Thu, 26 Aug 2004

The Minimum Wage 3

Steven E. Landsburg maintains "It is almost impossible to maintain the old argument that minimum wages are bad for minimum-wage workers." Far from it. I maintain that old argument, because the old argument is still true. To the extent that minimum wages actually raise wages above the market-clearing level, they create unemployment. I really don't care about the statistical studies of actual minimum wage changes, because legislators carefully ignore the moronic requests to double the minimum wage. Instead, they wait until nearly everyone is being paid more than the minimum wage, and raise it just a little. The effects of these kinds of changes are not discoverable by statistical studies because they are lost in the noise.

Steven also shows that he is indifferent to the fate of the people who become permanently unemployable. He claims that they don't care about having their job destroyed. He says "... so what? Sure, you've lost your job. But don't forget, this was a minimum-wage job in the first place.". How in the world can he speak about, much less *for*, someone he has never spoken to? That is, you see, the gist of the problem. The minimum wage destroys the jobs of people who are not known to be willing to have their job destroyed. This seems to me to be completely immoral.

Steven makes the point that published statistical surveys are not representative. He's probably right that we should ignore them. We should ignore them not for the reason he gives, but instead because it's simply bad statistics to measure the results of ongoing production. Instead you should run an experiment at the ends of the parameters you wish to study. The trouble is that we've done that experiment already, and whole industries got destroyed.

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Mon, 23 Aug 2004

The Minimum Wage 2

Morosoph fails to get the minimum wage argument correct. He makes three glaring errors. First he says "Well, everybody will just raise their prices", ignoring the fact that some will compete by cutting costs. Second, he admits that some poor shmuck is going to lose his job because of the minimum wage. How can that ever be moral? And yet people support the minimum wage because it's just. Third, he thinks that "Decent statistical analysis would clear the air..." It won't, and not for a lack of trying. There are many reasons why a person might lose their job. The effect of a minmum wage increase happens over time, not immediately. This information is lost in the noise. There's no way to pull it out of the noise except by raising the minimum wage by a lot. That's been done before, and yes, many people lost their jobs, so no, we don't need to run that experiment again.

The theory predicts it, the evidence supports it, the only question is "how many people lose their jobs vs. how many people's income goes up." But how can any moral person ask that question? How can it be right to hurt some innocent person just so you can help other people?

Morosoph's kind of economics is the kind that just pisses me right off, because he Just Doesn't Understand how economics works in the real world. He thinks that legislated laws can break natural laws. He would probably vote in favor of changing the speed of light.

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Sun, 22 Aug 2004

Value and Transactions

I received email from a reader, asking me to resolve a dispute between her and a friend:

I think that they are having trouble resolving this question because it's a wrong question ("Ask the wrong question, you'll get a wrong answer.") It can be answered trivially, so let me propose a better question, and then answer that.

By definition, every transaction in a free market economy is a win-win transaction. Both parties see more value in what the other party has than in what they have, so they trade. In any other circumstance, one or both value their current circumstances better, and refuse to trade. The only kind of trade you can have in a free market economy which leaves one of the parties immediately worse off is when they are forced to trade against their will.

Leaning heavily on Ludwig von Mises' tome Human Action, remember that the future is uncertain. People's opinions about the future differ. People take actions based on those opinions. All actions involve an element of risk. It's simply not possible in this world for all actions to succeed. Some will pan out, some will come up dry (very deliberately choosing to use those two cliches).

Every transaction is undertaken because the individual perceives a benefit at the time. Therefore, her question is trivially answered "every transaction in a free market (capitalist) economy already is a win-win transaction." I don't think she'll be satisfied with that answer, however, because I don't think the question is right. I think a better question, following from the dispute between her and her friend, is "Does the proper operation of capitalism rely on some people making mistakes?"

The answer to that question is "No". It's more a matter of mistakes being inevitable, and capitalism surviving them. If people didn't make mistakes, then capitalism would work much better ... but then again, so would socialism. Capitalism has a lot of flaws, whereas socialism is perfect in its design and has no flaws. The trouble is that imperfect people have to carry out both systems. Capitalism trades off the constant presence of small mistakes and thereby avoids the big mistakes that a socialist economy will make.

