EEP100 - Lecture 20

Uploaded by calcommunitycontent on 09.11.2009

It's lecture 20! We have seven more lectures in this class. One of them next week is
going to be a guest lecture from a guy named Ties, from the Netherlands. I have no
idea how he talks. I pretty much think he's going to talk about Dutch water stuff, but
that might be false also. So we're moving right along. Some people asked
about a good thing to read on Lynn Ostrom. I just started reading this interview
with her husband Vincent and her that was done a couple years ago. I will upload
this on the resources page for bSpace as well as on my blog, because a lot of people
were asking on the blog as well. And if you want to know more about Lynn Ostrom's
philosophy and work, this interview is actually quite a good channel for understanding
how they do (the Ostrom's) their work, and how the so-called Bloomington School
of thought works more or less. In economics and other academic fields and
disciplines, there's a notion of a school. There's the Chicago school, which is very
free market. There's the Harvard/MIT school, which is theÉwe can all figure it
out and make the economy function according to a little machinery. There's the
KeynesiansÉthe blah blah blah. The Bloomington's had to do with how do weÉwhat
do we see in the real world and how does that work, and does that match what we
see in reality, which I've been mentioning to you repeatedly, doesn't often
match upÉsorryÉdoes what we see in reality match what we see in theory? And as
I've mentioned to you many times, we don't see that economic theory. So Bloomington
school is one of those big challenges to economics.
Of course, the political scientists and economists have tried to ignore them, but the
Nobel Prize is kind of an "eff you" as far as that's concerned. So that will be
uploaded. I will talk about the water bill later today
in this lecture. I have strong opinions about it. pretty muchÉthe bottom lineÉas
far as I'm concerned is that it is a fail situation, and I will outline political economy
in that, the water bill, will actually help you understand some of the issues on your
briefing, in a sense of how is that weÉthat the legislatureÉwhat was that expression?
So rarely have so many done so much and produced so little. So it's not going
to fix our water problems. It might make it worseÉI'm not quite sure, but we'll
see. In the meantime, let me get into more principle
agent stuff. Oh sorry. Any questions? Any open questions?
You had a question about SchwarzeneggerÑhe's not running in 2010.
There'll be a new governor. Any open questions? Q & A stuff? Okidokie.
I've got some people kind of sending me test balloons on e-mailÉhow does this
briefing look? And I was like whoaÉlooks like you should read the assignment and
get back to that and answer that question. So no, I will not read your briefings
ahead of time and tell you if you're doing an awesome thing. This is a clarification
of what I wrote in the e-mailÑit is okay for
your solution to benefit a special interest group as long as it is increasing overall
social welfare and the social welfare not going to special interest groups. And you
don't have to sit here and run a spreadsheet and find out what percentage changes
are happening. I just want you to concentrate on policy actions or advice
to your political boss. I want you to concentrate on the advice that is going to
benefit the general public. The nameless person. The Joe Plumber. So that's your goal.
How do I bribe my politician/boss on how to benefit Joe Plumber to the detriment,
potentially, of special interest groups, and get reelected in that two-year cycle,
okay? Is there any other questions about other stuff?
Before I get to principle agent stuff? No? okay.
So I've been mentioning to you that there's this principle agent relationship, and I
want to clarify the flow of activity here, okay? So what's happening is the principle
is going to be worried about what two things? Jargon?
Moral hazardÉ Moral hazardÉwhich meansÉhow do I account
for moral hazard? You monitor it?
Monitor, okayÉwhat else are they worried about?
Adverse selection? Right. Adverse selection. And how do they
account for that? Signals.
Signaling. Sometimes streaming or filtering, and the best thing of all in terms of
making these two procedures work better is to do what with your agent, if you're
the principle? How do you magnify the quality of the feedback on your monitoring
and your screening? Yeah? Repetition
Repetition, right? You want to have many interactions with your agent. So it's a
repeated game. It's much, much easier if you're doing a principle agent transaction
over and over and over again because you're going to get some feedback as to the
quality of the work of your agent, for example okay? So when you go to work day in
and day out, and day in and day out, and you serve hundreds of cups of coffee, for
example, your boss will have a pretty good idea about how good of a job you're
doing in terms of working for your three dollars or ten dollars or whatever dollars
per hour living wageÉwhatever that is. But if you're just doing one 200 thousand
dollar transaction one time with one person that you've never met and you will
never meet again, that createsÉit makes it a much more high stakes game.
And that's what I mentioned before. One of the reasons that real estate agents tend
to get paid so much moneyÉthis wholeÉ6% commission, 6% of the average house
in CaliforniaÉI don't knowÉ$500,000 in BerkeleyÉmaybe a million dollarsÉ6% of
500K is $30,000. If you're the person who's buying or selling a house, technically
the fee is paid by the seller, but split by the buyer and the seller, right? So if you're
selling your house, you're basically sayingÉI'm selling my house for 500 grand. I
will pay $300 thousand dollars in commissions. So it doesn't make sense on the one hand becauseÉwait,
why would I pay such a huge commission if the agent might screw up?
But on the other hand it makes sense because you wantÉit's such a high stake game
that you want to make sure that the agents who are working this business have
an incentive to do a good job. You want to attract high quality talent into the real
estate agent business. Because if someone's going to sit there and sayÉI'll
do it for $100. Maybe they don't care, right? Now, congratulations, you just saved
$29,900, but your house sold for $100,000 less. So then you lose money. Does
that make sense? So you want that agent to work on your behalf to get a higher
price. And in some ways it's likeÉI will pay you a huge amount of money if you're working
hard for me. There are obviously problems, and the real
estate business is like famous for having problems, right? The whole fraudulent real
estate agentsÉbut the whole idea of paying a huge fee is that you're going to
actually attract a quality agent into the game, right? In a senseÉyou want real estate
agents to be on par with lawyers and doctors and accountants in terms of quality
of work that they can do. Although people still complain about that fee. So that
is actually called, in the jargon, that's called an efficiency wage. Did I tell you
guys what that was before, yes? Okay, I'm just reminding you. Okay, good.
Now, so this is the typical principal agent dynamic. What's happening is the
principle is in a sense, monitoring and screening the agent. And in exchange, the
principle is getting back what from the agent? Service?
Service. It's a benefit. It's likeÉI, as a principle, put in effort, right? In terms
of screening and monitoring. And I will get back
a benefit. And the reason is that typically a principle will hire an agent because
the principleÉalthough the principle might be able to do the job them self, mow
their own lawn, sell their own houseÉthe agent will either save them merely timeÉsay
that you're a lawyer who charges $400 an hour, and you don't want to mow your own
lawn for $10 an hour when you can get the kid onÉdown the street to do it.
So that'll save you time, and potentially the
agent can do a better job than you because the agent is specialized in that task. Even
the lawn mower kid can probably mow the lawn faster than you can.
So that's the tradeoff. It's essentiallyÉif you put in effort, and then you get back
some kind of financial benefit, let's just say. Now this is an importantÉwhat
happens isÉin a lot of situationsÉyou have this third person who shows up called a
beneficiary. And a beneficiary is getting the benefits, alright? And I will use the
example that is most obvious to meÉit's that you've got a principle agent beneficiary
relationship when you have a politician, and a water manager, and who? A citizen.
