Craig Pirrong's Blog, page 22

Non-compete Agreements Face the Wrath of Khan

Nina Khan’s FTC has indicated that it will outlaw non-compete clauses in labor contracts. Be skeptical. Be very skeptical.

My priors are that such restrictions are unwarranted, especially when originating in the Khan FTC.

For one thing, this brings to mind Coase’s dictum that the knee jerk response to any non-standard contracting practice is that it is the result of monopoly (or in this instance monopsony) power. Coase argued that instead most such practices economize on transactions costs. Research dating back more than a half century reveals that many practices frequently branded as monopolistic, such as resale price maintenance, exclusive dealing, and exclusive territories, reduce transaction costs associated with free riding on information. Non-compete clauses can obviously serve this function by preventing an employee who obtains proprietary information at company X from supplying that information to company Y. Eliminating this protection on property rights to information will result in less investment in this information.

Furthermore, although the monopoly/monopsony explanations that Coase belittled at least involve the application of economics, the Khan FTC has basically thrown economics out the window. (It has definitely thrown Chicago School economics–which provided efficiency rationales for RPM, etc.–out the window.) Instead, her FTC has embraced Brandeisian big-is-bad, unconventional-is-bad antitrust. The Khan Theory of Antitrust Enforcement is akin to Potter Stewart’s theory of pornography: she knows an antitrust violation when she sees it. It is a very subjective approach completely contingent on her non-economics-based subjectivity.

Moreover, the process at the Khan FTC is highly dubious. The Chairwoman is alleged to run roughshod over staff and other commissioners–as epitomized by the resignation of the FTC’s Republican Custer, Christine Wilson. This furthers suspicions that this proposed rule is purely the product of Khan’s uneconomic, idiosyncratic mind and prejudices, rather than on sober analysis.

So my priors are that anything that comes out of the Khan FTC is likely bilge.

But priors can be modified by evidence! So let’s look at the economics of a ban.

So as not to keep you in suspense: this analysis provides no reason for me to change my priors. To the contrary.

Evidently the rationale for this ban is that non-competes are a means of exercising monopsony power. Where to begin?

First, given the plethora of participants on both sides of labor markets–including markets for fairly specialized labor–there is considerable room to be skeptical that monopsony power is severe. This is particularly true for information workers for whom non-competes are most likely used.

This is especially the case today, when the reduced cost of remote work sharply mitigates one of the factors that could conceivably create a quasi rent that an employer could extract, the cost of moving.

Not that this would be a major issue for a lot of information workers anyways. Due to well-understood agglomeration effects (that have been operating since, say, the heyday of New England cotton milling in the antebellum US!) firms of a particular type, and hence employees of this type of firm, tend to be geographically concentrated. So an employee with valuable information can find work at another firm that can use that information without having to move, or move far.

Indeed, this can explain why non-competes exist in the first place. Employers in industries with a high degree of spatial agglomeration cannot rely on the costs of relocation to prevent competitors from poaching employees. Thus, I would predict that non-competes are more likely in industries where agglomeration effects operate, whereas the monopsony power theory would predict the opposite.

To make it more specific: I predict non-competes would be more prevalent in places like Silicon Valley, whereas the monopsony theory would predict that they would be less prevalent there (because employers would have less market power when relocation costs and hence quasi rents are low).

Second, although non-competes can potentially create quasi rents ex post, ex ante potential employees can negotiate contract terms (or at least reject terms offered by a potential employer). Employers can attract employees only if the other terms of the contract (including pay, but also other terms) compensate for the restriction on the employees ex post options. As long as the ex ante employment market is largely competitive, contractual terms will compensate (or more than compensate) for the employee’s ex post loss of freedom. If (due, for instance, to information disclosure problem) non-competes are wealth enhancing, the Coase Theorem comes into play. Employers and employees will negotiate other terms that make both better off.

Third, even granting arguendo that non-competes are a way of exercising market power ex ante (a dubious proposition), eliminating non-competes does not eliminate the market power, so it is by no means clear that eliminating non-competes will make employees better off. Rapacious, monopsonistic employers will just find some other way to exploit their market power. And that could make employees worse off. Eliminating an efficient way of exercising market power makes the pie smaller, and it is likely that both employers and employees would both suffer as a result.

This raises the issue of why monopsonists would prefer to use non-competes to exercise (ex ante) market power, rather than just paying lower wages/salaries, or offering fewer benefits. Perhaps you could view it as a form of price discrimination where employers exploit differences among employees by offering a menu of contracts with different pay and non-pay terms (including non-competes, or not) to extract rents. Even if that’s what’s going on, it is well known that the welfare effects of price discrimination–and hence of its restriction–are highly ambiguous.

That is, even if non-competes are a way of exercising market power, eliminating this particular way of doing so does not necessarily mean that market power will decrease: firms may instead utilize less efficient ways of exercising it.

One Chicago School staple is that a monopolist has no incentive to engage in things like exclusive dealing in order to extend market power: it can extract the maximum profit by just charging the monopoly price. Hence, there is likely some non-monopoly leveraging explanation for such contracting practices. Similar logic applies to exercise of monopsony power.

