What To Do About the Immaturity of Systems Modeling

Sam Harris recently had a conversation with Scott Adams (Dilbert creator and author of How to Fail at Everything and Still Win Big) about Trump. Adams predicted Trump's victory because he sees Trump as a master persuader. There's a lot to say about that but Adams made a really useful distinction about what he saw as the three stages of climate change policy. He distinguishes between:
1) The reality of climate change as an ongoing phenomenon that seems to be man made;
2) The ability to simulate future climate change with good models; and,
3) An appreciation of the economic policy implications of the above.

A decade or three ago, it was fashionable to dismiss climate change. This has become problematic for at least two reasons. One, the science is not that sophisticated. Certain industrial activity releases greenhouse gases. These gases - as the name suggests - work like a greenhouse and trap heat. That science is not exactly quantum entanglement and the data for greenhouse gas emissions and resultant warming seems to track pretty well to the theory. So Adams cedes this point and allows that climate change is probably real and ongoing.

Adams worked as a financial analyst at a bank, though, and challenges the second point: the ability to simulate future climate change. He said that it reminds him of the financial models he ran as an analyst that - should they reveal something his boss didn't like - could readily be changed with just a tweak of a few variables. Given we can't really forecast accurately what might happen, it is good to be skeptical, he says.

In this he has sort of put his finger on something really important and is sort of missing the point (probably intentionally).

What is really important is that systems define so much about what does or does not go well in our world - systems as varied as the economy and financial markets, energy systems, ecosystems and school systems - and yet we really don't understand system dynamics that well. Systems are tough to model and our models are not great. This is reason to be skeptical about any predictions but it also suggests that systems modeling deserves a massive infusion of research money. A crowd was gathered to watch a hot air balloon ascend and some woman said, "What is the use of all this new technology." Benjamin Franklin answered, "Madam, what is the use of a new born infant?" Systems simulation matters a great deal and is not that mature. Better to invest more heavily in it than to walk away from it. (And I think that computers' ability to simulate systems is maturing just when that capability is most needed for shaping policy dependent on such systems.)

And even with admitted limitations of models for any systems, it is worth asking whether even the models Adams was tweaking for his boss were all that bad. Once you understand a model for an economy or business, you articulate risks, a range of outcomes, and important variables. With good models you learn what factors they are most sensitive to (housing mortgages are sensitive to widespread economic downturns or refinancing from a drop in interest rates, for instance) and even spotty historical data can give you some sense of the probability of those events. (Yes. Nassim Taleb has rightfully pointed out that markets can be rocked by unpredictable events but risk mitigation can protect you from some of these rare events. A person who has saved three years of salary is better prepared for an event "they never could have predicted" than is someone with only three months of salary.)  Financial models are a little sketchy in prediction but there are ways to gauge their efficacy in spite of a large margin of error. (For instance, only about 20% of businesses succeed past 5 years. If your bank lending model assumes that is going to raise to 50%, it will probably be wrong; if it assumes that it will raise to 25% or drop to 15%, it could be right but done properly even that should require a coherent explanation that tracks to the numbers rather than arbitrary tweaks.) Further, to the extent that Adam's boss was unique in cheating the models so that they showed what he wanted, his bank would suffer. There is a drive to make models more accurate and - within the financial world at least - big rewards for such accuracy.

Models force questions and conversations about what variables matter and they bound reasonable outcomes. It is true that climate change models will be wrong but the simplest truth is pretty easy to predict: we will emit more greenhouse gases and temperatures will be higher than they would have been without these emissions. There are a host of unknowns that come with that (will particular regions benefit or lose, will changes in wind or sea currents result in unexpected cooling in certain regions, might unforeseen natural phenomenon or new technology absorb these gases, etc.) but the general story is known. If you invest in stocks over a 25 year period you can't be sure of when your portfolio will drop by half or raise 20% a year for successive years but you can reasonably guess that over your lifetime you'll be a better shape for having saved 10% of your income than not. Same with greenhouse gases; reducing emissions will drive less uncertainty, disruption and climate change.

Denying climate change is in a long tradition of denying scientific results like the health hazards of tobacco or the notion that we orbit the sun. Climate change deniers are traditionalists who conflate market economies with oil and gas and see an admission of climate change as a threat to those forces. (It does seem like climate change will threaten oil and gas. The possibility of oil and gas being displaced by alternative energy is not a refutation of markets that periodically unleash gales of creative destruction, though, but is instead an affirmation. Markets are no more dependent on oil than horses and markets don't treat fossil fuel industries as sacred.)

