Friday, December 23, 2016

The New Year's Game

US tax code creates some… interesting incentives. One of these is the New Year’s Game: a once-a-year opportunity for individuals to make an expected annualized return of 10% to 20% on a $3000 investment.

In the US, money made from selling any sort of investment instrument (usually financial assets or real estate) held for at least one year, is classified as long-term capital gains. So if I buy a stock or option contract on December 28 this year, and sell it on December 29 next year, then any profit made on trade is classified as long-term capital gains. Long-term capital gains are taxed at a much lower rate than ordinary income: 0% for individual income up to $37650, 15% up to $415050, and 20% from there. (Note that this is federal tax only.)

Aside from long-term capital gains tax, the other interesting thing about investment income is what happens when investments generate a loss. Individual investors are allowed to deduct up to $3000 of capital losses from their taxable income each year.

Together, long-term capital gains tax and capital loss deduction create an asymmetry: gains on investments are taxed at the lower capital gains rate, while losses are deducted from higher-taxed ordinary income. Let’s look at an example to see how it plays out.

Let’s say I pay 15% tax on long-term capital gains, and 25% tax on ordinary income (I wish it were that low...). If I hold a stock for one year, and make $100 profit off of it, then I pay $15 in taxes and keep $85 after taxes. On the other hand, if I lose $100 on that stock, then I deduct that $100 loss from my ordinary income and get $25 back with my tax return, so my effective after-tax loss was only $75. Thus the asymmetry: even if this investment is a coin flip, I still gain more in the good case than I lose in the bad case.

For simplicity, let’s assume that we’re investing in an efficient market with zero discount rate. That means the price of any asset is its average expected payout: if an asset has 50% chance of paying off $1.00 and 50% chance of paying off $0, then it costs 0.5*1.00 + 0.5*0.00 = $0.50.

In this simplified efficient market, an asset with a 50% chance of gaining $100 and a 50% chance of losing $100 costs 0.5*100 + 0.5*(-100) = 0, i.e. the asset is free to buy (we’ll talk later about how to implement this). But after accounting for taxes, this asset would return 0.5*85 + 0.5*(-75) = $5 on average. So we have an asset which is free to acquire, but has an expected after-tax return of $5!

The idea of the New Year’s Game is to push this idea to the maximum.

Abstractly, the trick outlined above works by turning ordinary income into long-term capital gains. In our simplified efficient market, everything has an expected return of zero, so all expected gains are offset by expected losses. But the expected losses are deducted from ordinary income, while expected gains are long-term capital gains. So for every expected dollar taken away from ordinary income, we add an expected dollar to capital gains. In other words, expected dollars are taken out of ordinary income, and put into long-term capital gains.

The expected gain is just the difference in tax rates times the amount of money moved from ordinary income to long-term capital gains. In the example above, the difference in tax rates was 25% - 15% = 10%, while the number of expected dollars moved was 0.5*100 = 50, for an expected gain of 0.1*50 = $5.

Since the profit comes from turning ordinary income into long-term capital gains, we maximize profit by turning as much income as possible into capital gains. Counterintuitively, the trick here is to maximize expected losses: because the market is efficient, expected (pre-tax) loss equals expected (pre-tax) gain equals the amount of money transformed from ordinary income to capital gains. The losses are capped at $3000: that’s the maximum amount we’re allowed to deduct from ordinary income, so that’s the maximum amount we can transform into expected capital gains.

So we want an investment which, in most years, loses exactly $3000.

Let’s choose an investment which has some small probability p of making a huge windfall return, and probability (1-p) of losing $3000. The expected loss will be (1-p)*3000, so on average, the investment returns (1-p)*3000 times the difference in tax rates. (The difference in federal tax rates is always 10% - 20%, depending on income.)

In practice, this can roughly be done with some number of long call options and the same number of short calls at adjacent strike prices, so the investment pays off some amount if the underlying stock ends up above $K, and loses $3000 if the underlying stock ends up below $(K-1). By adjusting the strike price, we can adjust the probability p that the investment pays off in any given year.

The main tradeoff is the probability p. For example, if p is ½, then the investment pays off every other year on average, but the long-run average return is only (1-p)*3000 = $1500 times the difference in tax rates. If p is ¼, then the long-run average return improves to (1-p)*3000 = $2250 times the difference in tax rates, but the investment only pays off once every 4 years on average. As p decreases, the long-run average return approaches its maximum limit of $3000 times the difference in tax rates, but the investment pays off less and less often (though the windfall when it does pay off gets larger and larger).

Once we pick a value for p, we need to pick a strike price for the long/short option pair. If the gain when it pays off is G, and the loss when it doesn’t is L, then with zero expected return, p*G = (1-p)*L, or L/G = p/(1-p). Pick a p-value, and this formula will tell you what L/G ratio you need. I won’t spell out all the details, but it should be straightforward to compute the payoff for both the gain and loss scenarios with each strike price K, and then pick an option pair close to your target L/G. After that, just divide $3000 by the loss amount to figure out how many to buy.

The final implementation detail is the one-year constraint: in order to qualify for long-term capital gains treatment, the investment must be held for at least one year. The final trading day of 2017 will be Friday, December 29, so the last chance to enter the New Year’s game for 2017 will be this coming week on Wednesday, December 28.

Saturday, December 10, 2016

A Conservative Approach to Climate Change

I think a big reason why conservatives ignore climate change is that the solutions usually proposed are very stereotypically liberal. Most are some variety of "Hey, let's all do our part to cut our energy usage!" The conservative's knee-jerk reaction to that is "Great! You guys have fun with that, and don't forget to join hands and sing kum-bay-ah when you're done."

Very important rule: if a proposed solution requires getting everyone together to pitch in, then conservatives probably aren't going to like it. Too much signalling, too small likelihood of success. Conservative solutions are all about making the solution happen, on time and on budget, whether anyone likes it or not.

Let's try to get into the mindset of a hypothetical conservative serious about climate change. Imagine that climate change were a very clear, immediate life-or-death threat, not just to cute coral species but to humans. Let's say that for some weird reason, once atmospheric CO2 crosses 500 ppm, major cities start blowing up at random intervals. What would be the conservative reaction?

Probably something like this:
1. Immediate shutdown of the power grid. A few areas with carbon-free power sources would be left online, mostly around the large damns in Washington and the southwest, and around nuclear plants. Areas with large solar and wind supply would be brought back online only when sufficient power was available, and alert systems would quickly be put in place to let people know when that was.
2. Fuel rationing. Mostly farming and shipping would receive priority. Need to keep people fed.
3. Demands for fuel rationing and grid shutdown in other countries, backed by threat of war.
4. A Manhattan project around geoengineering. If dumping iron in the ocean to produce an algae bloom can cut CO2, then we do that. Red tide? Worry about it after the CO2 drops.
5. Massive ramp-up in nuclear power construction. This would actually be very fast if the president declared a national emergency and completely overrode the usual zoning laws and approval processes. Mobile nuclear plants modeled after those used by the navy would likely come online first.