A customer. Because what's going on is thatÉit's very,
very common and you'll have politicians that are appointing water managers. The Los
Angeles Department of Water and Power is a public utility. The biggest public
utility in terms of retail in the country. And their directors and managers are controlled
by the LA city council (the LA Mayor). So that's the politicians. They are
appointing the water managers. The water managers are working on behalf of the
citizens, the customers in LA, right? So then what you see that's going on here is
thatÉby distributing the benefits of monitoring and screening, the benefits are
no longer going to the politicians. They're going to the customers. So the politicians
have a stronger or weaker incentive to do that oversight job?
Weaker? Weaker. A weaker incentive to do that oversight
job. Now theoretically, there is a feedback loop calledÉthe citizens elect the
politicians, right? Very, very few mayors of a city are elected or reelected based on
the quality of their water supply. Potholes in the road, maybe, but not necessarily the
water supply. Can you say that the customer is the principle,
and the principleÉ Well there's different sets of relationships,
and the relationship as far as water supply is concernedÉthis is what's going
on, okay? In the citizen-politician relationship, then there's another thing going
here, which is that feedback relationship, right? So that's a different
setÉso that'sÉsomeone pointed outÉI think it was an e-mailÉwell can't all principles
be agents, and agents be principles? In a sense, you can get that because say that you
haveÉthis is a paper I've been working on for a million yearsÉin the case of international
aid, you might have a taxpayer sending money to a politician who sends to
a bureaucrat (a US bureaucrat) who sends it to a [inaudible] bureaucrat, who
sends it to a guy in the field, who sends it to
the poor person. Principle, agent, right? And that person is
a principle to an agent, and so on. There's this baby chain of principle agent relationships.
By the time you get down to this poor person, the length of the chain between
the taxpayer and the poor person is extremely weak, which is one reason why international
aid rarely works because if you think about the whole problem, the whole
reason why the principle agentÉthe whole dilemma described by principle agentsÉis
that this agent here might not care about working on behalf of the principle.
That's what I was saying to earlier on. If the agent is getting paid a salary to take
care of the principle's business and decides to go take the day off, it might help
the agent, but not help the principle. Does that ring any bells? Does that make sense?
So this is the dynamic. But you know for the water supply problem?
Wouldn't it make sense also for the water manager not to do a good job? Besides the
politicians? Because if the water manager is not reporting back to the politicianÉjust
serving the customerÉit doesn't really care likeÉ
Who doesn't care? The water manager or the customer?
The water manager. The water manager may not care to do hard
work on behalf of the customer or on behalf of the politician?
Yeah. Yeah. that's the problem. That's the problem,
right? So the problem with all principle-agent relationships is thatÉyou've
got your coffee shop owner, and you've got your coffee shop employee, right? They're
getting paid dollars per hour. If they push through $80 per hour or a $100 per hour,
it doesn't change their hourly salary. It could change their tips, but let's just
assume their salary. So the agent might say, "Hey, you know what? I don't want to work
that hard." But that hurts the principle. So there's always this problem of effort on
behalf of the agent. And the principle might worry about that and might want to monitor
the agent in a sense because of intrinsic motivation. I'm just throwing in
another complication here. There's intrinsic and extrinsic motivation
right? So if you're a coffee shop guy, and you hire somebody to work for you, and they're
like, "I love serving coffee. I can't wait to serve 200 cups an hour." Then you,
the owner of the coffee shop, are going to be psyched. Because that person would actuallyÉwould
probably work for free, even. Just to serve as much coffee as possible
because they have high intrinsic motivation. But if it's just a normal person
who's like, "I don't care, I just want the money from my job." Then they have an incentiveÉor
they have an issue with working hard.
The problem when you bring in the water manager scenario, the principle agent
beneficiary scenario, is thatÉthis person is still just as lazy as before. Let's say,
in terms of additional effort, but now the benefits
to monitoring don't even go to the principle. So the principle's likeÉI don't
even care. I'm just going to go do something else because the benefits are going
here, so the monitoring gets weaker. And the agent has even less incentive, extrinsic
incentive, to do harder work. And intrinsic incentives are not going to
be altered, right? But the extrinsic incentive for the agent will be weaker because
there's less monitoring going on. Yeah?
But wouldn't the politician also be in a beneficiary situation?
That would be when the principle is intrinsically motivated. Right? Because they
want to do the best thing for the people. If the politician is likeÉwell if the water
supplies don't work, I don't care. It doesn't affect my reelection process. But the
politician's likeÉI want a great water supply because I love my people, my citizens.
Then the politician will have strong intrinsic motivations to monitor. So this is this
intrinsic extrinsic thing that matters, and it really does matter. If everybody was
justÉpoliticians really just want to serve the people, and the managers really want
to serve the peopleÉthe whole public servant thing? Then we wouldn't have these
principal agent problems. And for many years, it was assumed that we didn't. I
meanÉthen people started to be economists and there's no theory.
But then economist started thinking, why do these bureaucrats not work? And the
whole jokes about bureaucrats is that they're around for hundreds of years.
Thousands of years. And they started to thinkÉwell maybe the bureaucrats don't
want to do that job, because they don't really care. This is known as public choice
economics, if you didn't hear this before. Did I say that before? Yeah. public choice.
So the school of public choice economics came around in the 1950s, 1960s maybe.
And that's mentioned explicitly in this Ostrom interviews.
But that doesn't mean that the bureaucrats suddenly got lazy in the 1950s. we've
had problems with bureaucracyÉactually, this is an important point. In the United
States, bureaucracy became bigger in the 1930s with the new deal. In the 1940s and
1950s, and especially the 1960s, the Great Society, right?
So as bureaucracy in this country expanded from essentially 10% of the GDP going
into the governmentÉwe didn't have income taxes, even, in the 19Éuntil 1913. So
the government started to grow in the 40s, 50s, and 60s, and as the government is
growing, it's running more goods and service through the government, which means
that the people in the governmentÉyou have to pay more attention to the people in
government. And Europe has been that way for a much longer time. And in some
ways, the culture of the bureaucrat in Europe is more of a public service, right?
In some ways, the status of public servants in Europe is much higher. In China,
you've got thousands of years of history of bureaucrats doing a good job.
IncludingÉyou'll get killed if you don't. So they had pretty good penalties as well.
So now they have a problem with party, not necessarily the bureaucrats.
So in the US, the public choice school of thought kind of originated when all these
people started thinking about, "Wait a second. We've got all of theseÉmore and
more bureaucrats in this country. And what are they doing, and why are they doing
a bad job?" Because they just got hired to things that weren't done before.