As to Adams' third point about evaluating the economics of climate change policy, I'll just say this. If it is inevitable that we'll adapt new energy technologies, there is less likely to be a penalty for rushing into creating and then converting to alternative energies than there is to be a penalty for delaying that change.

That's Absurd! (Mere Blogger Takes on Would-be Leaders of the Free World)

The difference between Monty Python skits and political debates is that Monty Python was trying to be absurd.

It was utterly absurd when McCain and Obama were arguing with each other about who would provide the most in tax cuts. Next year’s deficit is projected to be as much as $1,000 billion (a trillion or a million million) and they are clamoring to cut taxes. Do they really think that we Americans are so stupid that we don’t realize that tax cuts that fuel deficits don’t make us better off? Or are they really that stupid? Can anyone pronounce “credit crisis?”

Obama had the good sense to talk about needed investments. Why Obama did not make more effort to distinguish between government spending and government investment is lost on me. The American people need to be reminded that things like the interstate highway system, the Internet, and the GI Bill were fabulous investments that more than paid for themselves. Today there are even more opportunities for such incredible investments – in everything from biology research and nanotechnology and alternative energy to transforming school systems to educate and train people able to work in such fields. And getting back to deficit spending, it was no coincidence that when deficits became surpluses in the 90s, investment and business formation boomed. Government borrowing squeezes out business borrowing. Can anyone pronounce “credit crisis?”

In an age of globalization, it is ridiculous to talk about ending reliance on foreign oil unless or until we end reliance on oil. The mix of oil we consume through free markets will always pretty much look like the mix of oil on global markets. Can anyone pronounce “credibility crisis?”

One of the odder proposals thrown out by McCain (almost as odd as his defense of the “drill baby drill” chant while claiming to be one of the early defenders of climate change initiatives) was his casual mention of a “troops to teaching” bill that would allow veterans to go right into teaching without needing those (and this said with a grimace) “credentials that they require in some states." So, having worn a uniform somehow exempts a person from the need to meet state teaching standards?

We spend the most per capita on education and health care and we rank near the bottom of the industrialized countries in measures like math and science and infant mortality. Obama’s solution to high expense and poor results in health care is more government. McCain’s solution to high expense and poor results in education is less government. I have no doubt that their plans will work.

Finally, the most absurd thing about the debate was how the first third of this debate seemed to be taken up with accusations and defense of character. This when the American people are watching a slow motion train wreck of America’s financial system, when 86% of Americans think that we’re on the wrong track. McCain seemed not to understand that the American people would be less interested in his hurt feelings than what he proposed to do to get the country back on the right track.

It seems as though McCain missed his opportunity to gain ground on Obama tonight. I am almost beginning to feel sorry for McCain, seeing various polls that suggest Obama led by 8 to 14 percent before the debate and that the percentage of undecided voters who thought he won tonight’s debate is nearly double those who thought McCain had won. But I’d much rather feel sorry for McCain than for the country that has already suffered under 8 years of Republican’s confident and cheery incompetence.

ANWR is a Distraction

This evening, for the second time in about a month, I heard conservative friends and family decry the ANWR (Artic National Wildlife Reserve) fiasco, where environmentalists were standing in the way of oil that would allow us to stop buying from Saudi Arabia and the Middle East. This makes about as much sense as re-electing George Bush.

If we pumped out ALL the oil from ANWR in one year, it would meet about 30% of global demand. In one year. This might halve oil prices. For one year. And then we would be back to our current situation. More reasonably, the output from ANWR would dribble out in smaller quantities - probably increasing global supply by about 1 or 2% over a period of 10 to 20 years and have a negligible impact on oil prices.

Further, the oil from Alaska does not change our dependence on oil from the Middle East. Oil is a global market. The Saudis will still sell oil, as will the folks in Russia, Iran, China, Mexico, Canada, UAE, Venezuela, and Norway (which, along with the US, constitute the list of the top ten oil producing countries). Imagine water being pumped into one pool by ten hoses. The level of the water is determined by the collective efforts of the ten hoses, but you cannot swim in just one hose's water. You swim in the pool or do not. Oil markets are made up of output from many countries: once the oil is on the market, it is all sold at the same price (adjusting for different refining costs, etc.) and goes into the same pool. Using a bit more oil from Alaska does not hurt existing oil producing countries that much.