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Fri, 20 Aug 2004

Gregory Mankiw

Poor Gregory Mankiw. He points out a fundamental theorem of modern economic science, and gets excoriated for it. I refer of course to his statement that outsourcing American jobs was good for the country in the long run.

He's right.

You can practically use people's reaction to his statement as a litmus test of economic understanding. Does somebody understand the least bit of economics? If so, then they agree with Gregory. If not, then they disagree with him, often vocally and vehemently. Economic flat-earthers, I call them.

America's strength is its willingness to lose jobs. Look at all the buggy-whip jobs which don't exist anymore. Or whaling jobs. Whole careers have been eliminated. Not just some jobs, but all of them. Gone. Not overseas, but gone from the face of the earth. Now, if we're willing to destroy jobs, why is it such a Big deal if somebody else in some other country gets that job? This whole outsourcing flap is like throwing something out, and then finding that somebody has garbage-picked it.

Okay, you can make the point that we weren't really done with those jobs. That people were still willing to do them. But here's the catch: for what wages? There is no such thing as "unemployment", and there is no such thing as "unemployment insurance". Something exists that has that name, but it is not insurance. You cannot insure against something over which you have full control. Insurance doesn't work that way. Insurance covers you against things that you cannot control.

The alternative to losing jobs is to keep jobs doing things that people don't want. Besides the morale problems with doing something that nobody wants, you also have a serious economic problem. You can't have everyone doing useless work. Somebody has to be productive to pay for those jobs that are no longer needed. What happens when people in the former group move into the latter group? There's no such thing as a perpetual motion machine.

You may question my assertion that "unemployment" does not exist, particularly since you hear unemployment figures quoted weekly. Very simply, yes, there are people who choose not to work for a particular wage. They are not simply unemployed; they cannot find work for a wage of their choosing. So, it doesn't make sense to talk about "unemployment" without knowing more about the jobs that aren't being taken. If a Wall Street stockbroker cannot find a job paying $200,000/year, is he unemployed? According to the Bureau of Labor Statistics, yes, he is.

Let's take a case which might be more obvious. Let's say that a laborer earning the minimum wage becomes unemployed. The stockbroker can probably find a job by offering to work for less money. The laborer doesn't have that option. He is not unemployed by choice, but instead by fiat (and no, I don't mean that the Italian car manufacturer refuses to hire him!). The source of minimum wage unemployment is the minimum wage.

Now any non-economists must be livid. "Ask people to work for less money!!! How can you do that?? You are cruel and heartless!!" Um, no. Consider the plight of the poor unfortunate Indian worker who gets paid far less to work in one of those Indian call centers we've heard so much about. Instead of answering the phone as Suskana, she has to answer the phone as Susan. Instead of working during the day, she has to work when most of her countrymen are asleep (IST == +1030, as opposed to an EST of -0500. Do the math). For this onerous duty, she gets paid $2 an hour, for which no American would work, could work. The thing is that her expenses are much lower. She can eat out every day for those wages, and afford a nice three-bedroom apartment in downtown Mumbai. Wages have no meaning unless you consider what they'll buy.

An efficient economy is constantly driving down prices and profits. This seems counterintuitive to anybody who lived through the inflation of the 70's. Inflation, though, is a monetary phenomenon. While it doesn't affect every price identically or immediately, it affects all prices because it's a change in the supply of money. What matters is the amount of time that you have to work to exchange for something of value to you. That amount of work has been dropping more or less steadily for the past five centuries. It may be that this year or this decade is one in which that trend shows a temporary reversal. As Mankiw said, in the long run, it's good for US jobs to be exported overseas. What he didn't say, but which is equally true, is that it may be painful in the short term when US jobs are exported overseas.

The good sense of "You do what you do best, I'll do what I do best, and we'll trade" cannot be denied ... except by people without a good sense of economics.

TM Lutas comments, making the point that social relations create pressure to assist transitions into new fields. Indeed yes, but if you try to restrict job loss or tie training to the ability to eliminate jobs, then that becomes an economic issue and worthy of criticism. Separately he points out that sometimes other countries make a gift of their wealth to us, and he claims that's a problem. Personally I think "Hey, thanks for the wealth" is an adequate response, and the louder we say it, the better.

TM Lutas comments again, saying that I just don't get it. I think I do get it.

