exchange something, the try to sell something else that is not appreciating as rapidly instead.

In contrast, a modern fiat money almost never goes up in value, so there is almost no incentive to hold it as a store of value.  The main reason people hold ordinary money is to use as a medium of exchange. Central banks actively engineer a little inflation which steadily reduces the long-run value of money. That inflation gives speculators an incentive to buy other things (like stocks, bonds, money-market shares, gold or bitcoin) as stores of value rather than money. It is the “animal spirits” of speculators that cause most of the price volatility in financial markets and by making money a bad bet for speculators, central banks reduce the volatility of the value of money.  A primary responsibility of all central banks is to minimize the volatility of inflation and maintaining a little inflation helps reduce the volatility of inflation.  Because money is held for use as a medium of exchange, there is little speculation about how much it should be worth and speculators focus their volatility-inducing attention on other assets like bitcoin and gold instead.  The lower the volatility of the value of money, the more useful it is both as a unit of account and a medium of exchange.

Bitcoin is not money because nobody uses bitcoin (nor gold) as a unit of account (for measuring value) and that is the most important function of money.  Bitcoin sucks as a unit of account because the value of bitcoin jumps around much more capriciously than almost anything that is actively traded.  Even fresh pork bellies would be a better unit of account than bitcoin because pork bellies have a more stable value! 

The US dollar has been the best money in the world for many decades because it is the best medium of exchange in the world. For example, oil producers in the Middle East use the dollar as their unit of account for selling to everyone because it is the most convenient unit of account for everyone around the world.  It is also frequently used as a medium of exchange between companies that do not use dollars at home.  For example, Airbus has often sold airplanes in places like Argentina using dollars.  Even though Airbus is a European consortium and neither Airbus nor their customer use dollars at home, it can be more convenient to exchange pesos for dollars and then dollars for airplanes and then exchange the dollars for euros, than to exchange pesos for euros directly and buy with euros.

According to Mark Williams, as of 2014, bitcoin had volatility seven times greater than gold, eight times greater than the S&P 500, and 18 times greater than the U.S. dollar.  Even the Bitcoin Foundation sets its employee’s salaries in dollars rather than in bitcoins.  Because bitcoin (and gold) are bad units of account, they are rarely used as a medium of exchange except by criminals. Cryptocurrency has a major advantage for criminal exchanges because it is much harder for police to trace, but for everyone else, the transactions costs due to high price volatility outweighs any other advantage of bitcoin for use as money.

Whatever currency is used as the unit of account has a big advantage for use as the medium of exchange because the medium of exchange has to be converted into the unit of account which adds extra complexity and cost to any transaction.  That added transactions cost means that bitcoin will always be at a disadvantage for transactions compared with dollars which must be involved in any transaction where dollars are used as the unit of account. 

Bitcoin uses block chain technology and that technology could offer a more efficient way of making payments at some point, but prices will always be quoted in money (a unit of account) such as dollars because dollars have a stable value. And as long as dollars are used as the unit of account, they will also be used as primary medium of exchange too because having a single currency that serves both purposes reduces transactions costs. For this reason bitcoin will never replace money as a medium of exchange either.

Blockchain technology may come to have some advantages for reducing some kinds of transactions costs but then blockchain technologies will then be adopted by the dollar-based banking system to reduce transactions costs.   It would be great to modernize our antiquated money transfer system, but even that lousy system is better than bitcoin and as new technologies for exchange come along, they will still use dollars for payments rather than bitcoins.

The big long-run problem with bitcoin specificially is that it will go obsolete as soon as a newer block-chain technology is produced that works better than bitcoin.  Bitcoin cannot change (or only with extreme difficulty) and all technology platforms that cannot change get replaced by newer technologies sooner rather than later. The probability that bitcoin will be replaced by a better blockchain technology in the near future is the main threat to bitcoin.  Newer technologies will make it obsolete, and then the value of bitcoin will collapse like the value of telegraph companies. Or bitcoin could collapse in value overnight when its security is successfully attacked with new technologies because it cannot evolve to meet new threats.  Or governments might just ban its use either to clamp down on illegal transactions or to reduce its rampant inefficient energy consumption.

Bitcoin is just an information technology that is competing with other technologies that are rapidly  evolving.  Bitcoin itself is almost impossible to update and so as other technologies continue to progress, at some point bitcoin’s technology will seem like a 1970s mainframe computer in comparison to a vastly superior Iphone 13.  It will look so inferior to newer alternatives that the value of bitcoin will collapse a bit like the Confederate dollar or other defunct currencies that went obsolete overnight.  Bitcoin is mainly popular because it was the first blockchain currency, but it is such an old, inefficient technology that it is unlikely that it will always be the best blockchain technology.  It has already been surpassed in transactions by Ethereum e-currency and more competition will continue to come.  Bitcoin was invented in 2009 and so it is going to seem increasingly elderly and decrepit compared to new technologies when it is 20 or 30 years old. 