The pushback against Chicago resulted in the creation of a lot of highly stylized, not to say contrived, models in which such monopoly leveraging can occur. Nice models! Never seen one that applies to a real world situation.

I therefore surmise that even if employers have ex ante market power, it is unlikely that non-competes enhance that market power, and that eliminating them will make employees better off–because the elimination does not reduce the ex ante market power.

The empirical evidence that supposedly supports the ban is that elimination of non-competes is associated with higher wages. Even putting aside my skepticism that wages are a sufficient statistic for employee welfare (since so many other terms of employment can be varied), it must be recognized that there are reasons why elimination of non-competes in competitive labor markets could boost wages for some.

Elimination of non-competes essentially gives employees property rights in valuable information. Absent non-competes they can effectively sell this information, whereas they cannot do so (or are limited in their ability to do so) when non-competes are in place. Since the information cannot be sold separately, it is bundled with the other services supplied by the employee. All else equal, employers (including an individuals current employer and potential employers) are willing to pay more for the information-service bundle than the service alone. That means higher compensation.

As Coase and subsequent scholars (including prominently my thesis advisor Lester Telser) noted, contractual restrictions can be ways of creating or protecting property rights in information. It is highly likely that’s the role that non-competes play, especially given their widespread use in tech and other information industries. Therefore, be skeptical indeed about the FTC proposal. Indeed, even if you believe that instead non-competes are in part a means of exercising market power, you should not conclude that their elimination will make employees better off because the market power remains even after one means of exercising it is constrained.

We should all fear the Wrath of Khan generally, given her economic ignorance, and indeed her hostility to economic reasoning. We should especially fear it in her latest attempt to reshape private contracting in what is arguably the largest market in the United States–the market for labor, and for information intensive labor in particular.

Balloon Excuses: The No Good, the Bad, and the Ugly

The embarrassment of this administration is ballooning, as if one could have thought that possible as bloated as it was already. Apparently in a belief that “Trump did it!” is kryptonite to any criticism, some anonymous DoD person told reporters that Chinese balloons had transited continental United States airspace on at least three occasions when the Donald the Dreaded was POTUS.

Virtually everyone in Trump’s national security upper echelons–including people who hate him, like Bolton and Esper–immediately called BS. They all said they were never informed of this. So what are the possibilities?

First, it never happened and this is just somebody making shit up to clean up after Joe. Always a real possibility.

Second, it did happen, and the balloons were detected in real time, but the DoD decided to withhold this information from the commander in chief. That would be a scandal of major proportions. And sad to say, it is believable.

Third, the administration’s elaboration: the previous balloons weren’t detected in real time, but they were uncovered after the fact by the intelligence agencies through some undisclosed means. Although all of these explanations are disturbing in their own way, this would be the worst. It would imply a gaping hole existed in US detection technology. Although the administration claims that THIS TIME they detected the balloon as soon as it passed over the Aleutians, and this suggests that the vulnerability has been addressed, we can’t be sure whether it’s just that NORAD got lucky this time.

There must be a public investigation, by Congress, to determine which of these explanations is the correct one.

With regards to the first explanation. Why did the WaPo rely on a single source for a story like this? Why won’t the Pentagon reveal who made the statement to the reporter? Note that the story–if it was true–would have involved the leak of highly classified information: a crime. If it wasn’t true, a “senior” official is spreading–wait for it–disinformation, supposedly the greatest threat to “our democracy.” Either alternative is unacceptable, and should result in the investigation, termination, and perhaps prosecution of the perpetrator. And he should be identified immediately while these steps are proceeding.

Letting the balloon traipse from Alaska to South Carolina (apparently on a tour of US nuclear facilities) is bad enough for the reasons discussed in my earlier post. But this clumsy attempt to exonerate Biden through whataboutism (“whatabout Trump!!!”) makes things even worse. It reveals the US military and Department of Defense to be incompetent, mendacious, or both.

Biden didn’t say anything either at a shout or a whisper about the balloon in his State of the Union address. He obviously wants this to go away. It can not be allowed to go away. It is a national security embarrassment of the first order, and Austin, Milley, the head of NORAD, and the head(s) of the intelligence agency or agencies that allegedly discovered previous violations of US airspace ex post facto must be hauled in front of Congress for a public grilling.

And then, perhaps, keel hauled.

Up, Up, and Away, In Xi’s Beautiful Balloon

The carnival of the Chinese balloon transcontinental transit is bringing musical flashbacks, such as this from 1983:

Or going even further back–deep into my childhood:

Groovy, baby.

Seriously though, I am of mixed minds regarding the decision–the Pentagon’s according to Biden–to defer destroying it until it had traversed the US from sea to shining sea. On the one hand, I can perhaps see that there is intelligence value in observing it. On the other, it makes the United States look pathetic before a strutting China.

On balance, I believe the latter consideration substantially outweighs the former. The lame excuse given for not puncturing it with extreme prejudice earlier–that its fall would endanger people on the ground–belies an intelligence collection motive: if that was the reason, just say so! At least that sounds more boss:

And what are the odds of someone on the ground being hurt in Alaska, the Yukon, or even eastern Montana FFS?