So I don't knowÉthat kind of just rolled around in a circle in terms of answering
your question. But that's what's going on. But if you can get a good agent, say you are
more efficient thanÉthen you'd beÉmake it more efficient becauseÉthe other choice
would be for the mayor to personally manage the water and electricity, and everything
else. Right. So the original theory wasÉbefore
these words were really coined, isÉI'm the politician, I only have so many hours of the
day. I need to delegate responsibilities to some people who clearly want to do their
job. That was the assumption, right? And maybe it was the assumption based on past
observation of bureaucrats doing a good job. Because clearly, there are some
professional bureaucrats out there. But as soon as you start hiring more and more
and more bureaucrats, after a while, you stop getting the people that can't wait to
work in the civil service, and you start taking the people that can't get a job anywhere
else. The notorious teacher-union problem.
So that's why the wholeÉthe response to teacher failure in this country has
beenÉAmericorpÉwhich isÉlet's get a bunch of really smart people who can't wait
to teach. And then send them to the worst schools possible. And see if they can
make a difference. Which, often they do. The Peace Corp is the exact same thing.
USCID sucks, let's send them to the Peace Corp. we'll get likeÉinstead of paying a
bureaucrat $100,000 a year to do international aid, we'll pay the Peace Corp person
likeÉ$5000 a year? Peace Corp makes nothing, if you didn't know that, right? So
we'll pay you $5000 and get twice the results. Because the Peace Corp people just
can't wait to help. So that's this dynamic aroundÉthe intrinsic motivation is really
critical to this. Other questions on this?
So the point of this principle agent beneficiary types of relationships, which is, in a
sense, what you're kind of dancing around with the briefing as well, is that theÉit's
not just the motivation of this person that matters, which is always true, but now
you're weakening the motivation for monitoring and streaming, because benefits
aren't going to the principle. They're going to the beneficiary. So unless the
principle cares about the beneficiary, as if that beneficiary was himself, which is
a very, very, very strong assumption, then you
are going to find that the monitoring and screening weakens, and the benefits to
the beneficiary weakens as well. That's the whole framework for thinking about this
whole principle-agent-beneficiary thing. Any questions?
We will continue on this topic. Probably, actually on number six. But we we'll see.
Okay. So let me just mention a few things on 3,
4, and 5. But once you have some jargon, it'll be on the back of your mind. Risk versus
uncertainty. A whole bunch of economic textbooks saysÉrisk and uncertainty.
As if it's one sentence. Right? Like ice cream. They go together. But risk and
uncertainty actually refers to two different things. And let's just say it this
way. Risk is quantifiable. In a sense that we know
that there's a chance getting a heads on a coin flip on a fair coin (as I always) add,
and on a fair coin, the chance of getting heads is 50%. So when someone says, I want
to present you with a risky bet. I'm going to flip a coin. It'll come up heads
or tails. That's what they're talking about. Risk can be quantified. You can call itÉthe
risk of dying from heart disease. You can call it the risk of dying before your ninety
when you're already 70. There's lots of data behind these things. There is a probability
attached to that. Now when it comes down toÉso this is the stuff that is
very popular and used very often in economics, and I'll give you a use for that
in a second. I just want to define the terms right now. Uncertainty is not quantifiable.
And uncertainty is what we want toÉ It's something that comes along. You can't
predict it with statistical uncertainty in advance. So it's like the Wall Street meltdownÉ9/11Éthese
are situationsÉyou can go on and on and on. They're situations that
cannot be predicted in terms of a probability in advance. No one was sitting
there and sayingÉ9/11 has a 22.4% probability. They were saying it could happen,
but I meanÉthere was a warning that a plan could hit a building, a plane
couldÉa ship would blow upÉor the president could get shot. There's a whole
bunch of uncertainty that there's no probabilistic percentage attached to.
You can't take a bet on it at the betting parlor in Vegas, for example. The election.
The presidential election is more like risk than uncertainty. There wasÉthere's this
amazing websiteÉ Anybody seen, watched that during the election? That
guy was likeÉthat should be like a Nobel Prize. That was like the most awesome use
of statistics ever, right? And what he was doing wasÉhe was taking all
this quantifiable numbersÉpolling resultsÉand the guy was a baseball geek,
as far as I know, right? Baseball geeks are like the most incredible statisticians in
the world because they knowÉthey have amazing amounts of numbers to work with. And
he took baseball geek statistical technology to apply it to the presidential
election. And I think he hit the electoral vote within one vote, or 2 votes, a couple
days before. So that was a guy that was working with probabilities and risk. But uncertaintyÉthat
guy doesn't evenÉI meanÉprofessionally, he would not do it.
He's not an idiot, right? You don'tÉyou can't predict these things that are justÉdo
they come or don't come? So it'sÉthat's the difference between these two things.
Now the important part of this, as far as economics is concerned, is that you can't
make this into a mathematical formula. And here's what I mean. Remember I said
before, you have this expected utilityÉEU is equal to the probability of events, A
times utility of event A plus 1 minus the probability of event A times the utility of
not A. That would be an expected utility. And what you would do is you would
sayÉwell the probability of event A, for example, say that event A isÉremember I
was doing this thing withÉit's going to rain on your way to the football game? So
say that the chance of rain is 10% and 90%. And you know the chance of rain.
Because it's a climate prediction. There's these climate models that are sayingÉand
you read it and it's like a 60% chance of showers.
Well it doesn't rainÉit rains or it doesn't. But they put percentage on it because you
knowÉ60% of the timeÉand for whatever reason people like to hear 60% chance of
showers. And some people get more nervous when it's 30% chance of showers.
Some people get more nervous when there's a 90% chance of showers. But
whatever. There's some prediction of the 10% chance of showers. And given that
10% chance, you're going to multiply it times showers. Your utility from the football
game might be 2. Plus 90% times your utility when there is no rain, which is 20.
And then you figure it out, and it turns out your expected utility is going to be .2 plus
18 equals 18.2. This is actually your expected utility. And that's all it is. It's the
probability timesÉone outcomeÉthe probability of one outcome times the utility of
another outcome, plus the probability of the other outcomeÉand you can have
outcome 1, 2, 3, 4, 5 and it doesn't matter. You just keep going on forever. As long as
you have probabilities. And then you multiplyÉand you know you get your expected
utility. So in some ways, you wake up in the morning and before you look at the
weather report, you say I have an expected probability of 18.2 today. And then
you look at the newspaper and it's likeÉor you look outside and it's raining
or not. And then you realize that probability.
So this is really helpful in terms of running the economics of expectations, which is
stuff about the future, right? But it has nothing to do with uncertainty. Okay?
Because maybe there's something calledÉthis and that, and you have this going in
and suddenlyÉthis is a football game, right? It's like Oakland versus San Francisco.
I don't even know if that's possible. And the bridge breaks. So it's like, woah, I
didn't expect that. And your utility just completely changes now. That's uncertainty.
Unless Caltrain keeps breaking and we'll have a prediction after a while, right? It's
like ohÉit's Tuesday. I think it'll break today. So uncertainty cannot be quantified
with probability. Because it cannot be quantified with probability, believe it or not,
a lot of economists ignore it, which is fatal. Fatal flaw. Huge mistake. Because our
lives are full of uncertainty. Either very close to us, in terms of what happens in our
lives, like you come outÉyou don't expect that your car is burned down.