That's what a climate change strategy looks like when you stop fucking around.

Today, the threat is not nearly that immediate. 1-3 don't make sense without a very immediate threat. 4 does make sense, but it may or may not produce results. But 5? Nuclear power is what happens when you stop fucking around on climate change.

"But what about all that radioactive waste?" whine the liberals. "And those poor natives by the Cheyenne mountains? And those giant strip mines where the uranium comes from?"

Let's go back to the exploding cities scenario. That's a world where CO2 is a real threat to human survival. Let's even say that it requires 700 ppm CO2, to dampen the immediacy. So it's a few years out, but New York City is going to go boom. In that world, you shut up about the damn strip mines, and you build the damn reactors. Because when something is a real threat to human survival, nothing else is relevant. Nothing. Conservatives get this on a deep instinctive level. Liberals do not.

"But it's a few years out! As long as we've got the time, why not cut our energy use and build clean solar rather than dirty nuclear?" Does that sound like the strategy of someone who's worried about survival on a gut level? It's a lot like saying "Ok, the locusts are wiping out the crop. How about we cut back our food consumption by all going vegetarian? Then we can go organic, rather than using pesticides!" Conservative reaction: have fun with that. When the locusts swarm, we're calling Monsanto. If carbon's a real threat, we're going nuclear. Don't like nuclear waste? Fine. Worry about shifting to other power sources after the carbon threat is dealt with.

Look, solar panels and windmills and saving the rainforest are great for making people feel warm and fuzzy. But if you want to cut carbon, quickly and efficiently and economically and practically, then nuclear power and maybe geoengineering are the way to go. The root of the disagreement on climate change isn't whether or not it's happening. The root of the disagreement is that conservatives are big fans of efficiency and economy, and are definitely not happy with solutions which trade off efficiency and economy for warm fuzzies.

Conservatives see liberals suggesting warm fuzzy solutions to climate change, and assume that this whole climate change thing is just a made-up excuse for the warm fuzzies. After all, if it we actually feared for our lives from CO2, we'd be advocating nuclear power and geoengineering.

So I'll wrap it up with this: liberals, if you want to convince conservatives to support climate change action, then tell them that you want to fast-track nuclear power plant construction. See how they feel about that.

Wednesday, December 7, 2016

What Signalling Feels Like

Guest-written by Sisi Cheng.

Background: Eric Anderson suggested a post on what signalling feels like from the inside. Awesome idea! I've never explicitly practiced noticing myself signalling, but Sisi has. Most of this post is her work, and it opens in her voice.

At one point, I asked John if I could change my facebook profile photo to a couple-y shot of the two of us. I came up with all sorts of reasons: my old profile photo has been there for ages and it’s getting boring to look at; it’d be a good opportunity for us to go out and take a nice photo of us two...etc. In retrospect, all of these reasons were just excuses. The real reason was I wanted to signal that I was in a happy relationship.

It’s not wrong a priori to use a couple-y photo as your facebook profile picture. However, you may make very different choices in profile photos if you intend to signal a happy relationship vs. post a generic good shot of you. Understanding your motivations fully and realizing your intention to signal is important to optimizing your choices. This post focuses on what signaling is, what unintentional signaling feels like from the inside, and tips on how to spot it in yourself. This will help you realize when you’re unintentionally signaling, allowing you to make decisions like: a). Do I actually want to be signaling this? And b). Either stop signaling or signal more effectively.

What is Signaling?

Before we can spot signaling behavior, we need a better idea of what signaling is, psychologically. There are two main underlying factors in signaling: status and identity. Any signaling may include one or both of these factors, in varying amounts.


Using a couple-y facebook profile photo is a good example of signaling one’s status. Having a good, healthy relationship is a classic status symbol. I look around facebook and see that many of my friends have posted couple-y photos or updates from their happy relationships. I feel the need to one-up them (or at least match them) by showcasing my own happy relationship. A public visible photo feels a bit like having the last word in an argument, or a socially acceptable way to show off. Much of signaling is related to aspects of status, be it wealth, career success, marital happiness, or knowledge. Signaling is a way we establish our places on the social ladder and our positions in our friend circles.


Continuing with the theme of facebook profile photos, another time, I considered changing it to a group shot of me and my friends from work having fun at a party. I was unintentionally signaling a part of my identity: me as a member of my work group. Every time someone likes that photo, or every time I see it as I wander around on Facebook, it asserts that I’m part of a team. I get a warm fuzzy feeling inside every time I log in and am reminded of how well I fit-in with my colleagues. It feels good to have a well-defined in-group identity. It gives a sense of belonging and purpose. Often, signaling achieves such an effect by echoing a part of your identity, whether it be a relationship, a personality type, or a social group.

Like the above examples have shown, signaling is not inherently right or wrong. We just want to be aware of our underlying motivations so we have the opportunity to either stop it or do it with more efficiency. In my examples above, after much introspection and consideration, I decided against the couple-y profile photo because I felt it reinforced my relationship as part of my identity, and my desire to not have that effect outweighed the benefits of signaling my status of happily in a relationship. However, I decided to go for the coworker group shot, because I believed the sense of belonging with my colleagues can promote my happiness at work and boost my productivity. One can easily imagine that having made this decision to signal, I might optimize it by rallying several of the coworkers in the photo to all change their facebook profile photo to the same picture, amplifying the in-group identity.

How to spot unintentional signaling in yourself

Now that we understand the underlying factors to signaling, we’re ready for some self-reflection. A key to realizing you’re signaling is to understand your motivations. If you take a moment to examine your motivations, unintentional signaling should feel confusing: you want something but your explanations for why you want it doesn’t quite feel right. As soon as you suspect you might be unintentionally signaling, you should ask yourself “why do I want to do this thing I feel like I want to do?” and be very critical of your own answers. Does the answer make sense? Does doing this thing accomplish what I say I want, and could other things accomplish my nominal goal much more efficiently? Or do I have an underlying real reason I haven’t admitted yet?

Let’s walk through an example by following my train of thoughts in a moment where I realized I was unintentionally signaling. A few weeks after the Trump election, my facebook feed was still exploding with highly-political posts from my friend circle. One evening when I had some downtime, I started browsing my facebook feed, and every time I saw someone post a leftwing political article or opinion, I felt the need to like it or leave a comment. It was natural; I liked a lot of my friends’ posts on facebook: baby pictures, funny cat videos, thought-provoking articles… But usually I only reacted to content I really enjoyed or resonated strongly with me. As I took a pause from the mass-liking, I realized that I didn’t even read through the entirety of the last few linked articles, so I clearly was no longer enjoying the contents anymore. The thought that I was unintentionally signaling now crossed my mind. But what was I signaling? It wasn’t just to signal that I have lots of friends I interact with regularly, because I was drawn to a particular post type. Aha, I was signaling my political affiliation and in-group status by displaying solidarity with my left wing friends. All this took a few seconds, after which I decided to stop signaling and go read a book instead.