And was the benefit to us of the intelligence we collected on the balloon greater than the value of the intelligence the balloon collected on us?

And perceptions are reality. It’s not like this is a new super weapon. Pretty sure we had figured out everything it was doing and capable of doing during the time it was flying over thousands of miles of trackless waste–if we didn’t already know before it breached US airspace over the Aleutians. But the image of a spy balloon flying with impunity over the fruited plain does convey the image of a “pitiful, helpless giant” (to quote Nixon, reading what the just-retired Patrick Buchanan wrote). This is especially true given that there is a pitiful, helpless mental midget holding the position of Commander in Chief.

This reinforces the image of fecklessness that hangs around this administration like a bad smell. And fecklessness encourages recklessness. That is, we have to think about how Xi interprets this, and believe me, he’s not going to believe “we were protecting people on the ground” line for one second.

He may laugh, though.

But after he’s done laughing, he’ll incorporate what he surely perceives as an image of weakness and indecision into his calculus regarding Taiwan and other points of potential conflict.

This raises the question of motive. After all, China has supposedly reined in its “wolf warriors” and was trying to present a more conciliatory face to the US, and the world. Blinken was supposed to meet with the Chinese to help reset relations. (Nod was to remain in the White House.)

One possibility is that this was a test–would the US still proceed with a rapprochement despite a provocation (humiliation, in fact)?

Another possibility–never to be dismissed in one party (but many faction) states–is that elements in the CCP (including, perhaps, aforesaid wolf warriors) wanted to derail any rapprochement, and figured that creating an incident like this was the way to achieve that objective.

Given the opacity of the CCP/Chinese government, it’s hard to say. But under either scenario, the return message should have been: don’t fuck with us. Instead, we sent the message that we are eminently fuckable.

For their part, the Chinese lost their shit when an F-22 FINALLY took down Chairman Xi’s Amazing Flying Machine.* To which we should have replied: fuck you and the balloon you rode in on, commies. Instead, we gave a mealy mouthed, diplomatic reply.

We are in a very fraught period with China. We are trying to recover from “locust years” (as Churchill called them) of military distraction and decay and recover at least a semblance of our former naval and air dominance over China. China is ruled by a megalomaniac with ambitions to crown his achievements by retaking Taiwan. The last thing do do under those circumstances is to convey weakness. And regardless of the true justification for allowing the balloon to traipse over American unhindered, that’s exactly what happened.

The phrase “the balloon went up” means that the situation is very serious. It dates from WWI, when the appearance of a reconnaissance balloon was a harbinger of an artillery barrage incoming. Well, the balloon went up, and to my mind, was brought down far too late.

*The F-22 took down the balloon with an AIM-9X Sidewinder. A testament to how sensitive the heat seeking infrared sensor on that weapon has become. In early versions of Sidewinder it was necessary to get right on the tail of an adversary for the guidance system to be able to pick up the heat signature of the engine. To be able to take down a balloon, which has far less of a heat signature than a MiG’s exhaust, is pretty impressive.

The F-22 pilots used the call signs Frank1 and Frank2, apparently an homage to WWI “Balloon Buster” ace Frank Luke (whom Eddie Rickenbacker called the best pilot in WWI). There is some irony here, though, because it is clear that the current Pentagon leadership is shall we say slightly less aggressive than Lt. Luke.

Tanks Anyways

After much hemming and hawing, too-ing and fro-ing, Germany has finally relented and agreed to the provision of German-built Leopard II tanks to Ukraine. Apparently the deal clincher was an American agreement to supply 30-odd M1A2 Abrams MBTs. These will join a modest number of Challenger IIs to be provided by the UK.

This is an important development, but not an earth shattering one as some on each side are saying. Some pro-Ukrainian western observers assert this will allow Ukraine to recapture all its lost territory-including Crimea-from Russia. On the other side, which includes the Russians and many right wing populists in the United States, this is the next step to Armageddon. As Trump put it: “today tanks, tomorrow nukes.”

Settle down, everybody. (A big ask, I know.)

Yes, these MBTs are far superior to anything Ukraine currently operates, and to anything in the Russian armory. On every crucial dimension, the western-supplied tanks are superior: firepower, protection (including protection of ammunition), cross country performance, gun accuracy, optics and fire control systems. Optics and fire control systems are especially important because it has been long known that in armored battles, he who shoots first almost always wins. Iraqi tankers found this out to their dismay (if they were lucky enough to be able to find out anything) in 1991 when their tanks began exploding from hits from M1s that they couldn’t even see. Although both the western and Russian tanks have improved in the decades since, the already yawning gap in performance demonstrated in 1991 has only increased over the years.

But quantity has a quality all its own, as Stalin was wont to say. And the fact is that the quantity of tanks being supplied Ukraine is modest. Given the inevitable attrition due to combat and breakdown, the approximately 300 tanks is about enough for one armored division for one big battle.

Consider the use of this type of force on the defense and offense.

On the defense, an armored force of this size and quality could stop Russian armored advances and launch devastating counterattacks–if they are located where the Russians choose to attack, or can get there in relatively short order.