Someone's car in Richmond just got burned a couple days ago? It's likeÉI didn't
expect my car to get burned down. That's not part of my probability calculation
during the day. So that's the uncertainty part. And insurance companies, almost by
definition, will not insure against uncertainty. Too risky. There's no numbers.
There's no statistics. Does that make sense to you guys? Okay.
Keep an eye out for this in your future, and in the newspapers as well because
people will throw out risk and uncertainty as if they're the same. And they are not.
Okay. You know like when you pick a plan to buy airport insurance, likeÉif the plane
crashes? Is the plane crashing uncertainty or risk? Because you don't expect it to crash
right? Well whether you expect it or not, there are
statistics on plane crashes. So it's a risk.
It is a risk. And there's an insurance company willing to sell you money on it. And
there's also an interesting self-selection with plane insurance. Who buys plane
insurance? Plane crash insurance? Paranoid people, right? At least paranoid
about travel. It's likeÉit's the biggest rip
off ever, right? Because if the plane crashes, you're dead anyway. That's just one
point. But if you miss your planeÉflight cancellation insurance. Who's selling it to
you? The flight cancellation airline. So it's likeÉwe're going to be really unreliable.
You want to buy insurance against it? It's just weird. But that's for that particular
product. But you're talking about risk. Yeah? So insurance uses a formula or a formula like
that to calculate the risk? Well, what an insurance company will do is
they will look atÉthey have expected what? Utility? No. What? Profit, right?
So what are they going to get? They're going to sayÉthey're going to get a premium
if you liveÉremember the joke about insurance. You're betting that you die. You
only make money if you die. Life insurance, right? That's percent likelihood that
you live, right? Minus (that's their income). Minus the payout
if you die. And they have good numbers on these percentages. So the insurance
company's going to maximize profits based onÉand what they're going to
mess with is not the percentage likelihood that you live or you dieÉthere
are not hit squads out there. Actually they're probably out there trying to get you
to eat more fiber, right? Brush your teeth.
So they can't affect these percentages. They can'tÉbut they do know those
percentages. And then they adjust these two numbers. Right? The premium and
the payout to try and get as much money as possible.
The only reason this works also to our benefit is, in a sense, what? This get's a little
bit into the whole healthcare debate. But why does this work to our advantage as
consumers of life insurance? Because you don't have to pay out of your
pockets likeÉtoÉ That's the general principle, but whyÉwhat's
the incentive of that company? Which of these two numbers do they want to be bigger?
The premium right? Okay soÉthey want that to be bigger, and
they want this to be smaller, right? So why is this not a million dollars, and this
is zero? Because most people don't die.
No. On average you don't dieÉno. What else? Why are these numbers not a million
and zero? I set up an insurance company. It's like, yeah sure, I'll insure your life.
Pay me $1000 and I'll pay you $10 if you die. Why am IÉwhy can't I do thatÉmakes
sense, I'm an economist. I should be able to do that.
[inaudible] Demand, maybe. Is insurance a competitive
business or not? Yes. People will come in, and they sayÉdude, I'll only charge you
$900 a week, right? And I'll pay you $20 if you die. And bang, bang, bang, competition
among insurance companies will drive these numbers close to breakeven. Isn't that
the whole point of profitability and driving profits to zero? So here's the thing
you should worry about. If the government is the only game in town in terms
of insurance, they're going toÉif they're a populist government, they're going
to lose money. If they're a totalitarian fascist government, they're going to make
money. And that's why, for example, flood insurance
in this country is such a boondoggle, because the US government will guarantee your
losses if you live in a flood plain. And they will charge you very little in terms
of the risk of getting flooded in a flood plain. And what do rational consumers do?
They go live in a flood plain. They pay $1 a month for insurance, with a risk adjusted
premium should be $5, or $10, or $100 a month. And the government's like, "Oh
good, we're helping people that live in the flood plain." Right? It's like getting
insurance to live in the 9th ward in New Orleans. You're underwater, congratulations.
But the government helped you get there. So this is the kind of thingÉyou want
competition in this kind of market. Competition is good for people making the
right choices, I would say, in terms of prices.
Would it be a good idea to have health insurance companies sell life insurance at the
same time, so they would have motivation to keep you alive?
Oh, that's interesting. Then, couldn'tÉ.because they actually lose
if you die. Health insurance already have that incentive,
because if you go in for treatment for cardiovascular disease, they're going to pay
money. So they have the incentive to keep you healthy already.
Well then they find all kinds of ways toÉ That's a different problem. If they find a
way to not pay for your heart surgery, they'll find ways to not pay for your funeral.
So the same tensions alreadyÉ So motivation is already there for the health
companies because they want to keep you healthy anyways?
It's there in theory, right? In reality, the insurance situation is horrible. The biggest
reason is why? Why is the biggest reason? Who here directly contracts with a
health insurance company? Who directly contracts for the health insurance
company? Where do you get your health insurance from? Work, students
insurance, right? In some ways, that would cut out the whole
idea of competition andÉ What will?
If you get your health insurance through your employer or your school or
whateverÉthen there's really no competition in the health care industry.
Bingo. Gold star. It's becauseÉwhat happens isÉyou've got thisÉin fact it's worse.
It's a four way triangleÉit's a rectangleÉit's a quadrilateral. There's you. Your
getting it from work, let's say. You're getting your insurance, and the work is paying
your premium to the insurance company, and here's the doc, right? The doctor says,
"Hey, you want to have a procedure?" And you're like, "How much does it cost me?"
"Nothing." "Sure, why not." So you get the procedures, and the bill goes to the
insurance companyÉsorryÉthe money comes back here, and the bill goes here, and
the insurance company says to the employer, "Oh my god, we need premium." More
money back and forth, right? And the work says, "Your salary's going up
or down" or whatever, right? I'm not even going to bother drawing accurate arrows,
but you see that there is a problem here in terms of a feedback loop. If you contracted
directly with your doctor, or your hair care specialist, you can go and
get a haircut right? You're going to pay somewhere between $6 and $600, right? So you
pay somewhere between $5 and $5000 for your haircut? It's your money, it's
their haircut, right? It's a very close linkage.
You really make sure you get your money's worth. But if you were buying hair care
insurance, what you would doÉor you wouldn't even buy it; it would be part of your
salary, which is even worse. LikeÉI have a salary and my haircut insurance is built
into that. SoÉbut I only get it from my work, because they have a monopoly on
providing it, or it's free to the employer or the employeeÉsure, it's free, I'll take
it. So the employer contracts with the hair care
insurer. And the hair care insurer makes a contract with a few of these hair
care specialists, but not the other ones, because they make a special HMO deal or whatever,
and then the hair care person says, "Sure, I'll take care of your hair."
Or not. It breaks that linkageÉthat customer/provider linkage. And this, to me,
is the biggest reason the whole health care situation is screwed up in this country.
Because in the Netherlands, a place that does it very well, they've got public payment
for insurance for private provision for insurance. But there's no work payment going
on. So this is the biggest problem, as far as I'm concerned. And notice that no one
is addressing it. Or they're kind of running around it.