Sometimes, when you’re immersed in unintentional signalling, it’s hard getting that first seed of suspicion. Often, you feel that you want to do this thing so strongly that you forget to question your motivations altogether. I find it helpful to look at common examples of what people do to signal and develop my intuition for recognizing these things in myself. So to get you started, John made this list of common examples of signalling behavior:
  • Correcting grammar or spelling in conversation, when you know what the other person intended to say. This is a typical example of signalling knowledgeability, and most other forms of pedantry fall in the same category.
  • Purchasing certain products. Apple and Converse are the canonical examples of signalling products, but it’s not just about branding - it could be unnecessarily large trucks or unnecessarily small smart cars, it could be any jewellry whatsoever, it could be eating at an upscale restaurant, it could be an apartment with a view… all sorts of things.
  • Political applause lights. These are things you metaphorically “cheer” or “applaud” in order to show in-group status. Up-voting political articles on facebook without reading them obviously falls under this category. Lots of boilerplate political rhetoric is also signalling; see this post for a few examples.
  • Friendship and/or affection. We already discussed a few examples in this area, but one thing we didn’t discuss was countersignalling: I call my friends by their first name, but I call my best friend “hey assface”. That level of abuse signals trust and respect just by being comfortable enough to use it.
  • Remember in high school, when the goody two shoes sat at the front of the classroom and the troublemakers sat at the back? That’s identity signalling - in this case, signalling a conscientious or rebel identity, respectively.
  • Anything “hipster” is high-proof, pure, manifest signalling. Hipsterdom is basically signalling raised to an independent art form.
  • Business suits or branded hoodies, depending on industry, are standard ways of signalling in-group status at job interviews.
  • Virtue signalling. Eating lots of fruit and vegetables, sorting your recycling, and volunteering with a charity are all really good ways of signalling virtue (and many political things also fall under this category). However, these are all terrible ways of actually achieving the things which they are nominally about - the food pyramid was designed by agricultural lobbyists, the environment would be better off if all the time and money spent on household recycling were invested in rainforest preservation, and there’s the old question of why a high-paid lawyer spends an hour in a soup kitchen, rather than spending an hour working and hiring minimum-wage labor for a week at the soup kitchen.

Thursday, November 24, 2016

Avoiding the "Smug Liberal" Trap

Background: This is the fifth piece in a series on understanding conservative intuitions and communicating effectively with conservatives, for liberals. Please read the previous post BEFORE reading this one. The SSC zombies post is also strongly recommended. Earlier posts are optional.

Trigger warning: brief discussion of racism and college rape discussions.

Last post talked about signalling moral superiority. We used the example of "LGBT" vs "LGBTQ" vs "LGBTQIA" vs "LGBTQIAPK" vs "LGBTQQIP2SAA". This post talks about how that sort of thing can spoil conversations with conservatives.

For now, let's forget about conservatives for a moment. Let's say you're a badly stereotyped liberal talking to a fellow badly stereotyped liberal, and you bring up the topic of LGBT rights - maybe something like "hey, there's an LGBT rights march in the city next weekend, are you interested?". Your fellow liberal says something along the lines of "Yeah definitely, I should really be more involved in the LGBTQIAPK community.".

At best, that's going to raise an eyebrow. At worst, a response like that comes across as someone trying to show how morally superior they are, by memorizing all those extra letters, despite apparently not being all that involved in the relevant community. Depending on context, it could seem extremely pretentious (and often disingenuous to boot).

Obviously this is an exaggerated example. But when engaging with conservatives, it's important to pay attention to this sort of thing. Even conservatives who support LGBT rights are going to find it slightly pretentious if you talk to them about LGBTQ rights - not because they don't support queers, but because they feel like you're just trying to one-up them.

If you want to actually get through to someone, teach them something or change their mind, then you need to build some rapport. Making them feel like you're one-upping them is basically the opposite of building rapport. If you want to get through, don't try to seem morally upstanding; instead, play up your own moral weaknesses. On the other hand, remember that conservatives usually don't try to signal morality to nearly the extent that liberals do. So if a conservative seems to be signalling against something, remember that they might just not be signalling at all.

Some examples:
1. Racism is a great area to apply this, because practically everyone is at least a little bit racist (source: implicit association tests). Maybe say something like "look, I get a bit nervous when I'm walking alone at night and I pass a big black guy. That's a pretty ingrained instinct in our culture. But that doesn't mean that instinct is right, and we certainly don't want cops to go shooting people just because of that instinct...". You might try saying something like this even if you don't actually feel nervous.

2. Ambiguous cases make good signalling opportunities. College rape is a good example of this. There are (lots of) obvious clean-cut cases, like date rape drugs. But arguing that we need to crack down on date rape drugs is not very useful from a signalling perspective - practically everyone will agree with that, so arguing for it doesn't say much about you. On the other hand, there are people who argue that we should believe virtually every accusation, or that it should count as "rape" if a woman decides in hindsight that sex was a bad idea. These are more questionable. And because these ideas are questionable, arguing in favor of them sends a very strong signal - no one would argue in favor of ideas that extreme unless they were really concerned about college rape.

If you want to communicate effectively with conservatives, then try to notice this pattern. Even if you really honestly think that we should believe virtually all rape allegations, you should still recognize that reasonable people can find this pretty questionable, and it will require pretty strong evidence to make a case (you can find this evidence if you look - but most people haven't). Just because people don't agree with you outright does not mean they're bad people who hate women, it might just mean that they're not signalling as hard. And you still need to build rapport - open with something like "I know it sounds surprising, I thought it sounded ridiculous at first, but I looked at the data and...". Again, try saying this even if you didn't question it at first.

2b. Not necessarily a signalling thing, but as a general rule of political discussion etiquette, try to avoid the "mott and bailey" trick. I've seen this come up e.g. when discussing feminism - going from "feminism just means supporting equal treatment for women and men" to "opposing abortion means opposing equal treatment for women and men". The former is easy to defend. The latter is harder to defend. They are not logically equivalent.

In practice, mott-and-bailey arguments frequently accompany ambiguous-case signalling. If someone calls you out on using a mott-and-bailey, just admit that your argument was wrong, but make it clear that just because the argument was wrong doesn't make the conclusion wrong. Contrary to instinct, people will be far more likely to believe you later if you admit you were wrong at some point, so don't be afraid to really ham up an apology.

3. Remember that economics is a thing. There's the classic cautionary tale of rent control: New York City originally adopted rent control to protect lower-income people from exorbitant rent. After that, developers stopped building low-cost apartments, because rent control meant that prices couldn't adjust to demand, and tenants would hold rent-controlled apartments for decades. To this very day, there is a huge shortage of low-cost apartments in NYC. But there is an abundance of "luxury" apartments - apartments past a certain price point are not subject to rent control. In short, rent control accelerated gentrification.

Why do I bring this up in a signalling discussion? When someone argues against rent control or minimum wage or the ACA or what have you, there's a temptation to interpret it as signalling. It feels like they're against poor people or against sick people. Don't blindly trust that feeling; they may just be economically literate.