Given the record of the last 11 plus months, moreover, it’s not clear that Ukraine needs this force to defeat a putative Putin armored attack. In February-March of last year, Russia proved singularly incapable of utilizing armor effectively in the offensive, and its tanks proved easy pickings for anti-tank guided missiles. This was in part to (as I wrote at the time) Russia’s incompetence at combined arms tactics: tanks without infantry are extremely vulnerable. Given the dross with which Russian formations are being reinforced with, and the lack of training they have received, their capabilities are almost certainly worse rather than better than a year ago.

Logistical failings also helped doom the Russians in early-2022. If anything, massive attrition in vehicles and the effect of HIMARS has worsened their logistics woes: due to HIMARS, the Russians are being forced to locate their supply dumps well to the rear, increasing the duration of vehicle trips (effectively reducing supply capacity) and increasing the vulnerability of supply convoys to attack by drones, air attack, artillery attack, infiltrators, partisans, what have you.

So although an impending Russian spring offensive is anticipated, there is no reason to believe it would fare any better than the last one, and considerable reason to believe it would fare worse, tanks or no tanks.

Insofar as offensive operations are concerned, yes, the western MBTs can provide a striking force that might break through Russian lines. But a decent-size force of modern tanks is likely a necessary but not sufficient condition for such an outcome.

Successful armored assaults often rely on surprise and indirectness rather than mere smashing power. Tanks deployed against a weakly held section of an enemy line are far more effective than those hitting strong prepared positions. Compare Ardennes (1940, 1944) to Kursk (1943) or even the Seelow Heights (where in April 1945 a massively superior Soviet armored force took horrific casualties to overcome prepared but weakly-held defenses).

Achieving such an outcome requires considerable operational skill and operational security. Recall the lengths to which the US went to conceal its shift of its armored striking force from fronting Kuwait to fronting Iraq some distance to the west in order to be on the Iraqi flank. (In the event, the Marines smashed through prepared defenses in Kuwait, but the point holds). In 1940 and 1944 the Germans were helped by overoptimistic French and then American/British assumptions which led them to leave the Ardennes weakly defended and to discount the possibility of German massing there. At Kursk, the preparations were too massive to be concealed, giving time for the Soviets to construct a defense in depth which ground down the German armored spearheads before they could achieve a decisive penetration and breakout. Subsequently the Soviets launched a massive armored counterattack–against weaker German forces on the flanks. The same thing happened at Stalingrad.

Recent Ukrainian successes suggest some skill at deception and operational security. They evidently duped the Russians into believing the main Ukrainian effort would be in the south but instead the attack started in the Kharkiv region–agains skeleton Russian forces.

But there’s no guarantee of achieving that again, and ironically, the very mass of a big tank force makes deception and operational security all the more difficult.

There’s also the issue of whether the Ukrainian army can carry out the combined armed tactics that are necessary to succeed in an armored strike against opposition. The large casualties they have suffered over the past 11 months has certainly weakened what combined arms skill they possessed prior to 24 February 2022.

Further, there is considerable room to question how deep a penetration Ukraine could achieve. Its logistical capabilities are also limited, and the tanks they are receiving are gluttonous consumers of fuel (especially the Abrams). It would also have to confront the inexorable logic that every kilometer of advance hurts the attacker’s logistics and helps the defender’s.

And with respect to logistics, tanks require considerable maintenance support to begin with, especially when they are on the move. The fact that Ukraine is receiving three different kinds of MBT, each requiring a separate support structure (which will be of suboptimal scales) means that a lower percentage of their tanks will be operating at any time than would be the case for an American division operating a single type of vehicle.

In sum, the new western tanks will help shift the balance in Ukraine’s favor, but are unlikely to do so in a decisive way. I doubt that they will shorten the war appreciably, especially since even though they will likely result in more Russian losses on the battlefield, such losses have clearly not persuaded Putin to consider giving up, especially on terms suitable to Ukraine. And any advances the tanks facilitate will only encourage Ukraine in its belief that it can restore its 2014 borders.

So my prediction is that the western MBTs will mainly shift the line of stalemate to the east. Perhaps a considerable distance, but not nearly the distance Ukraine desires.

ODD and Proud

Recently Bruce Thornton riffed on a WSJ piece about the “Dontells,” people who don’t want to be told what to do. These people have been labeled as suffering from “Oppositional Defiant Disorder,” or “ODD.” (I’m sure that acronym is not a mere coincidence.).

This is officially recognized in the Diagnostic and Statistical Manual of Mental Disorders DSM-5. It’s supposedly treatable but incurable.

This smacks of Soviet psychiatry, which labeled those who opposed the regime as mentally ill. (Putin has resurrected this heinous practice. But hey, so has Germany which is forcing an 85 year old Holocaust survivor to be institutionalized for refusing to be “vaccinated” against COVID.)

Can’t wait until hooliganism is an officially recognized DSM condition.

The reason that ODD is running rampant is that THERE ARE LOTS OF PEOPLE IN GOVERNMENT, CORPORATIONS AND MEDIA TELLING PEOPLE WHAT TO DO. About everything. Such a mystery, right?