If the company or the workers aren't happy with the insurance, can they go back to
that? They can switch the insurance planÉ They should do that. Now, if you're a worker,
and you're upset with the quality of work that you're getting, and say that you
work at a medical corporation. Or even a little corporation. There's a hundred of you.
Say this whole classroom has one insurance provider. And you're like, "I hate
this company." And you just tell everybody, "This company sucks. Let's switch."
And everybody's like, "No." Then you're screwed.
They don't have to switch. When you're not getting the coverage that you needÉ
Say that you hate the company because of the color of their logo.
Well that's not a reason that happens in the real worldÉ
Okay. Come up with a reason. Say that you don't like itÉ
They're not covering my son's [inaudible] and other people in the company are having
this same problem, but it's just random that this companyÉ
Maybe there's only 20 people that have kids. You go to the company that you work for, and
you complain about it. There's more than one personÉit's happening all across
the workforce. And then they switch. Because the worker's are unhappy withÉ
And they switch to what? That's what I'm talking about. There's a competitive
market of insurance. They switch to another company.
That would be good, right? But unfortunately, the HR department, which, by
definition, doesn't answer your call, doesn't care, necessarily, about switching
because that's work for them. Whoa, you want to us to get another company? We
just got a company. You know how much work that was? I've got to go get coffee.
And then if you want to coordinate with all the other dissatisfied employees, who
are likeÉ "Yeah, my son's healthy. I don't care about my medical plan." It's you who
has the problem. Your son needs the meds. But everybody else has either no sons,
or their sons are healthy. So there's a coordination problems between you and all
the other employees. Then say you manage going into HR, and you
manage to make them care. Then they have to go around to shop, maybe they get
a worse company. Because that company's even worse. They're giving them
a kickback, right? To screw over the employees.
It's either that or the entire workplace just quits.
You're going to quit your job for health insurance? How often does that happen?
If there are enough people that need to[As a percentage of people that quit their job.
]Éare not benefitting from the insurance that their company's providing? There's an
incentiveÉ I have a solution. Here's what happens. You,
as the employee, get more salary and less health insurance. In factÉzero. You
go get your own insurance. You don't have to worry about coordinating with all these
guys who definitely don't know what's going on, or don't care. Then you also get
to choose the exact company that you do like. That fixes your problem, as well as
this problem. So the problem I'm pointing out is the problem
that the employers provide health care. Health insurance. We should just have
our salaries go up, and we all get our own health insurance. Then your problem will
be fixed much easier, which is what you want. You want to fix your problem, right?
You don't necessarilyÉit's not free, right? The health care from your insurer is
not free; it's just taken out of your salary.
But isn't there another part likeÉeven if we did that, there are only 3 or 4 huge health
insurance companies out thereÉ Oh no. There's many, many health insurance
companies. There are 3 or 4 huge ones, but then there's a lot of small ones
too. So most contract with the huge ones, and I
thought that the small ones would beÉbecause of the cost is so high (the healthcare
cost) that it's much harder to enter this kind of market because you need a...I
meanÉpeople are likeÉwell, if I can only go
to this one doctor because it's the only one I have a contract to because my insurance
company is so small, if I go to another state I can'tÉso isn't there also a problem in
terms of making it competitive. I wouldn't say there's a problem at all. What
you need is you need to have these numbers. Percentages. Because insurance, essentially,
is a breakeven plus a profit. Based on statistics, right? You have to have
a big enough pool. But some of these pools are only a thousand people. There's
300 million people in this country. There could be 300 insurance companies that could
have 100 million people in each one. That's pretty good in terms of probabilities.
So the insurance companiesÉthey don't need to be big in terms of scale, in terms
of building an SUV. They need to able to run the money back and forth. In the same
way a credit union can run a bank. The campus credit union must have less than 1000
clients, I'm sure. And they're still running a profit- making bank. Or not profit.
Breakeven. Don't most companies have more than one choice
for health insurance? Often they do. Sometimes they don't. Sometimes.
It's not even close though. If you sit there and likeÉan employer provided 401(k)'s
. You could choose among these ten funds. If you go to the financial pages
of the Wall Street Journal, there's like 6000 funds. There's clearly more choices in
the open market. Isn't one problem that companies just stop
giving insurance and not payingÉ Well it's a huge disaster, right? If you don't
have insurance at all. I'm just saying likeÉthe employer providing the insurance
is not goodÉhaving no insurance at all is a bigger problem.
Isn't that declining already too? The employers are basicallyÉwhat they're
saying isÉit's gotten out of control, here's an extra 200 dollars a month, go take care
of yourself. On the one handÉI meanÉI was getting insurance when I didn't have a
job, and I was paying $50 a month for what's called catastrophic insurance. The
first $3000 bucks is on me, and 100% is on them. I worry about those 90% co-pays because
10% of $100 thousand dollars is a lot of money, which is the cost of getting
your leg fixed or something. Crazy healthcare cost. More hands, more questions?
Okay. Moving right along. More jargon. For game theory, we're going
to do more game theory. But I want to point out one of the things that most economists
don't consider when it's talking about game theory. It is the whole definition.
The definition of game theory is that it is a game, right?
If you're playing chess, and you're on a board with 64 squares that I'm going to draw
inaccurately here. You get the point. If you're playing chess, there are rules. You've
got a piece, this is a legal move. White and black and white and black. That is what
really game theory and economics is about. There's a game, and there are rules.
This is called ludic, which is some Latin word for game. The reason that you have to
say the word ludic and say waitÉlet's talk about ludic game theory versus what I'm
callingÉand I don't know if it's a technical worldÉbut I'm calling it conflict game
theoryÉis that if you're playing a game of chess with somebody, and they say, "I'm
going to take your queen" and they say, "I've got a gun", you're not playing chess
anymore, right? You're doing a conflict theory. That actually really matters. What if
you are playing the game and someone brings a gun or a bat. It's likeÉdon't bring a
knife to a gun fight, right? That's the expression? So you have to think of conflict theory in
terms ofÉhow do you play the game if there are no rules? Period. And it doesn't
necessarily mean, by the way, that you justÉeverybody carries around guns and starts
shooting each other. Because the whole point of playing with somebody (in a
vaguest sense of the word "play") is that you have gains from trade. I will play with
you because I've got something that you want includingÉyou want me alive, right?
And so you want to keep me alive, and you want to give me some goodies for being
aliveÉ You won't kill me, and I will give you some
goodies. And that has a lot to do with actuallyÉsome theory aroundÉremember I told
you at the start of the semesterÉthe natural state versus the open
access state? The idea thatÉhow did society evolve? But what happens in terms
of how society evolve in terms of conflict is you've got a whole bunch of people (this
is the whole hunter-gatherer idea).
They're running around. The biggest dude with the biggest glove is in charge, right?
And he can bit the shit out of everybody but then they're all dead. That didn't help,
right? So what he doesÉlet's just say there's a bunch of these guys. And I'm saying
"guy" on purpose. That's the whole point. Guys are into violence because this is
how we started. There's a whole bunch of guys running around. There's a guy here,
and there's a guy here, and if you're over here, this person might come over and
exploit you and take all of your goodies. And then you have nothing, right?