4. If you think someone is working against their own self-interest, that's a major red flag. I occasionally hear liberals talk about how lots of conservatives vote against their own interest because they're conned by Rupert Murdoch. That sort of thing should be considered unlikely a priori, so you better have a strong case for why people think they're following their own self interest. "Because fox news told them so" is not, by itself, a strong case. The rent control example is a strong case - something that has bad consequences long term seems good at first glance. If you want to argue that people are voting against their interest, then you should also figure out why it looks good at first glance.

Assuming that you know what is good for a person better than that person may be the fastest way to get labelled a "smug liberal". Of course, there will be cases where you do know what's better, but that does not mean it's a good idea to say so! The relevance of signalling is left as an exercise to the reader.

Closing reminder: please remember that the point here is how to talk to conservatives, not who's right. Just because I suggest avoiding an argument, does not mean that the thing the argument supports is wrong.

Wednesday, November 16, 2016

The Inevitable Post about Signalling

Background: This is the fourth piece in a series on understanding conservative intuitions, for liberals; here are the first, second, and third. Second is optional, and just discusses current events.

The zombies piece hypothesized that liberal instincts are evolutionarily adapted to a world of abundance. It also mentions "what would no doubt be the main pastime of the people of this world: signaling". In order to talk more about how conservatives see the world, and especially how conservatives see liberals, we need to cover some background info on what that means. In particular, we need to talk about moral signalling as a memetic penomenon. Hopefully, this will help you understand some of your own thoughts, even before next post's discussion of conservative perceptions.

Let's start with a rich person, who wants to signal their wealth. Oldest signalling problem in the book: the rich person buys something very expensive, and utterly useless, which no one would possibly bother buying unless they had lots of money laying around.

Now let's crank it up a notch. The first rich person was the standard nouveau riche, flaunting their money about. The old money families want to signal that they are NOT the nouveau riche; they want to signal their social superiority. Thanks to years of expensive schooling, they are in no danger of being mistaken for poor, so they signal their old money by NOT buying useless expensive things. This is the classic example of countersignalling.

But it doesn't just stop with signalling and countersignalling. Perhaps the "old money" is only old by American standards, and European aristocratic families want to signal their superiority to the both the nouveau riche and American old money by buying even more expensive things. And then there's people even higher up...

We can extend to a whole continuum of wealth or status. At each point on the continuum, people try to signal slightly higher status by acting like the people ranked just above them. If we remove external constraints, e.g. wealth, then it becomes purely a game of acting like the people a few steps above you on the social ladder. The people at the very top act as trendsetters, and whatever trends they decide to adopt wind up propagating down the line. If the people at the top start wearing funny hats, it propagates down the line, and pretty soon everyone is wearing funny hats. Now imagine that status is not a simple line, but a complicated web, perhaps even an *inter*web, and you start to see how signalling games can propagate around memetically.

But we're not here to talk about games of signalling wealth. We're here to talk about games of signalling moral superiority.

Once upon a time, there was the LGBT community.

One day, someone came along and said "You know, we should signal our support for queer and questioning people too. How about, rather than just LGBT, we use LGBTQ?" Well, certainly nobody wanted to signal a lack of support for the queer and questioning communities. "LGBTQ" was clearly more inclusive of marginalized groups than "LGBT", and therefore morally superior. And so "LGBTQ" began to propagate through the memespace.

Now some people came along and said "But wait! There are other alternative sexualities too. What about asexuals?" And so "LGBTQA" entered the lexicon.

Around this same time, "intersex" was also added, and after a brief issue with a race condition, "LGBTQIA" appeared.

When I was writing this, I thought about writing "LGBTQRSTUV" as a joke. Fortunately, I did a google search beforehand, and found out that "LGBTQIAPK" is somewhat standard, although competing standards include "LGBTTQQIAAP" and "LGBTQQIP2SAA". Unfortunately it does not appear that NIST has addressed this yet. I'm poking fun a bit at the end, but I don't want to criticize too much - an awful lot of value comes about from moral signalling. The goal, for this post, is just to provide a little intuition for what moral signalling memetics look like. In a sense, it's intuition for your intuition.

Tuesday, November 15, 2016

Understanding Conservatives, for Liberals: Goals

Background: A lot of my liberal friends have suddenly realized over the past few days that they live in an echo chamber. Many of them want to know what typical conservative beliefs look like, beyond the small minority of fundamentalists and nationalists usually portrayed in liberal media outlets.

The first few posts in this series were mostly about current events. The remaining posts will shift focus. This post is a mid point; it's a good opportunity to lay out some objectives.

My main objectives for this series are as follows:
1. I want to provide liberals with a framework for understanding how conservatives actually think/feel. It's all too easy to imagine one's opponents as evil goblins who sit around thinking about how best to stir-fry babies. But most people, most of the time, do not see themselves as evil; almost everyone thinks they're the hero of the story. In order to engage productively in the real world, we need to understand how conservatives see the world and themselves, rather than imagine cartoon conservatives who hold meetings on how best to heat up the planet and fleece poor people.

(Side note: How best to heat up the planet and fleece poor people are actually very interesting theoretical problems. Unfortunately it's difficult to find people, either conservative or liberal, who share my interest in this sort of thing.)

2. With an understanding of how conservatives think/feel, we can talk about how conservatives' emotions and intuitions connect to conservative political positions (and liberal positions, too). The goal is to anticipate how a conservative will react *intuitively* to a new policy proposal. In practice, people make all sorts of logical arguments, but these only rarely change minds. More often, a person's stance on policy is determined by knee-jerk, intuitive reactions, and the arguments are filled in later. So if we want to engage productively, we should structure our arguments to fit the intuitions of the audience. Those intuitions will then work with us rather than against us, and the audience will argue *themselves* into agreement.

3. Address relative advantages/disadvantages of both liberal and conservative viewpoints. Arguing more effectively is one thing, and I'm sure many people reading this series are just interested in that aspect. But personally, I sometimes think about effective policy. In order to design effective policy, it's important to recognize the relative advantages on both sides of the political spectrum, and ideally integrate any relevant insights from both. Heck, it might even turn out to be useful for arguing more effectively, too.

Fortunately, (1), the framework for understanding, has already been done by a much better writer than myself: it's the zombies piece linked from the first post in this series. The series itself is mostly about applying that framework.

Sunday, November 13, 2016

What Might Trump Actually Do?

Background: This post is part of a series designed to help liberals get inside the heads of conservatives. My own views on Trump are here, and an overview of mainstream conservative beliefs is here. This post in particular mostly tries to evaluate likelihood of actions without getting into how good/bad those actions would be.

Remember where Trump comes from: he's a real estate developer who does megadeals. That identity has consumed him, it's who he is on deep level. He tells the investors whatever they want to hear. He hires competent people. He wheels and deals and greases palms, and he gets the project done (which may or may not be the same project he promised).

Those habits are not going to go away.