And the fact that people being pushed by the pushy are pushing back is precisely why the pushy in government, corporations, academia, and the media are so intent on diagnosing them as mentally ill. (Of course, someone born with a Y chromosome who wants to ignore that fact and cut off his junk is the epitome of mental health and you are a hater–and probably mentally ill yourself–for harboring any doubts about this!)

I am not a religious person, but one theme in the New Testament that resonates deeply with me is Jesus’s imprecations against the Pharisees and teachers of the law. He was obviously suffering from ODD. Which is precisely why the Pharisees were hell-bent on killing him.

This resonates because we live in an increasingly pharisaical world, with priestly classes claiming a monopoly on authority and truth condemning, persecuting, and often prosecuting those who dissent. Cancel culture is just one manifestation of rampant pharisaicalism.

More prosaically, they are just so many Cartmans, demanding that you respect their authoritay and delivering a beat down if you resist.

The disgusting display of Davos is perhaps the most prominent congregation of modern day Pharisees. A self-anointed group of global control freaks who just know better, and who condemn those who reject their superiority–and their commands–as heretics and blasphemers. Except they use slightly different terminology, like extremists and purveyors of misinformation and disinformation.

The most outré Davos Pharisees were of course European, and many of their most bitter condemnations were directed at benighted Americans (e.g., the Euro who said that Americans were going to have to dispense with free speech and pass hate speech laws–how dare the hoi polloi be able to say mean things about us! Oh, you have no idea how much I hate you, woman. Or maybe you do, which is why you insist on such baleful laws.)

Unfortunately, there were many, many Euro-adjacent Americans there (John Kerry being the most egregious, with Al Gore giving him stiff competition in that regard), and the pharisaical class is firmly in command in American government (at all levels), corporations, academia, and media.

If you watch even a few minutes of what transpired at Davos, I am sure that you agree with me that nuking the place in mid-January would make the world a far, far better place.

The fact that the United States is the target of Europharisees is hardly surprising, given that the very reason that millions came to America in the first place was to escape the suffocating oppressions of the “elites”–royalty, nobility, and the established church. There was an obvious sorting process. The non-conformists were the most likely to leave. (Small example: I recall a study showing that Scandinavian emigrants to America were more likely to have unusual names.) Thus, Europe became more conformist, and American more heavily populated by those who bridled at authority.

Over the years, the United States has become more Europeanized, but Europe has not become more American. There has been convergence, but most of the movement has occurred in the United States, especially with the growing dominance of progressivism in government, media, academia, and corporations.

Progressives are Pharisees without God. And like the Pharisees of old they cannot brook dissent, and strive to use authority–including the authority of the state–to crush it. In doing, they label dissenters as possessed by demons or the Devil, only now their condemnations are tarted up in pseudo-scientific psychiatric jargon.

As for me, I’m ODD (by the psycho-Pharisees’ definition), and I’m proud. It manifests itself in small things (e.g., musical taste for punk and outlaw country) and large things (politics). I despise the modern Pharisees and rebel against them. I’m no Jesus, for sure, but I fervently embrace that part of his message.

Aside. In a Twitter scrape some years ago, I mocked the eminently mockable Pharisee wannabe and all around insufferable douchebag Tom Nichols. He responding by saying that I was “odd.” I guess he was right! Thanks for the compliment, Tom!

Joe’s Garage

The news brings to mind one of Frank Zappa’s classics, Joe’s Garage:

The reference, of course, being to the revelation that classified documents were found in Joe’s Garage. Joe Biden’s garage, to be specific.

Now, in a sane world I would say this is a big nothing burger. But in our clown world, the Biden administration has made this a Whopper through its pursuit of Trump for his possession of classified documents.

Hoist on his own petard. Karma is a bitch!

Biden’s defense appears to be that he’s only a little bit pregnant and he’s not as pregnant as Trump and besides he didn’t intend to get pregnant and he didn’t know he’s pregnant.

Perhaps that’s generous, because Biden can’t even read his own defense:

Doocy: "Classified materials next to your corvette? What were you thinking?

Biden: "My corvette is in a locked garage."

He then struggles to read off a script pic.twitter.com/UYGiFGnJBP

— Greg Price (@greg_price11) January 12, 2023

(I always have the deepest sympathy for Joe’s sign language translators. How do you sign “WTF”???? I guess she has lots of practice. Lots!)

To add to the hilarity, Hunter lived for a time in the house where the classified documents were “secured” in the garage with the precious Corvette. Yeah, the Hunter who did deals with CCP spies and cavorted with Russian hookers and who had an appetite for drugs that would have put John Belushi to shame.

Supposedly other locations that Biden had access to are being searched for additional documents. Locations like the office space that he shared with Hunter? Inquiring minds want to know!

There are those who suspect that this is a Deep State plot to deep six Joe, who has made it evident that he intends to use the White House as a cognitive care facility from 2025-2029. Could be! My cynicism is sufficiently advanced as to not really care. I’ll just grab some popcorn and watch the circus, clowns and all. Can’t do anything about it, so might as well get some entertainment out of it anyways.

Putin the Pathetic: Mommy! NO FAIR! Nato hit me back!