All stores of value must have some underlying value. Fiat money (like the dollar) is truly useful because it really does minimize transactions costs as a medium of exchange and that produces its underlying value.  If there were something else that was better at facilitating exchange transactions (like bitcoin), we would use it instead of dollars and the dollar would become worthless because it has no other fundamental source of value. Commodity monies like gold and silver can rise and fall in value, but they cannot fall to zero (and did not fall to zero when fiat money replaced them for transactions) because they are inherently useful for other things besides facilitating transactions. They are used for industrial production and for making beautiful things like the shiny gold plating that Donald Trump likes to surround himself with. Fiat money would have no value if it isn’t the best medium of exchange somewhere.

Even a poorly-managed fiat money cannot fall completely to zero value if a government requires that everyone pay taxes using it.  Almost a quarter of US income is paid in taxes each year and that would prevent the value of dollars from falling to zero even if the Fed were incompetent. But the Fed manages the dollar well which makes it the best kind of money for every other transaction in America and for a huge share of international transactions too.

Bitcoin gets much of its fundamental value because cryptocurrency is the best form of money for a peculiar fraction of the World’s transactions.  It is the cheapest and best form of payment for evading taxes, criminal transactions, and funding terrorism.  In 2017, researchers estimated that 46% of bitcoin transactions were for facilitating criminal activities.  Although there are also some ideologues who are willing to use it for legal transactions despite its higher cost, most legal users treat bitcoin as a speculative asset and do not use it for making a lot of transactions.  A notable difference between those who use it for legal purposes versus illegal purposes is that illegal users tend to hold less bitcoin as an asset (a stock) relative to the amount that they use for transactions (flows).

So a big part of the bitcoin economy depends upon how much governments are willing to tolerate the black-markets it sustains.  Because bitcoin’s main advantage as a medium of exchange is for use by terrorists and criminals, governments have an incentive to shut down the companies that exchange bitcoin for real money and that would make bitcoin worthless for criminals who rely upon real money for most of their legal transactions.

Most people are excited about bitcoin based on the theory that it could eventually become a new global money, but it is never going to beat government money as a medium of exchange (for legal transactions), nor as a unit of account as long as governments are functional, but what about if  governments collapse? The best argument for a fundamental function for bitcoin is as a hedge against civilizational collapse. This function is also big part of what gives gold fundamental value.

…one reason gold is valuable is that some people see it as a hedge against the collapse of governments. In medieval and early modern Europe, as well as in many other premodern states, gold was used as money for cross-border payments because governments weren’t stable enough to be able to maintain stable fiat currencies. Even if we never return to that sort of anarchic world, people might want some kind of insurance against the possibility.

Gold’s current total market cap is estimated at a bit over $10.6 trillion. Bitcoin’s market cap, as of this writing, is about a tenth of that. So if Bitcoin were to become as big of a hedge against global disaster as gold is, it would probably be worth a lot more than it is now.

Another fundamental reason for Bitcoin to have long-term value is its usefulness in [illegal activities] or use as a currency in places where the government has broken down, [such as] where hyperinflation makes local fiat currency effectively useless…

In general, all of these uses can be grouped under a single umbrella concept: System failure. The system of governments, banks, financial regulations, etc. etc. that currently runs the world is not infinitely robust. In the places and times and future conditions in which that system fails, peer-to-peer financial solutions like Bitcoin are inherently very valuable. That gives Bitcoin fundamental value.

So bitcoin could be useful if the ordinary banking system collapses, but again, this is a motive for using bitcoin as a store of value because it could become useful as a form of money at some point if our ordinary monetary system collapses.

Ordinarily a fiat money like the US dollar is cheaper to use than bitcoin as a medium of exchange because 1) its value is more stable because it is actively managed by the central bank which makes it a better unit of account; 2) it is required for paying taxes so Americans have to use lots of dollars every year; 3) the fact that everyone uses dollars creates a kind of economy of scale called a network effect which makes dollars more convenient to use simply because all other Americans are already using them; 4) bitcoin is structurally prone to deflation which would contribute to recessions if it were adopted for an entire economy.  That fact alone will prevent any sovereign economy from adopting it.