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Thu, 19 Aug 2004


It's surprising how many people don't understand the nature of profit. They think that people who are wealthy must have become so at the expense of other people. They think that if you have more than other people, it must be that you profited at the expense of another. I don't mean to dismiss their objections or their outrage. But surely it can't be "profit" that they object to. Look at this:

Orange and profit, as attributes of human action, may be related. That is, there may be actions which result in neither orange nor profit, and actions which result in both orange and profit. If that's the case, then they are related to each other, or said to be co-related, correlated, or positively correlated. On the other hand, it may also be that you have actions that result in orange but not profit, and actions which result in profit but not orange. If that's always the case, then they are negatively correlated. They're still correlated because if profit is present, then orange is not, and if orange, then not profit. It's just that the relationship is negative.

When profit is created by some actions, and other actions create profit and orange, then there is no correlation between profit and orange, because the presence of orange has nothing to do with the presence of profit. Profit is always present, and only orange depends on which action is chosen.

My point here being that you have profit without orange. Presumably, since people are objecting to orange and calling it profit, then you can have orange and profit at the same time. Profit and orange are not correlated with each other, and yet people criticize profit for being orange. I think they do this because most actions are neither profitable nor orangable, and then lump the remainder into just one category: profit or orange. The critics miss the cases where profit is present but not orange.

Why don't they see those cases? Because, surely, not seeing those cases is a symptom of bad economicing. Perhaps we can come closer to identifying the nature of orange if we can discover why the case of profit without orange is invisible to them or otherwise not a part of their experience? I need to ruminate more on this, so I'll pick this topic up later and link forward to it, and back to here. Comments and guesses welcomed.

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Profit 2

Earlier I mused about some people's reaction to profit. I noted that profit didn't have the qualities that they imputed to it. I guessed that they were actually objecting to something else, which I called "orange" (so as not to prejudice myself or anyone else as to its nature). Bob Johnson suggested that orange==passivity, noting that the harder someone sweats for their money, the more acceptable are their profits.

I think Bob is quite right here. The quintessential honest job is that of a farmer, and you know that farmers put their backs into their jobs. The next most honest job is a steelworker, another sweaty job. A more "orange", or passive, job is secretary. Secretaries rarely get sweaty; if they do, they're probably doing their job wrong. Still, the pay isn't very good, so the lack of sweat can be forgiven. Still more "orange" is the job of college professor. The perception is that they only have to come in to the office a few hours a week, teach a class or two or three, and rake in the bucks. All those perceptions are wrong, but the perception of passivity is there.

Even more passive is an insurance company. Their profits are assumed to come with no work. More passive yet is the job of landlord, particularly a landlord who doesn't reinvest money in repairs (but if those repairs won't result in more or retained income, why spend money on repairs?) The most passive is someone who merely invests in a company. Of course, if you invest passively, you get some pretty passive profits. While there's condemnation of investors when they're making money, there's little sympathy when an investor loses money.

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Sun, 15 Aug 2004

Cream skimming is to be expected

Andy McAdoo, General Manager of Nicholville Telephone Company, writes, in part, about my earlier essay on DANC:

Sorry, no, Andy, but free markets don't quite work that way (then again, with a government agency under discussion, who's talking about a free market, but I get ahead of myself). It's a serious problem, but not for the reason you state. Cream skimming is a natural effect in a free market, and one to be expected and enjoyed in its way.

Rich people have yachts. Everybody expects this to be the case. Only the people who worry that some rich person, somewhere, might be having fun oppose this (they are, by the way, the people responsible for killing the yacht industry by taxing it out of existance). Most people really don't care for yachting, so the price of yachts has remained high.

Rich people also buy Cadillacs, or at least they used to. The Cadillac still has the imprinteur of style, class, and just plain wealth, even if there are other expensive cars competing with them. A childhood friend of mine, Peter Goldring, had a father who worked on Madison Avenue. They had a Cadillac (this was back in the 60's). It was an amazingly plush and well-equipped automobile. It had automatic windshield washers and electric windows.

I always wanted to own a car with windshield washers and electric windows. I thought they were the neatest gadgets. I dreamed of being wealthy enough to own a Cadillac with those features. Of course, now I own a fairly pedestrian Subaru Outback with windshield washers and electric windows. You can't buy the car without them. It also has -- get this -- electric seat heaters. Not even Cadillacs had them back in the 60's.