Vladimir Putin has added a chapter to the Annals of Gobsmacking Asininity by whining about the unfairness of Russia’s fight in Ukraine because of the involvement of Nato.

The article stated, “As Russian President Vladimir Putin emphasized earlier… ‘the military potential and capabilities of virtually all major NATO countries are being actively used against Russia.’ Defense Minister Sergei Shoigu noted that Moscow is fighting not so much with the Ukrainian military as with the ‘collective West.’”

Tass further tried to emphasize that Russia was at a considerable financial disadvantage on the battlefield, as foreign aid to Ukraine has exceeded $150.8 billion, including military, humanitarian and financial support.

So let me see if I have this straight. Nato has always been hell-bent on destroying Russia. Ukraine posed an existential threat to Russia because it wanted to join Nato. But who coulda possibly thunk that a Nato looking for an opportunity to crush Russia wouldn’t have just stood by with its thumb up its collective butt when Russia invaded Ukraine?

The incoherence of Putin’s “thinking” is a thing to behold. But maybe that just means that Putin is a first rate intelligence, according to F. Scott Fitzgerald’s definition: “The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function. One should, for example, be able to see that things are hopeless yet be determined to make them otherwise.”

Actually, I don’t think Vova is a genius, by anyone’s definition. The more plausible explanation for his actions is that he didn’t fear Nato, or the United States. He thought they were paper tigers who would acquiesce to his invasion of Ukraine. (No doubt the Afghanistan fiasco encouraged this belief.) They turned out not to be, so now he’s crying No Fair!–the lament of losers.

Perhaps Putin’s calculation would have been correct had his other crucial assumption that he would kick in Ukraine’s door, and “the whole rotten structure would come crashing down” been true. (For those who are unaware, that’s what Hitler thought of the USSR.) But it was Vova’s vaunted army that proved the paper tiger. Therefore, seeing that Ukraine was not going to collapse, and that Russia had jumped into a quagmire, the United States and many Nato nations (not Germany!) found that Putin had handed the opportunity to beat the crap out of him on a silver platter.

And according to Putin, that’s what Nato has been panting to do forever. And he gave them the perfect opportunity to do it. Genius!!

Which leaves Putin to be a whining little bitch bewailing the unfairness of it all.

Dude. Don’t start a knife fight on the assumption with the guy with the guns isn’t going to use them.

Some time ago I pondered what Putin’s sobriquet should be. I think this settles it. “Putin the Pathetic” it is.

Just Because It’s Not All Bad Doesn’t Mean It’s All Good, Man

A coda to my previous post. The EU natural gas price regulation avoids many of the faults of price controls, largely as a result of its narrow focus on a single market: TTF natural gas futures. That said, the fact that it potentially applies to one market means that there are still potentially negative consequences.

These negative consequences are not so much to the allocation of natural gas per se, but to the allocation of natural gas price risk. Futures markets are first and foremost markets for risk, and the price regulation has the potential to interfere with their operation.

In particular, the prospect of being locked into a futures position when the price cap binds will make market participants less likely to establish positions in the first place: traders dread being stuck in a Roach Motel, or Hotel California (you can check out but you can never leave). Thus, less risk will be hedged/transferred, and the market will become less liquid. Relatedly, price caps can lead to perverse dynamics when the price approaches the cap as market participants look to exit positions to avoid being locked in. This can lead to enhanced volatility which can perversely cause the triggering of the cap.

Caps also interfere with clearing. There is a potential for large price movements when the cap no longer binds. Thus, in the EU gas situation, ICE Clear Europe has said that it will have to charge substantially higher initial margins (an estimated $33-47 billion more), and indeed, may choose to exit the EU.

These negative effects are greater, the closer prices are to the cap. Europe’s good luck with weather this winter has provided a relatively large gap between the market price and the cap, so the negative impacts are relatively unlikely to be realized. But that’s a matter of luck rather than a matter of economic principle.

Risk transfer is a vital economic function that generates substantial economic value. The cost of interfering with this mechanism is material, and should not be ignored when evaluating the EU policy. That policy avoids many of the standard problems with price caps, but its narrow focus to the futures market means that it has the potential to create economic costs not typically considered in evaluations of price controls. Meaning that not even Saul Goodman would come to its defense.

The Least Bad Price Control Ever?

At the very end of last year the European Union finally agreed on a rule capping natural gas prices. And what a strange duck it is–unlike any price cap I’ve seen before, which is probably for the best for reasons I discuss below.

Rather than a simple ceiling on the price of natural gas–which is what many EU nations were clamoring for–the rule limits trading in front month, three month, and one year TTF futures if (a) the front-month TTF derivative settlement price exceeds EUR 275 for two week(s) and (b) the TTF European Gas Spot Index as published by the European Energy Exchange (EEX) is EUR 58 higher than the reference price during the last 10 trading days before the end of the period referred to in (a).  The “reference price” is: “the daily average price of the price of the LNG assessments “Daily Spot Mediterranean Marker (MED)”, the “Daily Spot Northwest Europe Marker (NWE)”, published by S&P Global Inc., New York and of the price of the daily price assessment carried out by ACER pursuant to Article 18 to 22 of Council Regulation .”