5) Bitcoin is expensive to store and gets more expensive and environmentally destructive as the bitcoin economy expands.

6) Bitcoin transactions are extremely expensive and slow relative to dollar transactions in the conventional banking system.  This is one of the biggest failures of bitcoin as a money.  As Marketwatch points out, “Credit cards can settle 5,000 transactions per second. One bitcoin transaction takes 10 minutes.”  Visa and Mastercard charge about 3% transaction fee which is a ridiculously large, inefficient monopolistic fee. Hopefully a blockchain technology will someday be able compete with the banks to force down their fees at some point, but so far the credit card duopoly is safe because bitcoin transactions are much more expensive than Mastercard:

to use bitcoin to buy a $4 latte at Starbucks, you might have to either wait several hours for the purchase to go through or pay $5 to speed it up. “One of the biggest challenges for bitcoin has been that the fees are too high for it to be used as a simple transaction account, and it takes too long,” O’Hara said. “The number of bitcoin transactions that can be added in any given time is orders of magnitude smaller than, say, Visa cards.”

Even the “free” work that is done to process bitcoin transactions have high real costs.  Those costs are actually paid by bitcoin “miners” who do the calculations that process transactions for which the system “prints” them new bitcoins.  In the process they consume an incredible amount of electricity.  It is tremendously expensive and wasteful.


Bitcoin mining alone uses more electricity than 159 different countries and in order to make it worthwhile for miners to continue processing transactions, bitcoin will have to deflate in value because there is a finite amount of bitcoin that can be “mined” and as we approach that hard limit, the costs of mining (processing transactions) continues to rise, plus there are limits to how many blockchain transactions can be processed per minute.  Perhaps that is why we reached peak Bitcoin transactions way back in 2017:

Meanwhile, the rising expense of processing transactions won’t be worthwhile unless the value of bitcoin continually rises.  That may sound good, but a rising value of a currency is called deflation and deflation is extremely harmful for an economy when it is caused by a money supply that does not expand as fast as the number of transactions that people want to make.  Because the costs of processing Bitcoin transactions must rise over time, it will continue to get even worse as a medium of exchange.  Inflation is much healthier for macroeconomic stability than the same amount of deflation because deflation turns money into a store of value which causes hoarding rather than the transactions that make the economy go round.

Bitcoin’s technology has some advantages, but the dollar is better for almost all legal transactions. Plus, if the technological advances of blockchain were truly important, some part of the dollar banking system would easily copy them.  The only real advantage of bitcoin seems to be facilitating criminal transactions and it isn’t even ideal for that use because although it does provide a degree of confidentiality, it is anything but anonymous because every transaction made from every account is public information for everyone.  Other technologies provide both confidentiality and anonymity, including good old-fashioned cash.

So far bitcoin speculators have been hoping that bitcoin’s technological advantages will eventually prove to be so much better than the dollar as a medium of exchange that everyone will someday want bitcoins for conducting all their daily business (except paying taxes presumably). But it is more likely is that the dollar system will eventually adopt some of bitcoin’s technologies and wipe out what little advantages bitcoin currently has for exchanges.  Plus, because bitcoin’s main advantage for exchange has been its ability to fund illegal activities, it will probably eventually be used to fund a major terrorist act and that will motivate large governments to clamp down on the exchanges that connect the bitcoin network to the global financial network.  That would be the sudden end of bitcoin except as a historical curiosity like the great tulip bubble of 1637.

I hope that doesn’t happen because bitcoin is that it provides a backstop alternative for the fiat monies of the world.  A fiat money is always in peril of being managed badly and that has dire consequences for the people who depend upon it such as in the Zimbabwe hyperinflation.  But if a fiat money ever becomes a worse option than bitcoin, then people could switch and bitcoin might be used as a backstop in that case.  Bitcoin may be inefficient, but it would be better to have a really inefficient form of money than no money.

But I’d rather have gold, because if the US government collapses, then our communications and electric grid will also probably collapse and that would make bitcoin useless.  So bitcoin provides some insurance for the world’s monetary system, but it isn’t a very secure insurance.  For example, in Zimbabwe’s economic collapse most people have been using the fiat currencies of other nations, most commonly, the US dollar, rather than bitcoin. There is simply no major economy where bitcoin has replaced fiat currencies as the main medium of exchange except in some parts of the criminal underworld and they still rely upon real money to serve as the unit of account.

Bitcoin is a fascinating new kind of store-of-value, a lot like baseball cards and other collectables and it is also occasionally used as a medium of exchange, but it isn’t money.

Posted in Macro

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