Step one to guessing what Trump will do is to recognize that voters are the investors. He's been saying whatever people want to hear for over a year. If we want real predictive power, we need to basically ignore anything that came out of his mouth. But anything with the word "contract" on it is probably reasonably reliable... bearing in mind that the exact wording of that contract matters, because it's likely to be intentionally misleading in places.

What follows is a brief tour of Trump's Contract with America. Before we dive in, it's important to have some idea of what's plausible, and where to be more skeptical. This document is the closest thing Trump had to a platform during the election. It's meant to pander to his base, and various specific political groups. That said, Trump's still a con man, so we should keep an eye out for misdirection, especially in the pandering parts. Also, there's a number pandering proposals which will certainly be struck down by Congress. On the other hand, in areas where Trump isn't clearly pandering to anyone specific and doesn't make promises which Congress will certainly strike, the "contract" probably lays out actual plans.

Let's dive in, section by section.

Section 1: Term Limits, Lobbying, etc...
This section opens with a congressional term limit proposal. Needless to say, that's unlikely to ever actually pass, but hey, he's welcome to propose it.

Next two items are a federal hiring freeze, and a rule that two old regulations must be removed for each new regulation added. Both of these are feasible, as they would require only an order from the sitting president. The exemption categories for the hiring freeze are pretty broad, but the regulation rule could have some real teeth.

Finally, there's a few items around lobbying and fundraising bans. It's not clear whether these could be implemented without congressional support (congresscritters are unlikely to support banning themselves from lobbying).

Section 2: Boo Trade, Yay Jobs, Fuck Da EPA...
The first four items in this section are all trade related, and include renegotiating NAFTA and the abandoning the TPP. All of them are feasible and do not require immediate Congressional support. Given Trump's background striking big real estate deals, I suspect he's eager to try negotiating a trade deal like NAFTA. However, the language in these items is ambiguous in places, and leaves plenty of room for Trump to maneuver as he gets to know the trade landscape.

The next two items involve trade-offs. In both cases, the Obama administration made trade-offs in favor of the environment over the economy, and Trump wants to reverse those. With republicans in Congress, this is feasible and will likely be a priority for congressional leadership as well.

Finally, Trump proposes dropping funding for UN climate change programs, and redirecting the money to US infrastructure. As grandstanding goes, this is almost comically conservative. Relatively speaking, the numbers involved probably aren't huge (for either the US or the UN). The current main targets of US funding to the UN are not climate programs, and the US is a significant but not top donor to UN climate programs.

Section 3: Boo Immigration & Miscellaneous...
First up, Trump promises to cancel every "unconstitutional" executive order issued by Obama. So basically just yelling "boo Obama" and then not really promising anything.

Next up, a promise to appoint new justices who will "defend the Constitution". Definitely signalling judicial restraint. Conspicuously absent here is any mention whatsoever of abortion or marriage - this strongly suggests Trump will completely ignore those issues.

The last three items are all immigration related. These sound pretty hard on immigration, but look closer and the most telling item is a promise to remove "two million" immigrants. Turns out, two million is roughly the same number the Obama administration removed, per term. Funny coincidence, that. Sounds like Trump is trying to con some voters.

Page Two: Proposed Bills for Congress
Since these are all items which involve Congress, Trump's team has a lot more freedom to pander here, with the expectation that Congress will strike down the bills. That means we need to be a lot more skeptical of these proposals, especially if it's unlikely to pass Congress.

2-1: Tax cuts. Republican president, republican Congress, there's going to be tax cuts. No surprise there.

2-2: Tariffs. Not sure how this one plays out in Congress; republicans haven't historically been very protectionist, but politics could change that.

2-3: Ambiguous, supposedly revenue-neutral infrastructure plan. Likely to turn into a pork-barrel Christmas tree once Congress gets their hands on it.

2-4: Charter schools etc. Long list of education-related ideas here; at least some are likely to pass.

2-5: Repeal Obamacare, streamline FDA approval. Again, an obvious target for a republican Congress.

2-6: Childcare/eldercare tax cuts: Likely to pass.

2-7: The wall. The wall's kind of a red herring (mostly symbolic), the proposal's mostly about stricter punishments. The most aggressive parts are unlikely to happen simply due to prison capacity. Also, republican congressional leadership has been fighting for years to gain ground among hispanics; I'll be surprised if they give up on that.

2-8: More money for law enforcement. Likely to pass, unlikely to change anything, probably going to be pork-heavy.

2-9: Security. Controversial part is screening immigrants for "compatible values", which could morph into anything from stricter background checks to blatant discrimination against muslims. Again, not sure how congressional republicans will respond to this, considering how many voters it would piss off.

2-10: "Clean up Corruption in Washington Act". Lol, yeah right.

A few things to note, right off the bat: there is absolutely no mention of marriage or abortion. He does mention appointing new justices, and says "defending the Constititution" will be a priority. That sounds like avoiding judicial activism, but it doesn't sound like overturning anything.

There is some serious talk about immigration. The promise to deport 2 million sounds flashy, but it's a red herring - that's roughly the same number Obama's administration deported, per term. Cancelling all federal funding to sanctuary cities also sounds serious, but remember that little federal money goes straight to towns anyway. The 2 million number in particular makes me think that the immigration talk is all a straight-up smokescreen; Trump's just going to keep the status quo.

I'm sure some people will argue that it's not what's said here that's worrying, it's the horrible things Trump might do that he hasn't said. In principle, sure. But in practice... I think if Trump were planning to really go extreme on immigration or abortion or gay marriage or what have you, he probably would have mentioned it in a document specifically designed to pander to his base (i.e. the document we're talking about here). If anything, in most of the scary areas, this document sounds like it's trying to appease the base without actually doing most of the things liberals are scared about.

The one thing I'd be most worried about is discrimination against Muslims looking to immigrate. That said, it's not something Trump can do without Congressional support, and it would be a very politically risky move for republicans in Congress.

Also, if you're worried about climate change, then keep worrying. Trump is definitely going to undo some environmentally friendly policies. There will be another post about that a bit later in this series.

Saturday, November 12, 2016

Conservative Views, for Liberals

Background: A lot of my liberal friends have suddenly realized over the past few days that they live in an echo chamber. Many of them want to know what typical conservative beliefs look like, beyond the small minority of fundamentalists and nationalists usually portrayed in liberal media outlets. This is the first in a serious of posts on the subject. There is also a prequel on my own (definitely not typical conservative) views here.

Part 1: The broader conservative viewpoint on Trump

This Slate Star Codex piece about zombies is a hard prerequisite for this post. Don't even bother reading this post until you've read that; it's better written, more useful, and the next few paragraphs assume you've read it. It's also medium-length, so give it a bit of time. That piece will give you a very good idea of how conservatives see the world, and why they act the way they do. The rest of this post will talk about those ideas in the context of current events.

Done with the zombies piece? Cool. Hopefully you have an interesting new perspective on conservatives in general. Let's talk about how that applies to this year.