So in other words: (a) the TTF price has to be really high for two weeks straight, and (b) the TTF price has to be really high relative to the European LNG price over that period.

In the event the cap is triggered, “Orders for front-month TTF derivatives with prices above EUR 275 may not be accepted as from the day after the publication of a market correction notice.” So basically this is a limit up mechanism applied to front month futures alone that basically caps the front month price alone. Moreover, it will not go into effect until mid-February, meaning that the last two weeks of February would have to be really cold in order to trigger it. (The chart below shows how far below prices currently are below the flat price cap trigger.)

These conditions are so unlikely to be met that one might get the idea that the cap is intended never to be triggered, and if it is, its impact is meant to be limited to front month futures. And you’d probably be right. Some nations definitely wanted a traditional cap on the price of gas inside the EU, but the Germans and Dutch especially realized this would be a potential disaster as it would cause of of the usual baleful effects of price controls, notably shortages.

The rule as passed does not constrain the physical/cash market for natural gas anywhere in the EU. This is the market that allocates actual molecules of gas, and it will continue to operate even if the front month futures market is frozen. The freezing of futures may well interfere with price discovery in the physical/cash market, but regardless, prices there can rise to whatever level necessary to match supply and demand. As a result, the cap will not achieve the objectives of those pressing for a traditional price ceiling, and won’t result in the consequences feared by the Germans and Dutch.

So the cap is unlikely ever to be triggered, and if it does, won’t interfere with the operation of the physical market or have much of an impact on the prices that clear that market. So what’s the point?

One point is political: the Euros can say they have imposed a cap, thereby appeasing the suckers who don’t understand how meaningless it is.

Another point is distributive–which is also political. The document setting out and justifying the rule spends a tremendous amount of effort discussing a very interesting fact: namely, that when prices spiked last year, basis levels got way out of line with historical precedents. Notably, TTF traded at a big premium relative to LNG prices, and to prices at other hubs in the EU. Sensibly, the document attributes these extreme basis levels to infrastructure constraints within the EU, namely constraints on gasification capacity, and pipeline constraints for moving gas within the EU. (Although I note that squeezing the TTF could have exacerbated these basis moves.)

Again, the rule won’t have any impact on the basis levels in the physical market. So again–what’s the point? Well almost in passing the document notes that many natural gas contracts throughout the EU are priced at the TTF front month futures price plus/minus a differential. What the rule does is prevent prices on these contracts from being driven by the TTF front month price when those infrastructure constraints cause TTF to trade at a big premium to LNG or to prices at other hubs. So for example, a buyer in Italy won’t pay the market clearing TTF price when that would have traded at a big premium and high flat price level: instead, the buyer in Italy will pay the capped TTF front month price.

In other words, the mechanism mitigates the impact of a very common pricing mechanism adopted in normal times against the impacts of very abnormal times. A buyer outside of NW Europe takes on basis risk by purchasing at TTF plus a differential, but usually that basis risk is sufficiently small as to be outweighed by the benefits of trading in a more liquid market (with TTF being the most liquid gas market in Europe, just as Henry Hub is in the US). However, the stresses of the past year plus have greatly increased that basis risk. The price cap limits the basis risk on legacy contracts tied to TTF, without unduly interfering with the physical market. The marginal molecules will still be priced in the (unconstrained) physical market.

So there you have it. Beneath all the political posturing and smoke and mirrors, all the rule does is limit the potential “windfall” gains of those who sold gas forward basis front month TTF, and limit the “windfall” losses of those who bought basis front month TTF. If demand spikes and the infrastructure constraints bind (or if someone exploits these constraints to squeeze TTF futures) causing the basis to blow out, the rule will constraint the impact on those who benchmarked contracts to the front month TTF.

In some respects this isn’t surprising. All regulation, in the end, is distributive.

Putting it all together, this is probably the least bad price control I’ve seen. It is unlikely to go into effect, and even if it does its impact is purely distributive rather than allocative.

Between the David Signal and the Goliath Government, Shockingly the NYT Sides With the Latter

The New York Times’ latest service as butt-boy to the Deep State is this op-ed by one Reid Blackman, in which Mr. B expresses his deep, deep concern about Signal and other applications that promise to deliver levels of privacy far beyond what say, Facebook or Twitter do.

The gravamen of Mr. Blackman’s concern is that “that criminals have also used this government-evading technology,” that technologists operating under a privacy uber alles ideology are facilitating this criminality, and that unsuspecting innocents might be enabling this ideology out of convenience.

The last objection is most easily disposed of, especially in light of the first. The innocents who choose say Signal because (in his words) “here’s a way to message people that my friends are using” are not harmed in any way by the putative ideology, and do not pose the criminal threat that so concerns Blackman. Nor are they endorsing or enabling the use of the service by criminals, who can use it regardless of who else does. So leave them out of this, OK?

The “criminals and pedos use it” is the the go to rationalization for governments to oppose encrypted services. Well, heard of the Internet? They use that too. And among the revelations following Musk’s acquisition of Twitter are (a) pedos and child pornographers used Twitter with abandon, and (b) the government really didn’t GAF, caring far more about whether people used it to share information about Hunter’s laptop. So spare me.

