Checkerboard Puzzle, Moore's Law, and Growth Prospects

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My father the mathematician first posed the checkerboard puzzle to me back in grade-school, perhaps on some rainy Saturday. His version of the story went something like this:

The jester performs a great deed, and the king asks him how he would like to be rewarded. The jester is aware that the king is a highly volatile individual, and if the jester asks for too much, the king might just kill him then and there. The jester also knows that the king views his promise as sacred, so if the king says "yes" to the jester's proposal, then the king will honor that promise. So in a way, the jester's problem is how to ask for a lot, but have the king at least initially think it's not very much, so that the king will give his consent.

So the jester clowns around a bit and then says: "Here's all I want. Take this checkerboard. On the first square, but one piece of gold. On the second square, two pieces. On the third square, four pieces, and on the fourth square, 8 pieces. Double the amount on each square until you reach the end of the checkerboard."

In the story, the king laughs at this comic proposal and says,  "Your great deed was so wonderful, I would have happily done much more than this! I grant your request!"

But of course, when the king starts hauling up gold pieces from the treasury, he will discover that 2 raised to the 63rd power, the final spot on the checkerboard requires about 9 quintillion gold pieces (that is, 9 followed by 18 zeros). 

I've had some sense of the power of exponential growth ever since.  But what I hadn't thought about is the interaction of Moore's Law and economic growth. Moore's Law is of course named for Gordon Moore, one of the founders of Intel, who noticed this pattern back in 1965. Back in the 1970s, he wrote a paper that contained the following graph showing how much it cost to produce a computer chip with a certain number of components. Here's his figure. Notice that the numbers of component on the horizontal axis and the cost figures on the vertical axis are both graphed as logarithm (specifically, each step up the axis is a change by a factor of 10). The key takeaway was that the number of transistors ("components") on an integrated circuit was doubling about every two years, making computing power much cheaper and faster.


Ever since I started reading up on Moore's law in the early 1980s, there have been predictions in the trade press that it will soon reach technological limits and come to and end. But Moore's law marches on: indeed, the research and innovation targets at Intel and other chip-makers are defined in terms of making sure that Moore's law continues to hold for at least awhile longer. Stephen Shankland offers a nice accessible overview of the current situation in an October 15, 2012, essay on CNET: ""Moore's Law: The rule that really matters in tech"  (The Gordon Moore graph above is copied from Shankland's essay.)

As Shankland writes: "To keep up with Moore's Law, engineers must keep shrinking the size of transistors. Intel, the leader in the race, currently uses a manufacturing process with 22-nanometer features. That's 22 billionths of a meter, or roughly a 4,000th the width of a human hair." He cites a variety of industry and research experts to the effect that Moore's law has at least another decade to run--and remember, a decade of doubling every two years means five more doublings!

It's hard to wrap one's mind around what it means to say that the power of microchipo technology will increase by a factor of 32 (doubling five times) in the next 10 years. A characteristically intriguing survey essay  from the January 10 issue of the Economist on the future of innovation uses the checkerboard analogy to think about the potential effects of Moore's law. Here's a comment from the Economist essay:

Ray Kurzweil, a pioneer of computer science and a devotee of exponential technological extrapolation, likes to talk of “the second half of the chess board”. There is an old fable in which a gullible king is tricked into paying an obligation in grains of rice, one on the first square of a chessboard, two on the second, four on the third, the payment doubling with every square. Along the first row, the obligation is minuscule. With half the chessboard covered, the king is out only about 100 tonnes of rice. But a square before reaching the end of the seventh row he has laid out 500m tonnes in total—the whole world’s annual rice production. He will have to put more or less the same amount again on the next square. And there will still be a row to go.

Erik Brynjolfsson and Andrew McAfee of MIT make use of this image in their e-book “Race Against the Machine”. By the measure known as Moore’s law, the ability to get calculations out of a piece of silicon doubles every 18 months. That growth rate will not last for ever; but other aspects of computation, such as the capacity of algorithms to handle data, are also growing exponentially. When such a capacity is low, that doubling does not matter. As soon as it matters at all, though, it can quickly start to matter a lot. On the second half of the chessboard not only has the cumulative effect of innovations become large, but each new iteration of innovation delivers a technological jolt as powerful as all previous rounds combined."

Now, it's of course true that doubling the capacity of computer chips doesn't translate in a direct way into a higher standard of living: there are many steps from one to the other. But my point here is to note that many of us (myself included) have been thinking about the changes in electronics technology a little too much like the king in the checkerboard story: that is, we think of something doubling a few times, even 10 or 20 times, and we know it's a big change, but it somehow seems within our range of comprehension.