This year in particular, elitism was a major additional dynamic. From the perspective of most conservatives, the zombie apocalypse is imminent... for themselves. But there's also a bunch of urban, coastal, college-educated elites who seem insulated from the zombies. Those elites don't need to worry about factories or mines closing down. Those elites don't need to worry about the rapidly shrinking demand for workers without a college degree. Those elites, from the safety of their ivory towers, would rather argue about what bathrooms to use than address the immediate economic problems of half the country. Those elites want to tell the conservatives what to do, but they don't care about the conservatives' economic problems. That's the feeling. (Although that's not the language - the "elite/anti-elite" phrasing is itself somewhat leftist. But that's the feeling.)

Hopefully you can see where somebody like Trump - low-brow, often crass, decidedly not a gentleman or scholar - might appeal to people with that sort of feeling.

And it's not just white males. Trump outperformed across the board among people without a degree - in fact, compared to 2012, he even slightly outperformed Romney among the latino/latina community. Apparently, one in three latino/latina voters either don't put much stock in Trump's racial rhetoric, think his anti-elitist attitude outweighs it, or both. This should not be surprising. By the numbers, minority communities share those zombie-apocalypse economic problems.

But don't think that anti-elitism was the only factor. As the examples below illustrate, standard conservative positions were still the main driver in the election. Elitism was more relevant than usual this year, but that doesn't mean it was the dominant factor for most Trump voters.

Part II: A few conservatives I know well...

a. My family
My family, including both parents, four aunts/uncles, and grandfather, are all self-employed. They all support LGBT rights, they all want free immigration, but what they really care about is regulation and taxes. Every one of them watched their health insurance premium go through the roof this year - that's what happens when insurers can't turn people away for pre-existing conditions. What they wanted most this year was to get rid of the ACA, and go back to the insurance they had before. They want regulatory reduction, they want spending cuts. Fun fact: self-employed people pay twice as much of their income into social security. No one in my family ever expects to see any of that money again. They've written off that loss - they just wish they weren't still stuck paying into it.

b. A few friends in the military
They're not big fans of gun control. Also, there's always a certain amount of tension between the military and the state department, so of course there's a list of gripes about things Hillary did as secretary of state. But I think what really matters for many of these people is group identity: many of them went straight into the military after high school, and I think Trump's anti-elitist identity really resonated with them (even though they might not use fancy words like "resonate"). Some (not all) of them were fairly racist back in high school, but that turned around pretty quick once they joined the military. Turns out there's a high fraction of racial minorities in the military.

c. Several other friends from high school
Health insurance hikes were a common theme, and anti-elitist identity was popular. On the democratic side, there's ongoing talk about making college more accessible to all. A number of my high school friends never went to college, don't want to, see most degrees as useless, and certainly don't want their hard-earned cash taken away to subsidize other people getting useless degrees. The phrase "underwater basket weaving" comes up from time to time. There's a number of jokes about what all the democrats do while the republicans are at work. I remember an article at one point about hipsters with various useless college degrees using food stamps to buy free-range chicken at Whole Foods. That's how my republican friends from high school view the democratic party.

Next post in this series is on what I think Trump will actually do

Friday, November 11, 2016

Why I Like Trump... AND Hillary

First, some general principles which underlie my view. I feel that the vast majority of the impact of a president comes from day-to-day work, mostly outside the spotlight, which is mostly unrelated to popular political issues. Furthermore, most of that day-to-day work is highly specialized, requiring special knowledge and skillsets. I believe that most presidents, regardless of party, perform far better during their second term primarily because they've acquired the requisite knowledge and skills.

On the flip side, the public mostly supports very bad ideas, on both sides of the isle. The vast majority of people, including myself and probably you, knows very little about economics, foreign diplomacy, legal procedures, or bureaucratic feasibility. (Democracy is still better than anything else we've tried, but it has major downsides.)

Put two and two together, and the ideal political candidate is somehow who tells people exactly what they want to hear, gets elected, and then completely ignores everything they told people.

In this election, Hillary was certainly the better candidate in terms of having the requisite knowledge and skills, more so than any other first-term candidate in recent memory. Unfortunately, Hillary also seems conscientious enough to be at least somewhat honest. She had to make promises in order to be electable, and she would have carried through on some or all of those. Now, this where you and I might disagree: you might think most or all of the things she promised would be great. I'm not going to bother digging in to that. But I will say that I thought Hillary's competence made her a great choice this year, and I would have loved a Hillary presidency.

Now back to Trump. If ever there was a complete huckster, a con-man who is master at the art of schmoozing and suckering, it's Trump. One of the two things that I really like about a Trump presidency is that there's no way in hell this guy is keeping his campaign promises. Maybe we'll get a two-mile "wall" on the Mexican border, with lots of fanfare, but there won't be anything with real impact. The other thing I really like about Trump is that he has an established reputation for bringing in the most competent people to do the actual work. That's not as good as having all the right knowledge and skills himself, as Hillary does. It's a higher-variance choice. But if Trump's presidency goes anything like I expect, he'll be offloading all the work to extremely competent people, and he'll spend his time going around blustering and bullshitting and generally telling the public whatever they want to hear. In the best case, the competent people will get a great deal of freedom to do what needs to be done, while Trump bullshits the media. That could be even better than a Hillary presidency. In the worst case... well, worst case is that Trump does what he said. Like I said, high variance.

On the bright side, the worst case is that Trump turns out to be completely honest and does exactly what he said. So not very likely. Reasonable to worry about, but unlikely, especially considering the political views he espoused back before running for president.

To wrap it up, I should mention that roughly 1 in 3 latino/latina voters voted for Trump (slightly more than Romney in 2012), so it's not just safe white guys who think the risk isn't too high.

Thursday, November 10, 2016

How to Implement a National Popular Vote

There was a project for a while around implementing a national popular vote without a constitutional amendment (I think this is it). Since states are free to apportion electoral votes as they see fit, a national popular vote just requires that states controlling a majority of electoral votes commit to give all of their votes to the winner of the popular. Under the project setup, states individually pass bills committing to go along with this scheme as soon as enough other states agree to it.

I think that project has the right general approach - tackling the problem state-by-state, achieving a simple majority, and routing around the challenge of a constitutional amendment. The problem is that the states with a relative advantage under the electoral college probably won't want to give that up. And you will need the support of those states - precisely because they control an outsized portion of electoral votes!

What we really need is a setup that makes the national popular vote a Nash equilibrium. States with extra electoral votes need to be able to gain an advantage if they agree to a popular vote, but other states don't. So the trick is to set up a deal between two (or more) states, which puts them at an advantage relative to other states. I haven't figured out a perfect way to do it yet, but I may have a solution which is good enough.

Here's the idea (there are others): rather than a state allocating their electorals to the popular winner iff enough states agree, how about a state allocates all of their electorals unconditionally to the winner of the popular vote among states which have agreed?