Put differently: the “criminals and pedos” line is one that the government uses to distract the plebs from the government’s true concern–it’s ability to keep tabs on you and me, and from Facebook et al‘s true concern–their ability to monetize our information. Epstein demonstrates just how much the Feds really care about pedos: very little.

Bank robbers use cars to make their getaways. We don’t ban automobiles as a result.

Blackman’s example is also unintentionally hilarious:

But it is no coincidence that criminals have also used this government-evading technology. When the F.B.I. arrested several Oath Keepers for rioting at the Capitol on Jan. 6, 2021, one of its primary pieces of evidence was messages on Signal. (It’s unclear how the F.B.I. got access to the messages in this instance; there is a longstanding cat and mouse game between lawmakers and technology.)

Stop it man: you’re killing me! For one thing, clearly the government found ways around the technology that so disturbs Mr. Blackman. For another thing: the Oath Keepers? Are you RUFKM? The group that was so penetrated by the Feds that it’s an open question of who outnumbered who? The fact that Oath Keepers have been rotting in DC jails for two years despite their use of Signal tells any sentient being that ideological technologists’ commitment to privacy enables criminality is the least of our concerns.

(Blackman no doubt invokes the Oath Keepers despite the drooling stupidity of the example because it is a bogeyman of the NYT’s bedwetting readers.)

Blackman of course has to acknowledge the possibility that governments and corporations might misuse information, but then he dismisses it in the most absurd fashion:

What’s more, the company’s proposition that if anyone has access to data, then many unauthorized people probably will have access to that data is false. This response reflects a lack of faith in good governance, which is essential to any well-functioning organization or community seeking to keep its members and society at large safe from bad actors. There are some people who have access to the nuclear launch codes, but “Mission Impossible” movies aside, we’re not particularly worried about a slippery slope leading to lots of unauthorized people having access to those codes.

Hmm, how could anyone possibly have a “lack of faith in good governance” in 2022 America? And the nuclear launch codes comparison is so laughably off-base I am surprised that anyone with the slightest self-respect would use it. But then again, in writing this Mr. Blackman demonstrates that self-respect is not among his attributes.

But it gets better!:

It’s true that the crowd at Signal aren’t government officials, and they don’t work for Fortune 500 companies. They are a small group of people who govern these powerful tools, and they are not accountable in the way that, say, a democratically elected government is. Whether law enforcement should tap our phones on the condition that a warrant is obtained is, at the very least, worthy of public discussion. Signal has unilaterally decided for us all.

Savor this line in particular: “they are not accountable in the way that, say, a democratically elected government is.”

Really! He wrote that!

Tell me, Mr. Blackman, when the FBI, or CIA, or any other federal law enforcement or intelligence agency has ever been held accountable for violations of privacy? Or many other transgressions?

Take your time. I’ll wait.

FFS, just look at the FBI’s response to the Twitter files, which can be summarized as “we’re going to do whatever we want–whatcha gonna do about it, proles?”

Blackman bewails that Signal etc. “are a small group of people who govern these powerful tools.” Small group? Powerful tools? Heard of the NSA? CIA? FBI?

Blackman cleverly attempts a sort of judo, equating pro-privacy “technology overlords” with the government–and with Facebook, Twitter, Google, etc., technology overlords who monetize our data and are good little Igors to Dr. Frankenstein government. There’s really no comparison, and the attempt to make one is a perfect encapsulation of Blackman’s fundamental dishonesty. The government has the coercive powers of the state at their disposal. Signal does not. And it is now abundantly clear that the government uses its coercive powers to get Big Tech to do its bidding.

He laments Signal’s unilateral action regarding privacy, but is silent on the clearly unilateral utilization of government power to surveil and censor.

Blackman makes a direct comparison between privacy-oriented technologists and the government, and the big tech companies like Facebook. (I don’t say “Meta” because it’s just too retarded. Sorry, Stanford!) The comparison is beyond risible. The relative power of the former and the latter is so disproportionate that it is insulting to our intelligence to make the comparison.

Blackman attempts to portray himself as a paragon of ethics, in large part by denigrating the ethics of his technologist enemies whom he accuses of a “lack of appreciation for moral nuance and good governance.” Well, put Matthew 7:5 in your pipe and smoke it, bro’: “thou hypocrite, first cast out the beam out of thine own eye; and then shalt thou see clearly to cast out the mote out of thy brother’s eye.”

To be honest, my concern about Signal is not that it protects my privacy: it’s that it doesn’t under the pretense that it does. One can never be sure of whom the “technologists” like Signal’s Moxie Marlinspike are really working for. “Privacy” is a room full of mirrors, and trusting anyone with it is dangerous indeed.

To close. Who is Reid Blackman, actually? Well, apparently he is “an adviser to government and corporations on digital ethics.” Is he now. Do you need to know any more about who butters his bread? Or the NYT’s? Ho’s gonna ho, dontcha know.

Looking at the bright side, the fact that the NYT ran this pathetic piece suggests that it–and its government masters–are threatened by people having a choice to escape the government’s panopticon. I very much hope that they are.