Was Cadillac cream skimming? Yup. Was there anything wrong with that? Nope. They were specifically targetting a wealthy minority with advanced features and benefits, with no intention of ever providing them to the rest of us.

Why, then, do we have them now? The answer, simply enough, is free markets. In a free market, new things are always provided to wealthy people first. In time, entrepreneurs find a way to reduce the cost of those things, and sell them to everyone else.

What is wrong with the DANC proposed cream skimming? It is that it intends to operate outside free markets. First of all, they plan to sell to BOCES, which are about as socialist, centrally-planned institution as you can find in America (where is McCarthy when you really need a hearing?) apart from Congress itself. I'm not going to get into BOCES right now, since I've already ripped them up and down, and back up again.

But second of all, DANC is not a profit-seeking institution. They could, quite reasonably, stop at providing Internet access to the schools, hospitals and local governments. They don't have stockholders clamoring for the last bit of profit in a market. Andy is upset, and reasonably so, because DANC is planning on monopolizing the marketplace with subsidized (paid-for by grants) Internet. It would be too bad for Andy if DANC was a private company and was able to out-compete him. But they're not. DANC has their hand in the public till.

After all, once you've provisioned Internet access to the schools, hospitals, and local governments, what's left? Fibermark? Resnick Mattress Outlets? Kinney's? Wisebuys? Potters? In a competitive marketplace, a private DANC would end up taking only part of the market, leaving some for Nicholville Telephone, and Verizon, and Time-Warner. Everyone would skim off whatever cream they could, and in order to gain continued growth in profits, they would have to sell to the little customers who are less profitable to begin with.

So no, Andy should attack DANC for having their fingers in the public till (and that includes accepting money from BOCES) rather than attacking the idea of cream skimming. Given the chance, he'd do it himself. Or try, but so would everyone else who owned a right-of-way on the utility poles of St. Lawrence County.

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Price, Cost, and Marginal Value

Steve den Beste talks about economics. He does a pretty good job, but falls down on the parts he's not really talking about.

In a free market, over the long run, price == cost == marginal value. Everything that den Beste says about prices is true only in the short term. In the short term, the price is going to be higher than the cost in order to pay the entrepreneur who set up the business. However, that profit gets competed out, so that in time, the price of something equals the sum of the costs of it. Gotta remember that the cost must include everything: cost of goods sold, rent, power, light, salaries, interest and dividends. Interest is rent on money lent, and dividends are rent on capital ownership. Neither are profits to a business; the business pays them out.

The marginal value of something equals the price of it. If you valued the next one of something more than the price, you'd buy another one. There are obviously quantizing problems here (for most people, the first car is the only one whose marginal value exceeds its price), but if you average out the purchasing decision, it will close in on the price. For bulk-purchased commodities like loose candy, the value (to you!) of the last candy you slipped into the jar is equal to the price of it.

den Beste said that people have to value something more than its price or they won't buy. That's just a specific case of the marginal value being the value of the very first one.

So, all that said, is den Beste wrong about the inverse network value? Not at all. He is specifically not talking about a completely free market. He's talking about a market where the Rolls-Royce company has a monopoly on producing Rolls-Royce cars. The whole point behind trademark law is to allow producers to charge monopoly prices. In a completely free market, when Rolls-Royce tried to restrict production to keep prices up, other people would step in and create more Rolls-Royces. Not clear that anybody wants markets to be that free.

Update: Ron writes in with some confusion over marginal value: "The marginal value equalling the price depends on den Beste being right. It's the last customer that has value equalling price. If the price rises, he drops off and there's a new last customer at the higher price. If the price falls, another customer comes on and the former last customer makes a profit. All the customers but the last make a profit."

Ron, marginal value refers to the value to *you* of buying yet another one of the things. In the case that Steve is talking about (cars), very very few people buy more than one at a time. Therefore the marginal value in this case is going to be the same as the value. Quite clearly the value must be equal to or exceed the price for someone to purchase something. My point being that the marginal value might only equal the price. In the long term, in a free market, with something that doesn't suffer too badly from quantizing effects, it makes sense for somebody to keep adding items to their cart until the marginal value *equals* the price. This is true even if the first one purchased is the last one purchased.