Say, for instance, Alaska decides to form the "Alaska voting block". All of Alaska's electoral votes go to the winner of the popular vote within the block. Any state can join the block by agreeing to the same terms: all of their electoral votes go to the block winner. So now California comes along and is like "hey, we can pick up 3 electoral votes basically for free by joining Alaska's voting block. Let's do it." And then Texas takes a look and says "you know, California's popular vote is actually pretty split... we could swing the popular vote of the Alaska block if we join." And then New York hops on board. And so on. Pretty soon, the Alaska voting block is the dominant factor in an election, and all states need to join in order to have any say at all in the election.

To make this happen, you only need to pass a single bill, in a single state, and it doesn't even matter which state. Plus, whichever state is first gets to name the voting block!

Saturday, November 5, 2016

Game Theory vs The Halting Problem

The usual presentation of the Halting Problem goes something like this. Suppose we have some computer program H, which takes in the code for another program P. H(P) outputs "yes" if P, when run, will eventually stop (a.k.a. "halt"), or "no" if P will run forever.

Then we take the code for H, and use it to build a tricky program called G. G first runs H on itself - it gets H(G). If H(G) is "yes", then G immediately enters an infinite loop and never halts. If H(G) is "no", then G immediately halts. So, when H runs on G, G will halt if and only if H(G) is "no". But the whole point of H is that for any program, H says "no" if and only if the program does not halt.

In short, G breaks H. Given any supposed halting-predictor program H, we can easily write a program G which breaks it. Thus there is no perfect halting-predictor program: the halting problem is "undecidable".

Using the halting problem as a starting point, theoretical CS classes go on to prove all sorts of other problems are undecidable. I'm going to go in a different direction, one which I haven't seen before: I want to argue that the standard halting problem asks the wrong question.

First, let's rewrite the halting problem in game-theoretic terms. Rather than two programs, the game has two players: H and G. G has two choices: halt, or don't halt. H's goal is to predict whether G halts or not; H wins if it says "yes" and G does halt, or if it says "no" and G doesn't halt. G, on the other hand, want trick H: G wins if H says "no" and G halts, or loses if H says "yes" and G runs forever.

Here's a table to show the rules:

halt run
yes H wins G wins
no G wins H wins

Now, when computer scientists say the halting problem is "undecidable", what they're really saying is that this game has no equilibrium in pure strategies. What does that mean? Well, a "pure" strategy means that H and G always do the same thing. In this case, if H always says "yes", then G always wants to run forever; but if G always runs forever, then H always wants to say "no"; but if H always says "no"... You see the issue. There is no equilibrium in pure strategies, because either H or G will always want to change their choice.

Remember the movie "Beautiful Mind", about John Nash? Well, John Nash's original claim to fame was a proof that any game with finite players and finite choices has at least one equilibrium. (In fact, for the simple two-player zero-sum case here, Von Neumann proved existence of an equilibrium even earlier.) But there's a catch: the equilibrium isn't always in pure strategies. In order to find an equilibrium, players may need to randomize their choices. Strategies with randomized choices are usually called "mixed" strategies.

For the halting problem game above, there is one very simple equilibrium in mixed strategies: H picks "yes" or "no" randomly by flipping a coin, and G chooses whether or not to halt randomly by flipping its own coin. Half the time, the choices will match, and H will win. Half the time, the choices will not match, and G will win. As long G splits 50/50, H cannot do any better by picking "yes" or "no" more often. As long as H splits 50/50, G cannot do any better by picking to halt or not halt more often.

In general, no matter what program H is playing against, whether it's G or any other program, there is always some optimal strategy for H. For some programs, especially programs which aren't actively working against H, a pure strategy will work. For other programs, like G, a mixed strategy is needed. (Technical note: I'm brushing some things under the carpet here, specifically involving jump discontinuities and limits in strategies, but these are the sorts of things which can usually be worked around.)

So let's reformulate a game-theoretic version of the halting problem. The new goal is to write a (nondeterministic) program H, which takes in another (possibly nondeterministic) program P, and returns either "yes" or "no". For any program P, H should select "yes" or "no", possibly randomly, in order to maximize its win rate, i.e. maximize the probability that H correctly guesses whether P halts.

Is this problem solvable? I don't know yet. Maybe it will turn out that this new halting problem is still undecidable. But the good news is, we're at least asking a reasonable question this time, not just searching for pure-strategy equilibria. And if it turns out that this game-theoretic halting problem is solvable, then the consequences would be significant: the undecidability of many other problems is based directly on the halting problem, or proven using the same method. The same technique should provide a practical approach to a wide variety of other problems, if the new problem is indeed solvable.

Finally, for anyone reading this who is familiar with both game theory and the undecidability proof of the halting problem: this should all have been fairly obvious. There is no way that this hasn't been thought of twenty times over. So why can't I find any literature on it? Am I not searching for the right terms? What results are known?

Tuesday, October 4, 2016

Rich People Pay Consumption Tax

Suppose the owner of a medium-size business makes $1M profit in a given year, before taxes. If the owner takes that money out of the business directly, e.g. as a dividend or salary, then it gets taxed as ordinary income. But what if the owner decides not to take all that money as income? Instead, maybe the owner takes home just $200k for spending money, pays ordinary income tax on that, and leaves the rest in the company. The remaining $800k is reinvested in the business - perhaps by buying new equipment, opening a new branch, etc.

Alternatively, suppose an executive at a Fortune 500 company makes $10M worth of stock options. With the right contract structure, they can hold their $10M of stock for a year, then take home that money and pay capital gains tax on it. But what if the executive decides not to take all that money as income? Instead, maybe the executive takes home just $500k for spending money, pays capital gains tax on that, and leaves the rest in stock. The remaining $9.5M stays invested in the company, and the executive can even reinvest any dividends to avoid paying income tax on them.

In these cases, and others like them, people effectively pay taxes not when income is earned, but when it is spent on personal consumption. Any income invested is not taxed until the investment is cashed in and spent on consumption. There is a name for this sort of tax: consumption tax. Consumption taxes are like income taxes, except that tax is only paid on income "consumed", as opposed to income invested.

Economists tend to like consumption tax, because it incentivizes investments over consumption. That means people spend more on economic growth, promoting consumption tomorrow over consumption today. Opponents of consumption taxes argue that they would fall disproportionately on the poor, since lower-income people have to spend a larger fraction of their income on living costs. Of course, in practice, any consumption tax would likely be graduated much like today's income tax, charging a much higher percentage to the wealthy, so this opposition position is rather weak.

Now let's talk about the 1% for a minute.

The wealthy elite generally do not get paid primarily through salary or wages, but instead through company ownership. This could mean anything from a successful entrepreneur who owns their mid-size company outright, to a Fortune 500 CEO who gets paid mainly in stock options, to a real estate developer who owns a large share in various holding companies created for specific deals.

We hear all the time about how the wealthy avoid paying their "fair share" of taxes. Income through ownership vs salary or wages is the key distinction, but you won't find the reason written down anywhere in the tax code. Contrary to popular belief, it's not about capital gains vs income tax, and it's nothing to do with the alternative minimum tax. It's about reinvestment, just like the examples above.