So then you're likeÉI'm going to hide my stuff. But then this guy comes over here
and takes his stuff, and then it really sucks because you can't win. There's just too
many bandits running around. It's the sense there's no point in actually producing
anything so you stay at the hunter gatherer. If you can't find it, you leave it
immediately. You don't sit there and save everything up. It's too expensive to save,
because one of these guys is going to rob you. But what happens is this guy here
says, "I will protect you from that guy, there." I will use violence and force to protect
you from the other person. And then you can either leave or you can stay. Now why
would you stay here with this one guy? And you're protected. So what does that allow
you to do when you're protected? You're not getting robbed by the other guy,
but is this first guy going to rob you? 100%. You almost make a deal right? I can
give you some of my stuff if you don't rob me. But if you do, I'll just go to this
guy over here. So what happens is you end up getting a territory withÉlet's call it
a stationary bandit. That's basically our government. The government, the state of California,
is our local stationary bandit. The government says lookÉwe kind of like
it here. We've got some beaches, we've got some trees, we've got some hills.
We're only going to take some of your money, and you produce wealth, soÉyou have
to produce wealth to give us some taxes or whatever, and if you don't like it, you can
go to Nevada. Or if you really don't like it, you can go to Canada. Or wherever. So
the whole idea of a stationary bandit is the origin of, essentially, territorial
governments, and the deal isÉcitizens will produce some goodies and share some of
the goodies with the government or the bandit (the politicians and what not). The
militaryÉsame game. In exchange for being left alone most of the time. that is a
non-ludic equilibrium. That's the conflict type of equilibrium.
There are no rules, because you can always walk away from that game and go
somewhere else. Because if you do game theory and you sayÉwell I assume the
laws work, or contracts are maintained, or people do not inflict violence on each
other, now you're getting into a whole bunch of rules that are imposed from outside.
It really matters that they actually work. I assume that the public servant is honest
and does not steal taxpayers' money and go on holidays in the Bahamas. But
unfortunately we see public servants doing that all the time. Or executives, but
executives are a much smaller problem. But with the governmentÉit's not always true
that there are these rules in terms ofÉ[inaudible]
Yeah, but you can go to Nevada, right? You can make some movement.
Some movement. In fact all these visas and rulesÉthe illegal
Mexican migrantsÉis the most common example that come to CaliforniaÉare clearly
leaving the game in Mexico. It's likeÉwhy are you going to America? Because
Mexico sucks. I'd rather just take my chances in California being an illegal, right?
In fact, they're actually in a lawless society over here as far as they're concerned.
Because they have no legal protections. But even no protection here is better than
whatever protection they're supposed to get in Mexico. This is, essentially, what
refugees do. Political refugees being the most huge example because they're
government literally wants to kill them. That's why political refugees are a much
more touchy subject, right? Economic refugees are basicallyÉthey're talking about
the same thing. I hate my government because they're exploiting me too much. I'd
rather go. Back in the day in World War I, there were,
essentially, no visas. Or passports for that matter. And you could just move around
and find the least worst place to live, in a way. So the massive migration that came
to this country was part of that. Oh absolutely. It doesn't serve those migrants.
And in some ways, it doesn't serve us (Americans). There's this notion of migrants
who always want to close the door right behind them. In a sense, they don't
want competition. There's a lot of populism as well (those people of the wrong
color or the wrong religion, whatever). It's justÉbut you know, it'sÉif you open
up the border with Mexico right now, 90 or 100 million people in Mexico? That would be
troublesome in terms of flows into California into the southwest. Because a whole
bunch of them would say, "Great, I'd rather go do whatever I'm doing right now
in America del Norte." It would be nicer. But then a whole bunch of them obviouslyÉ
I meanÉif the whole community left, that would be cool. A lot of people don't
migrate because they like their community. They like they're family. That makes
sense. That's why the back, in fact. But they tend to leave to go get money so that
they can escape the problems they're experiencing at home. People in thisÉI
mentioned this in lecture the other day, this guy Cameron, the director. He lives in
Hollywood; he makes millions and millions of dollars, but he's a Canadian citizen
because he wants to keep his options, right? Because heÉif Bush gets elected for the
fourth time, or whatever. I'm going to do incomplete contracts in the
next lecture, and then we'll talk briefly about the water bill as an example.
The California Assembly passedÉthere's a senate and an assemblyÉI actually have a
very vagueÉI know more about the federal government than the California
government, which is kind of pathetic. I don't even knowÉwho knows who the
mayor of Berkeley is? What's his name or her name?
Tom Bates. Tom Bates. Who else knew that? Awesome, you
guys rock. Okay, soÉI have no idea about local politics, but I have a little
bit more of an idea about state politics. I know
much more aboutÉwhat's going on in German politics right now. So the California
legislature and assembly just passed a packageÑa water package after having their
heads banged together by the governor and staying up all night. And the package
consists of 5 components. I'm going to tell you about the 5 components not just
because I'm going to give you some legal mumbo jumbo. I'm going to tell you what
the implications are, and if it actually fixes any problems. The first thing that they
did is they tried to fix the delta. And I'll describe what these things mean to you
guys in a second. The second thing they did: they went after urban water. Third:
ground water. Four: illegal diversions. And five: money. 11 billion dollars. $11
billion dollar bond. So there's five components of this package.
The first idea is that we're going to create a delta council. That delta council
is meant to manage the Sacramento San Joaquin Delta. This is California, as you
would obviously recognize. And we're here. This delta here is where water is exported
to Southern California. The Sacramento River flows down here. There's some river
flows going this way, and that water goes out under the Golden Gate Bridge. The
Sacramento San Joaquin DeltaÉthe Delta is a critical ecosystem in California.
The most important ecosystem in California. It is essentially collapsing,
or collapsedÉdepending on whether or not you're an optimist or a pessimist. And it's
been under a lot of stressesÉenvironmental stress from waste
water flows from Sacramento and agricultural run off from pumping water out
of the Delta to go to Southern California.
This is the notoriousÉit's gone on since the 1940s, but it's also what people call
the peripheral canal, which is supposed to take
water around the delta and down to southern Calfironia to keep it cleaner. Because
what goes into the delta is kind of brackish. This delta is essentially the Wetlands,
right? So freshwater comes in on the Sacramento River, and mixes with the salty
water here from the Bay. And then it gets pumped down. They want it to go down
clean. So the idea isÉlet's build a peripheral canal to make it cleaner. People
in Southern California like that idea. The people in Northern California (the environmentalists)
don't like that idea because then it's likeÉyou're taking our
water. "Our" meaningÉwe in Northern California. You know the whole NorCal hat
type of thing? LikeÉwe don't belong to SoCal, right? There's kind of this North versus
South thing. The peripheral canal is not operating, and I'll get to that in a second.
So the delta is environmentally in bad trouble. There's also a huge problem of invasive
species. All the ships come in. they drop these muscles and snails and all kinds
of stuff. The bass. The fishÉis eating all the local fish. Huge problems environmentally.