Oil prices have gone up by 6X in the last decade. (From less than $20 a barrel to $127 a barrel.) It is hard to believe that a price relief of, say, even 5% would be noticed much in the context of 600% oil price increases.

The truth is that ANWR would supply oil for about 6 to 25 months of US consumption. The problems of oil supply and climate change are problems that will play out over decades. I'm working with one client now who is developing a new drug from a molecule: they are currently projecting a launch date for the drug in 2017. This is, by comparison with energy, a very simple project for which only one team in one company is responsible. Energy and climate change are problems that will take decades to address and, ultimately, coordinating the activities of millions of people. In this context, the 6 to 25 months that ANWR could buy us is noise. And to the extent that it mitigates the problem of oil supply, it exacerbates the problem of climate change. It is, in short, a non-issue and this will be the last time that R World addresses this issue. (And if that does not settle it, well then ...)

In truth, we could flip a coin on the issue of ANWR. I think it would be a mistake to drill there, but it won't make much difference whether we leave it alone or exploit. What will make a difference is if we move past oil and aggressively into alternative energy sources. If we could harness even 1/10th of 1% of the solar energy that hits the planet every day, we could replace all the oil we are now using. Unlike the distraction of ANWR, that is a promising possibility worth pursuing. To waste more political time and effort on an issue like ANWR is like re-arranging deck chairs on the Exxon Valdez.

Meanwhile, as long as oil companies can convince people that high prices are because of environmentalists they can distract us from the real issues. In that sense, ANWR is a distraction.

Newsweak

Pundits report the news before it happens and then authoritatively explain why it didn't happen as predicted. Hillary Clinton's campaign is over. So they say. They call themselves conventional wisdom and when they are wrong, they can all say, "We don't know how conventional wisdom could have been so wrong." When I get big, I'm not only going to talk about myself in the third person, but I'm going to refer to myself as some large and impersonal entity. ("Yes, dear, but conventional wisdom had been dead certain that you would love the real green dress.")

If you are willing to move to Kathmandu, there is an opening for a living goddess. It sounds like an interesting position, but I imagine that being the incarnation of Kali would leave one little room for personal self-expression.

Like an angry diner on a bad date cursing the waiter ("I did not order this heart break!"), the political machinery in Washington continues to try sending back the recession it did not order. But reality has its sense of humor, insisting that a prolonged recession is the perfect "cherry on top" for Bush's 8 years as leader of the free (for all) world. Proposing that his tax cuts be made permanent, Bush insisted that the problem was not government spending but was, rather, insisting that the government must pay as it goes.

It turns out that John McCain is "soft" on immigration because he is himself, an immigrant. John was born in Panama on a military base. Ralph Nader decried this as yet one more attempt by Republicans to eventually outsource every job in America.

The press has decided that they've lulled Barack Obama sufficiently that his expression of hurt surprise once they turn on him will make for priceless pictures and videos. Expect all favorable coverage to come to a sudden halt on Wednesday.

Crude oil prices continued their rise past $100 a barrel; sophisticated oil prices, by contrast, had already slipped past $150 a barrel months ago.

The Escher Expressway

If at first an idea isn’t absurd, there is no hope for it.
- Einstein

Coming home today, coasting downhill, I announce that this is the way to seriously increase gas mileage - simply build all roads to slope downhill.


"There are a few details to work out," I say, "but the general principle is sound."

"You'll have to call it the Escher Expressway," said my wife, Sandi.

I simply can't imagine why this won't work. We may even be able to do away with combustion engines altogether. Needless to say, I'm very excited about this.

Oil Prices Aren't Up - The Dollar's Value is Down

As oil approaches $100 a barrel, a great number of explanations emerge that focus on oil. Demand for oil worldwide is increasing, led by growth in India and China. Oil supplies are reaching a limit and new supplies are becoming harder to reach. Instability in the Middle East has resulted in an additional risk premium. Explanations like these that focus on oil may miss the most important variable - the falling value of the dollar.

Since early '06, oil prices have gone up from the about $60 a barrel to nearly $100. By contrast, oil priced by euros has gone up from about 50 euro to over 60 euro. Oil prices have increased by about 66% in the US, but only about 20% in Europe.

The good news is that the country consuming the most oil per capita is going to be forced to become creative in its use of oil. The bad news is that just as our goods are becoming more competitive, courtesy of a devalued dollar, our input costs are going up. Unless we can find ways to produce as much with less oil, becoming more productive, or energy-efficient, this opportunity to lower our trade deficit by exporting more could be lost.