Since I'm on the topic, what happens if the seller is deliberately quanitizing the price so as to "steal" profit from the consumer by arranging things so that the last one purchased always ends up with marginal value equal to the price? This is where the beauty of competition shines. Another less greedy seller could rearrange his sales so that he takes only half of the profit from that sale, and shares the other half of the profit with the customer (e.g. by offering a discounted price for buying that larger quantity).

I should note that transaction costs interfere with causing the price to exactly equal the cost, and the marginal value to exactly equal the price. Transaction costs suck, but then so does friction.

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Too Many Laws

We live in an age when legislatures create laws from scratch. Laws were not always created de novo. Earlier, laws were discovered rather than created. A conflict between two parties was seen as a problem to be solved. A solution was discovered by wise people working on the problem, just as are solutions to most other problems. Once a good solution was discovered, it would be applied to all further instances of that problem. Thus was the law born.

Legislatures, on the other hand, make up laws even when no problem is to be seen. This has a well-known corrupting influence on legislatures, what with people convincing a legislature that a personal or corporate problem is actually a public problem. Beyond that, though, a legislature, in my experience, will create more laws than it is willing to pay to enforce.

By corrupt, I mean that they take money for a service with no intention of supplying that service.

Having a surfit of laws and a deficit of funding puts the executive body into a quandry. Since it cannot enforce all the laws, it must pick and choose. Once it has this discretion, it has the ability to grant favors. With freedom comes responsibility, or irresponsibility in this case.

Now, I don't want anybody to take this as a blanket condemnation of all executive bodies. I'm merely pointing out the economics of the situation. The legislature (itself an easily corrupted organization) has created an incentive for the executive body to be corrupted as well.

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The Cost of a Man

What is the cost of a man? Poets and philosophers have tried to answer that question for centuries. Give an economist space to try.

The cost of a person's death is the loss of their productive output. Some people are very much more productive than other people. A Hemingway, a Mozart, a Monet, or an Einstein, all have had a greater impact on society than a Smith, a Baker, or a Barber. Can we then say that some people's death would have cost society more than others? Only weakly. Once someone is dead, they're dead. The future is closed to us; their future is closed to us.

We cannot value a person by looking at their death. We can only value a person by looking, not at their life, but what they would trade for their life. People do dangerous things all the time. Driving down the road is dangerous enough. People are trading (a risk to) their life all the time. That means that we can conclude that people do not value their lives infinitely.

How to determine how much someone values their own life? You can look at it by how much life insurance they buy. That's not a very good metric, though, because people are not often in such a risk of their lives that they purchase all the insurance they need. A better metric is to look at the actions of people with hazardous jobs, for example an explosives truck driver. They're much more likely to look at the risk, and decide how much risk they're willing to bear for how long. That risk, carried out, is how much they value their lives.

I won't hold you in suspense any longer. The figure comes out to about $1.2 million. It's not an unreasonable number. It's about $26K per year over a 45 year productive lifetime.

Thanks to David D. Friedman for doing the actual research behind this, and publishing it in his excellent book Hidden Order.

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The Environment is a meaningless term

There is no such thing as "the environment" from an economics point of view. People use that word, but it's poorly defined. There is only property. Some property is land, some is air, and some is water. Some owners of property are careful to prevent others from damaging their property, some are not.

Economists study markets. Markets only trade in property. If you want to examine something from an economics point of view, you have to consider that thing to be property. The defining characteristic of property is that it has a single owner. The owner gets to decide who does what with the property. These are called property rights. Some owners are of course not individuals, e.g. partnerships, or corporations, or governments. Still, the owner of property acts with a single voice when it comes to trading that property.

If you listen to some people, you would hear them talk about "the environment". They want to protect "the environment." Specifically, what do they mean by that? It usually means that they are against pollution (it means other things as well, but let's ignore those other things). What is pollution, though? Pollution is anything that they think shouldn't be there; for example noxious gasses or liquids or solids. Pollution is illegal when it is trespass. Sometimes pollution is not trespass because the property owner has a reason to accept the pollution. The difficulty is that not every property owner chooses to prosecute the trespass.

Why should these people care about "the environment?" After all, it's not their property -- it's the property owner's problem. Sometimes they care because they are a part-owner of the property. It's owned by a government that's under their control (or vice-versa), and the government is failing to take good care of the property. Sometimes they care because they are subjected to externalities of the pollution. Every use of property has externalities; the existance of externalities is not sufficient reason to discontinue that use of the property. The most interesting reason is due to the way in which we have split up ownership of land.