So delta council is meant to be a seven person council that will govern the
delta and make sure that it is ecologically sound or healthy and economically functioning
in terms of exporting water. They're called co-equal goals, which are political
words for "impossible to happen" right? You cannot have co-equal goals. We maximize
utility, we maximize profits. We don't maximize utility and hamburgers right?
We're just going back to one thing, right? But the idea of co-equal goals will
maximize two things at once, which are actually in direct conflict.
The idea for exporting water in the delta is that we can take it out of there without
harming the ecology. Everybody who understands ecology will say, "Let's not take it
out." So the whole idea of a co-equal goal is that you're going to push up with one
hand and push down with another hand, and they're going to be co-equal, which you
can't do. You either go here or you're here. So that's kind of a political farceÉor a
fudge or lieÉabout how we can have both environmental health and water exports.
However, they're going to continue to maintain the lie. The irony is that the delta
council, which is supposed to do this thing, has actually no political or economic
power to penalize people for not doing what they want them to. Essentially, the
delta council will be talking, and people will do what they want, anyway. It's kind
of like the World Peace Council. Let's have World
Peace, but people are out there shooting each other. Let's just be nice to
each other. The Happy Smiley Face Council.
So this is, quite honestly, a complete waste of time. It's been tried for the last 15
years. It's failed. That's part one of our solution. Part II of that solution is that
urban water users are supposed to cut their water use by 20% in order to conserve
water. As you may know already, the split in water is 20% urban and 80% ag in
terms of the diversion of water through canals and pumps like that. So the urban
people are supposed to cut their use by 20% of the 20%. That's the
number. They're supposed to cut their use by 20% by the year 2020. 20 by 2020.
That's the idea. That's already an idea that was out there, so basically they
repackaged it and put it back in this thing, and they declared another success, which
is nothing platinum; it's not 2020 yet. The other problem in terms of this brilliant
urban water move is what? Anybody see a glaring issue?
Right. We left ag-water off the table, right? Ag-water uses are going to be required
to use best management practices. Which meansÉdo what you've always been
doing. So nothing. The other question is thatÉdo they haveÉdo
they maintain the same amount of people? I meanÉevery person has to cut by
20% or are there more people moving in and having toÉ
Oh, it's even worse than that. So say that you have a per capita consumption of a
hundred gallons per capita per day in the Bay Area. We have fogÉit's kind of
coldÉpeople don't have any lawns; they live in apartments. And let's say that they
haveÉlet's go to San Diego. They have 200 GPDs. Everybody has to cut back by 20
percent. So nowÉthese guys have to go to 80, and these guys got to go to 160.
Anybody see an equity issue, here? In fact, even worseÉif you just left your hose on
all day, and you were using 6000 gallons per day, then you only have to cut it back
by 20% of 6000 gallons, right? So it actually doesn't matter if you've been saving
water already. You have to cut back. If you've been wasting water, you cut back
also, but from your waste. So that's another fuck up big time, right? Equity violation
number one. So does this mean that the agriculture people
can still sell their water rights, andÉ It doesn't even trust selling the water rights,
which is even...the most ridiculous thing, right? Because when they say the agricultural
water users are supposed to follow best management practices, then what's
the most important thing you have to think of in terms of water conservation
if you're an ag. Why would you spend money to conserve water? That's a cost. What's
the benefit? Is there a benefit if you're a farmer? What would be the benefit
if you're a farmer? You use a thousand acre feet of water per year. A thousand acre-feet.
1 acre-foot is 325,000 gallons. You use 325 million gallons of water a year.
You're a farmer. David the salesman comes along and says, "I can help you save
10% of that but you have to pay me $100 bucks an acre foot to save that money. Save
that water." What would the farmer do? Why would the farmer spend that money?
So they can save the money water bill? What's their water bill? They say $5 per acre-foot
of water. Let's just say. Let's say $20 an acre-foot. They make 20. That's actually
a fair number. And I could save them an acre-foot of water for $100. How's
that for a good deal? Let's go through the decision process for
the farmer? Would he try to save that much water so he
can save that water and sell it? Ah. But the bill says nothing about selling
water, or letting it go down the river. Right? So wait a second. I could use it and
make $20, or I can save it and pay $100. What's the farmer going to do?
Well, is that $100 a one time fee? No, let's say it's an ongoing fee. That's
a good question. Capitalization. We're not even going to go there. That's a good example,
but that's not where we're going. Because they have to use all of their water
allotted, otherwise they'll lose it Use it or lose it is a potential idea. If
you do sell your water, that's considered, still,
to be beneficial use. So that is okay. You don't lose your water rights if you do that.
But, as you're pointing out, there's no incentive to save this water. If I can spend
$100 to save it, but then I could sell it for $200, would I do that if I was a farmer?
Hell yea. Spent $100, make $200. Boy, that's a no brainer, right? But this says
nothing about that. Now in some ways, why does it say nothing about ag is because
the Aggies are likeÉdon't tell us what to do. And they tend to have disproportionate
power. Remember the agriculture in California isÉwho
thinks agriculture in California is worth 25% of the state's economy or more?
Who thinks its worth between 10 and 25 percent? Other hands? Come on, you have
to vote. More than 25%? 10 to 25%? 5 to 10%? Less than 5%. It's worth about 4%
of the state's economy. Nobody knows that. You know why? Because the farmers
are always in the news. Oh my god! No. The California economy's going to
collapse. Because our economy is not driven by Google, or by the San Francisco
Medical Community, or the Defense Industry, or Hollywood. It's driven by artichokes.
80% of the water in this state is diverted into agriculture, and it's used to
produce 4% of the GDP. And it employs fewer and fewer people, obviously. Low wages,
right? But politically, they are the gorilla in the room as far as water is concerned.
I actually have no issue with that. All I'd say isÉlet them sell their water; this does
nothing for that. There's noÉthe whole thing is that that isÉthe urban waterÉfirst
of all, putting urban water on the table is ridiculous because it costÉinstead of
costing a hundred dollars an acre-foot, and that's actually a real number, maybeÉfor
conserving. It'll cost $1000 an acre-foot to save that water in urban, because you
have to put it in a low flush toiletÉtoilets are expensiveÉyou take shorter showers?
Smelly people are expensiveÉright? You have to find urban leaks? Urban leaks only
might be 5%, but Ag has unlined canals (the water kind of just seeks through under
the dirt). But there's no incentive to save the water in Ag if you can't sell it. And
there's no provision for more of that water market, which drives me crazy. Okay. So
does that answer your question about why Ag water isn't on the table?
Just go look at the state development board on my blog. It'll have the links on there
or something like that. And we're not talkingÉthere's no multiplier garbage going
on. Even in Stockton. They make a lot more money off ofÉnot even direct Ag.
Because a lot of money goes into car parts and stuff like that. Ground water. The
state of California has the worst ground water management of any state in the
United States. As inÉthere is none. The tragedy of the commons is based on the
concept of land and aquifer under the land. One guy's got to pump. Another guy's
got a pump. Another guy's got a pump. There are no property rights. Open access.
Common pool good. If Mr. A decides to pump, it affects Mr. B and Mr. C, but neither
of Mr. B or Mr. C have recourse. Remember the game with the candy? Remember?