In today's world, the wealthy pay a de-facto consumption tax. The biggest de-facto tax difference between the wealthy and the rest of us is that we have to pay tax on our investments *before* investing, while the wealthy only have to pay *after* cashing out. To make the system reasonably fair, either the wealthy should pay tax on investments, or the rest of us shouldn't. Economists will argue for the latter as providing better incentives, but there's a more important reason too: taxing the investments of the wealthy simply isn't feasible.

Consider the example of the mid-sized business owner. If the owner decides to buy new equipment, that's a business expense. The business' profits today are reduced due to the investment in new equipment. How can you tax that? Tax the revenue? The problems with that idea should be fairly obvious. Short of nationalizing all the nation's businesses, there's just no way to stop business owners from avoiding taxes on investments in their own business. As long as there are business owners, they can pay consumption tax. This doesn't just apply in the US - business owners worldwide use the same tricks, whether in ultra-progressive Europe or nominally-communist China or free-for-all Hong Kong.

Business owners get to pay consumption tax, one way or the other. The only way to make taxation fair is to switch from income to consumption tax. Conversely, if you personally would rather pay consumption tax than income tax, then you need to either own a business or arrange to be paid mostly in stock options.

One disclosure: the main reason I'm thinking about all this is that my income is now at the upper end of the salary scale - i.e., I'm borderline wealthy myself. I pay around 40% in taxes (state and federal). I had read that the wealthy pay under 20%, and I wanted to know how to get in on that.

Thursday, August 4, 2016

Queueing Theory Without Math

Queueing theory, as you might imagine, answers questions about queues. It expresses relationships between:
- arrival rate of items (where items might be customers, orders, calls, etc)
- processing rate of items (where processing might be checkout, fulfilling an order, answering the phone, etc)
- number of processors (where processors might be clerks, warehouse workers, customer service reps, etc)
- processing time
- length of the queue
- time spent in the queue
- noise in all of the above
The last item, noise, is most important. Arrivals usually aren't perfectly even. Processing time isn't perfectly even. Sometimes you'll get a bunch of arrivals at once, the processors will be swamped, and the items will spend a long time in the queue. Other times, arrivals will be slow, items will spend very little time in the queue, but the processors will have free time on their hands in between arrivals.

To help reason about this without math, we're going to imagine two queues, rather than one (see diagram below). One queue contains customers waiting for an employee. The other queue contains employees waiting for a customer. Whenever both a customer and employee are available, they pair up and do something (processing). Once they're done, the customer proceeds on their merry way, and the employee gets back into the employee queue to process another customer.

The two queue setup: customers queue up to wait for employees, and employees queue up to wait for customers. When a customer and an employee are available, they pair up and process. When processing is complete, the customer leaves, and the employee queues up for a another customer.

You might be thinking "but employees don't usually queue up, only customers queue up". The reason queueing theory is useful is that lots of things that we don't usually think of as queues, still act like queues. Any time you have a bunch of customers, or calls, or employees, or items waiting for the same thing, it's a queue. It doesn't need to be first-come, first-serve. Maybe service is random, like if incoming calls get routed randomly to customer service reps. Then the available reps are "queued", because they're all waiting for the same thing (an incoming call). When you go to the super market and there's a bunch of open cashiers, you can think of those cashiers as queued up awaiting customers.

Anyway, back to the two-queue diagram. Notice that at least one queue is always empty: either there are no waiting customers, or there are no waiting employees. If there were a waiting customer and a waiting employee, then they'd immediately pair up and start processing. Now sometimes, if you're lucky, a new customer will show up exactly when an employee finishes processing a previous customer, and the two will pair up without either of them needing to wait at all. That's the perfect scenario: both employee and customer have zero wait time. In reality, that never happens.

Both employees and customers will inevitably have to wait sometimes, because the real world is noisy. Sometimes a bunch of customers show up at once, or a few customers take a long time to process, and customers end up having to wait. The queue gets long, customer wait times go up, customers get unhappy. Other times processing goes quickly, or only a few customers show up, and employees have to wait. Customers wait times go down, but lots of employees are just queued up doing nothing, and management complains about costs. (see diagrams)

At least one of the two queues is always empty. In practice, there is a trade off between customers waiting (above) and employees waiting (below)

One of the key ideas in queueing theory is the tradeoff between how much time customers spend waiting and how much time employees spend waiting. By either adding more employees or making processing more efficient, we can cut customer wait time. But in either case, employees will spend more time waiting. Maybe we improve efficiency and customer wait times go down, but then management notices that employees are spending a lot of sitting around. They stop hiring for a while, the company grows, customers come into the system faster, and employees spend less time sitting around... but at the cost of longer customer wait times.

Let's call this the Golden Rule of Queueing Theory: The less time customers are waiting, the more time employees have nothing to do, and vice versa.

Corollary 1: If your employees are always busy, then your customers are waiting forever!

Corollary 2: In order to achieve low customer wait times, management must actively ensure that employees often have nothing to do.

Corollary 3: Efficiency improvements in processing will only improve customer wait times to the extent that employees have more free time.

Can we avoid the tradeoff? Sometimes, a bit. The reason for the tradeoff is noise: sometimes a bunch of customers show up at once and customers have to wait, other times few customers show up and employees have to wait. But if we can predict when a bunch of customers will show up, then maybe we can have extra employees available. If we know when few customers will show up, then maybe we can have fewer employees on hand at that time. Note that this requires both accurately predicting arrival rate, and the flexibility to match employees to that rate. Alternatively, if we're very flexible, then we can wait for a bunch of customers to show up and then add more employees right away. Walgreens, for example, does this: when the line at Walgreens exceeds three people, they will call store associates to the front, abandoning lower-priority tasks for later.

In practice, the flexibility part tends to be harder than the prediction part. Employees tend to have pretty set schedules. Ideally, employees will have alternative things to do, like at Walgreens. Then we can have plenty of employees without people sitting around. But if the employee is a specialist, then that can be tricky.

One trick that can help is combining individual queues into bigger queues. Imagine that two employees, Alice and Bob, each have their own separate queue of customers. Sometimes Alice is busy when Bob is bored, and sometimes it's the other way around. If they can share the same queue, then it's the same as Bob helping Alice when he's bored, and Alice helping Bob when she's bored. The easier it is to hand off a customer between people, the better this works. On the other hand, if Alice and Bob are two different kinds of specialist, then this doesn't work at all - Bob can't help Alice' customers, and Alice can't help Bob's customers.

Don't get too distracted by avoiding the trade off. Opportunities to better balance customers and employees are valuable and should definitely be pursued, but at the end of the day, the trade off will need to be addressed. A target needs to be set for customer wait times, with the understanding that sometimes capacity will exceed customers, and employees will have spare time on their hands. In fact, if customer wait times are to be kept small, then employees must have spare time. There need to be employees sitting around when a customer arrives, in order for the customer to be processed quickly. That's the crucial takeaway.