Ownership of land

Property rights may not be completely unique in the same volume of space. That is, you may have the right to do one thing with a piece of property, while I may have the right to do a different thing. For example, you may own the surface rights to land, and I may own the mineral rights. The US government owns the right to fly an airplane over that land. The same land has multiple owners of the property rights.

As every land-owner knows, one of the things you have to do with your land is pay taxes on it. You can reasonably view that right as "the right to collect property taxes". Some states are willing to sell you that right, e.g. Nevada. You can, when you purchase the set of rights we commonly call "ownership of land", you can pay extra (a lot extra) to purchase the right to collect property taxes.

The existance of this right to collect property taxes causes a problem. What if the property taxes are not paid? What happens then is that the property tax owner can get a lein on the rest of the owners. If the taxes become large enough, they can take possession of the land and sell it. Aye, here's the rub. What if the owner of the surface rights has extinguished the value of his right by allowing pollution? The owner of the property rights does not wish to see his value destroyed by another, and so he will take legal action to prevent the extinguishing.

This interferes in the market by preventing some worthwhile uses of land. What if someone could concentrate pollution on just one bit of land in exchange for money? That would be worthwhile because it would keep the pollution away from others. It would concentrate the pollution so that if the pollution becomes valuable it is available for easy recovery. After all, Pennsylvania farmers thought that oil springs were a nasty nuisance.

Government Pollution

Except in western states where water is scarce, both the air and water have long been considered to be owned "by the public." Before governments were forced to take notice by their constituents, they were poor shepherds of their property. Air and water pollution by industrial processes are well-known problems. Note, though, that when water is privately owned, it is taken care of. This is the same effect you see when pollution of privately-owned land is not tolerated.

Still, calling air and water "the environment" confuses and conceals the issue. It's not an "environment", it's property, and the owner of that property is the only party that should be stopping pollution.

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Thu, 05 Aug 2004

Airport Insecurity

I got frisked by the Portland airport TSA folks. Somebody forgot to tell them that modern batteries and explosives are mostly the same thing. They saw my four-NiMH-D-Cell battery box on the x-ray, and thought it was Semtex, a plastic explosive. I think their chemical detector also id'ed it as Semtex, but nobody ever explicitly said that to me.

While they were gingerly pawing through my possessions as if they might explode, I noted aloud how disconcerting it was to see them pawing through my possessions as if they might explode. Somehow they turned that into some kind of bomb threat, because they called down their manager, the airport administration, the Portland police, and a Delta representative on me. While I'm not stupid enough to bring up the subject of bombs at airport security, watching somebody act as if my stuff might explode weakened my resistance to said stupidity.

It was only about a half-hour delay, however, it was a half-hour during which seven members of the security infrastructure paid sole and exclusive attention to me. It's obvious to me that I was a false positive. It was less obvious to them that I was a false positive; nonetheless I was a false positive for their tests.

One thing that economics teaches us is that you can't do everything at any one moment. At any one moment, the resources available to you are limited, and you must choose how you wish to allocate those resources. If you do one thing, you cannot do another. If you chase down a false positive, that leaves less resources to deal with other positives. Computer security folks are well aware of denial of service attacks. I think that the Transportation Security Administration folks are less aware.

Let's say that I wanted to get something through security. The best way to do it is to try sending pristine folks through security in a way that will trigger a false positive. While security is dealing with them, they go through security themselves, to find out what level of false positives are needed to overwhelm security. At some level, the security folks are likely to start sending people through with decreased scrutiny.

Of course, the whole increased airport security thing is a moronic waste of time. No hijacker would dream of hijacking a US airplane. Everyone would assume the worst, and fight the hijacker for their lives. There was a reason why there were four sets of simultaneous hijackings, and why Flight 93 ended up on the ground in Shanksville, PA instead of Washington DC. Airports were secure enough before; what was not secure was the instructions given to flight crews to cooperate with hijackers. Bombs on airplanes are still a risk, but for killing people, you can't beat a crop duster flying over any outdoor festival.

We have built a Maginot Line in our airports. You can be sure that the next terrorist attack will come in through the Ardennes Forest or the Low Countries. The economics virtually guarantees it.

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