That fishing game at the start of the semester? We are playing the big candy game in
the central valley. They are over-drafting the aquifers like crazy. Like nobody's
business. That's why the land level is settling. Dropping
byÉI think it has toÉit's something along the lines of about an inch per year.
That, of course, breaks more pipes. Unsettled foundations. And destroys the aquifer,
because the aquifer will compact and will never ever receive water again. Is
there going to be controls on ground water pumping? Actually, they say there is
something, and what will happen is if you don't record your reportÉthe don't even
record how muchÉwe don't even know how much pumping is going on with ground
water. We know far more about how many cars pass the smog test and how many
particles of matter are coming out of your tailpipe than we know about how much
water is being pumped in the state of California.
Remember, this concerns you because the water itself, not the rights to the water,
belongs to you. The constitution of California says the water of California belongs to
the people. And the people ofÉthe bureaucracy of California is not doing anything
to monitor it. We don't even knowÉwe're not trying to control it. Right? You need
to control it, if you want to stop over drafting? We don't even know how much over
drafting is happening. Now there's a penalty for not reporting, which is that they
willÉthe government will not give state money to the counties if they don't report it.
But who's in charge of monitoring ground water? It's not counties. It's irrigation
districts. They're not even in charge. So they put this wording in there to sayÉwe're
going to penalize you if you don't report it. But they're penalizing the wrong people.
It's like penalizing me for what you eat for lunch. It doesn't even matter. Because
obviously it's not my problem. And they'll say, "Oh yeah, I guess we'll just give you
the money anyway." So that's another serious fuck up right there.
Stupid, stupid, stupid, useless. Illegal diversionÉthis is the most amazing quote of
all. I'm going to just read it to you. The deal was approved after an all night session.
An increasingly familiar scene in the world of the California legislature. The major
breakthrough came ThursdayÉTuesday night after leaders agreed to add one billion
dollars to the bond package at the request of the Los Angeles delegation. That's
called pork. Earmarking and pork? You've heard about that? That was happening
on Tuesday. At the request of the Los Angeles delegationÉso all of us are paying for
Los Angeles now. That assume the bond happens (I'll get to that in a second). In
return, republicans won a major concession as democrats agreed to sever an
enforcement bill from the water package that cracked down on illegal diversions of
water, boosted fines, and decreased the power of the state water boards.
The republicans demanded that you allow this illegal activity to continue. And the
democrats said, okay, we'll let you keep breaking the law if you give us a billion
dollars of other peoples' money. That isÉthose are our leaders in action. These are
the people who areÉessentiallyÉyou're trying to write a briefing against. These are
ridiculous. Non-leaders. Thieves. Mark Twain has some choice words for them,
right? It's likeÉyou knowÉsay that I make a deal. You give me the gun, and I'll rob
these guys, and I'll give you the candy, and you're likeÉyeah, that's a good deal. And
you guys are like, "What the fuck?" You just got hosed by your own legislature.
Seriously. It's likeÉcriminal. I don't even know. It's ridiculous. The illegal diversion
shall continue. Congratulations. Now remember, by the way, in California, the
amount of waterÉthe water rights? They have issued the State Water Resources
Control Board, which is the most toothless regulator in the state (this is
the illegal diversion people). They have issued permits for 8 times the flow of water
(thereabouts) that goes through the river. 800% overallocation. That's like issuing
parking places for 8 times any parking place on the Berkeley campus. Would
there be a problem if they did that here? I mean, Berkeley is relatively efficient
in comparison to the State Water Resources Control Board. That's how miserably
wrong and bad those guys are. And finally, amazinglyÉthis is the interesting
thing. All those four pieces of ridiculousness are going to be put into place
when the governor declares victory whenever. And does a victory dance. That's
going to start happening now. But then, in a year from now, you, the voters, will
be asked to approve an 11 billion dollar bond that will build more dams, in California.
The cost benefit on these damsÉit's just funny.
So Damien, who gave a talk to you guysÉDamien did a little analysis on one of these
dams. In order for the dam to make sense in terms of cost benefits, they would have
to sell water to farmers for $700 per acre-foot. Now remember, farmers pay $20 an
acre-foot for the water, right? Do you think any farmers are going to line up to buy
some water? Oh yeah, $700 bucks an acre-foot? Good deal! Right? They're going to
build a huge cement elephant that will be paid for by us, right? And then no ones
going to buy the water on it because it's too bloody expensive. What are they going
to do once they build the dam? Rhymes with punk. Sunk. Sunk costs. Yeah,
okayÉonce they build a dam, what are they going to do about charging $700 a foot?
They're not going to chargeÉ They're not going to charge $700 a foot. They're
going to charge $20. Who's going to pay the difference?
We are. Congratulations. You have been raped for the
fourth time. The interesting thing is, actually, I think
that the bond for $11 billion, of which they added $1 billion of pork at the last minute
as a negotiation, is not even going to pass, because we're going to look at that and say,
"What the hell!" We have the worst credit rating of any state in the United States,
and we're spending $11 billion on dams that don't pass any kind of cost/benefit
test, and spread a whole bunch money aroundÉ
Oh the other one that I loveÉthere's another oneÉI'll get to your question in a
second. One of theseÉthe San Francisco PUC emerged triumphant out of the
negotiation saying this $11 billion bond issue will let us avoid raising our prices on
our customers. So we will be very happy because we will be cross-subsidized by
everybody over here on the East Bay. Everybody else down in wherever. In the
southland. In the valley. It's likeÉwe're not going to raise prices on our customers.
We would rather deliver subsidized water to them and have you guys pay for it.
Victory, right? It's just likeÉthis is how stupid it's gotten to. It's just the most
ridiculous thing I have ever seen. You had a hand up?
Could you use the dams to make electricity? The cost-benefit is rolled into that. The
dam that really has paid for itself like a million times over is the Hoover Dam. That
dam rocks in terms of electricity. Also the O' Shaughnessy Dam at the Hetch Hetchy
reservoir. That's like the greenest project we've done in California.
What do these politicians know about water? Very little.
Then how are they able to pass in the assembly? Don't the have likeÉyou know about
itÉlike you, or something? They ignore us because they go to the farmers
and say, "I've got a dam for you." And the farmer says, "Great!" why did the farmer
want the dam? Because it's free. If I went around giving you guys free pencils,
you'd be like, "This is a stupid pencil, but it's free." If you don't pay for it, then
you don't give a shit. It's free. But it's paid for
it out of general obligation bonds and all that other garbage.
Other hands? Yes? I heard that they're taking down some damsÉ
They're taking down some dams in Klamath, yes.
Is that the only dam that they're dismantling? Mostly. That's right. Because engineers love
building dams. Ooh. More cement. And politicians love cutting ribbons in front
of dams. Last question. All this legislatureÉis it statewide or is
thereÉ This is a statewide negotiation.
Okay so every county that negotiates will be under thatÉ
Whatever, yeah. No because the state project moves water around. There's a lot of
negotiations. Alright. See you guys on Tuesday!