The reasons for launching a national energy policy initiative that would lessen our dependence on oil are stacking up. At some point, even people as unimaginative and cautious as politicians will have to wake up to this fact and act.

Time for Automakers to Learn from Tech Industry

Last quarter, GM lost about $39 billion. It wouldn't take too many quarters like that before I was forced to borrow money from friends. Ford, too, is struggling, having narrowed their losses for the most recent quarter to just $380 million - beating analysts' expectations. While that might be only 1% of GM's loss, it still seems like a big number to me.

One reason that oil is difficult to replace is that if it were suddenly rendered obsolete, about $7 trillion in wealth - as yet untapped oil reserves - would suddenly be worthless. The folks who sit atop this vast wealth aren't particularly inclined to see that happen.

So, what vested interests have an interest in rendering oil obsolete? Why not auto makers?

One of the ways that Intel and Microsoft and Seagate (and others) have fed each other's success is by co-evolving. More storage or computing power allows for more sophisticated software (bloatware, to its critics). More sophisticated software requires more storage space and computing power. If you have a ten year old car, you can go pretty much wherever a brand new car can go. If you have a ten year old computer, you find large swaths of computer land are off limits for you. Whether it is planned or simply serendipitous, this rapid evolution of technology has helped computer sales. Today, even our phones rapidly become obsolete.

TV manufacturers have learned a lesson from this. In February of 2009, all analog broadcasting will stop and viewers will be forced to upgrade to High Definition - an act sure to stimulate hardware sales.

It seems to me that auto makers would want to take a similar approach with their cars. Imagine if they were to design cars that depended on something other than oil. Something that polluted less, or ran on cheaper fuel, or needed fueling less often - all of these options could help to stimulate sales. We so often talk and write about how positive might be the effects on our environment and our continued funding of extremism if we broke our oil addiction. But just imagine what this could mean for the auto industry.

Two Reasons to Pull Out of Iraq

By the time you read this, George will have announced his intention to send another 20,000+ troops into Iraq. Here are two reasons to resist this that you are unlikely to read in the mainstream media.

1. Climate change.
The first reason to pull out of Iraq is that spending there makes it difficult to afford research into alternative energy. As long as we're spending $100 billion a year in Iraq, we can't afford a serious program to transform our energy policy. We need the equivalent of a NASA program - billions of dollars in funding - to support an array of solutions to the problem of carbon dioxide build up. Just to stabilize carbon dioxide levels - not even reduce them - we need to cut carbon dioxide emissions by about 75% across the globe. This is not going to happen without serious investment in creative solutions. As long as we are pumping $100 billion a year into Iraq (a soon to be greater number, presumably, as Bush gets his surge in troop levels), funding for such programs is unlikely to emerge. This alone is reason enough to stop funding the aggravation of Iraqis and continuing to place our troops in harm's way as if they were the ducks at a shooting gallery, but there is another.

2. Terrorism.
Oil money from developed countries helps undeveloped countries to get money without modernizing. Our dependence on oil finances extremists in the Middle East, effectively subsidizing their refusal to modernize. Islam does encourage violent extremism, as did medieval Christianity. There is, however, one really big difference between the two. Christians could not enjoy economic advance without choosing to ignore traditions and teachings that contradicted progress. That is, they had to generate their own source of economic progress and fostering economic modernity required accepting philosophical modernity. Burning witches is one way to attempt an increase in crop yield, but it won't be as effective as adopting steel plows or fertilizer. The communities that cling to superstition about witches are going to have so little in resources in comparison to the communities that adopt the scientific method that those superstitious communities will be of little threat. Primitive communities may have dangerous philosophies, but their technology will not be dangerous. By contrast, Muslim states sitting atop of oil can cling to dangerous philosophies while earning enough income to finance dangerous technology. (Think of Iran and its nuclear program.) If they did not have oil revenues, they would face two paths: cling to religious authority in lieu of modernity and be of little threat because they would not have the resources or technology to become a threat; or modernize in thought and, consequently, technology and be of little threat because they now rely upon reason instead of religious extremism. As it is, they can refuse to modernize even while buying modern weaponry.

As long as we don’t sever our dependence on oil, we don’t force the Middle East to sever its dependence on religious extremism. Our continued reliance on oil effectively subsidizes the Middle East's continued reliance upon outdated, dangerous, and otherwise bankrupting ideologies.

The biggest problem with continuing to pursue an Iraqi policy that has yet to accomplish any of its stated goals? It continues to distract us from real issues, only two of which are listed above.