But when something has already been doubling every 18 months or two years for a half-century--it is continuing to double!--the absolute size of each additional doubling is starting to get very large. I lack the imagination to conceive of what will be done with all this cheap computing power in terms of health care, education, industrial process, communication, transportation, entertainment, food, travel, design, and more. But I suspect that these enormous repeated doublings, as Moore's law marches forward in the next decade and drives computing speeds up and prices down, will transform lives and industries in ways that we are only just starting to imagine.

Checkerboard Puzzle, Moore's Law, and Growth Prospects

To contact us Click HERE
My father the mathematician first posed the checkerboard puzzle to me back in grade-school, perhaps on some rainy Saturday. His version of the story went something like this:

The jester performs a great deed, and the king asks him how he would like to be rewarded. The jester is aware that the king is a highly volatile individual, and if the jester asks for too much, the king might just kill him then and there. The jester also knows that the king views his promise as sacred, so if the king says "yes" to the jester's proposal, then the king will honor that promise. So in a way, the jester's problem is how to ask for a lot, but have the king at least initially think it's not very much, so that the king will give his consent.

So the jester clowns around a bit and then says: "Here's all I want. Take this checkerboard. On the first square, but one piece of gold. On the second square, two pieces. On the third square, four pieces, and on the fourth square, 8 pieces. Double the amount on each square until you reach the end of the checkerboard."

In the story, the king laughs at this comic proposal and says,  "Your great deed was so wonderful, I would have happily done much more than this! I grant your request!"

But of course, when the king starts hauling up gold pieces from the treasury, he will discover that 2 raised to the 63rd power, the final spot on the checkerboard requires about 9 quintillion gold pieces (that is, 9 followed by 18 zeros). 

I've had some sense of the power of exponential growth ever since.  But what I hadn't thought about is the interaction of Moore's Law and economic growth. Moore's Law is of course named for Gordon Moore, one of the founders of Intel, who noticed this pattern back in 1965. Back in the 1970s, he wrote a paper that contained the following graph showing how much it cost to produce a computer chip with a certain number of components. Here's his figure. Notice that the numbers of component on the horizontal axis and the cost figures on the vertical axis are both graphed as logarithm (specifically, each step up the axis is a change by a factor of 10). The key takeaway was that the number of transistors ("components") on an integrated circuit was doubling about every two years, making computing power much cheaper and faster.


Ever since I started reading up on Moore's law in the early 1980s, there have been predictions in the trade press that it will soon reach technological limits and come to and end. But Moore's law marches on: indeed, the research and innovation targets at Intel and other chip-makers are defined in terms of making sure that Moore's law continues to hold for at least awhile longer. Stephen Shankland offers a nice accessible overview of the current situation in an October 15, 2012, essay on CNET: ""Moore's Law: The rule that really matters in tech"  (The Gordon Moore graph above is copied from Shankland's essay.)

As Shankland writes: "To keep up with Moore's Law, engineers must keep shrinking the size of transistors. Intel, the leader in the race, currently uses a manufacturing process with 22-nanometer features. That's 22 billionths of a meter, or roughly a 4,000th the width of a human hair." He cites a variety of industry and research experts to the effect that Moore's law has at least another decade to run--and remember, a decade of doubling every two years means five more doublings!

It's hard to wrap one's mind around what it means to say that the power of microchipo technology will increase by a factor of 32 (doubling five times) in the next 10 years. A characteristically intriguing survey essay  from the January 10 issue of the Economist on the future of innovation uses the checkerboard analogy to think about the potential effects of Moore's law. Here's a comment from the Economist essay:

Ray Kurzweil, a pioneer of computer science and a devotee of exponential technological extrapolation, likes to talk of “the second half of the chess board”. There is an old fable in which a gullible king is tricked into paying an obligation in grains of rice, one on the first square of a chessboard, two on the second, four on the third, the payment doubling with every square. Along the first row, the obligation is minuscule. With half the chessboard covered, the king is out only about 100 tonnes of rice. But a square before reaching the end of the seventh row he has laid out 500m tonnes in total—the whole world’s annual rice production. He will have to put more or less the same amount again on the next square. And there will still be a row to go.

Erik Brynjolfsson and Andrew McAfee of MIT make use of this image in their e-book “Race Against the Machine”. By the measure known as Moore’s law, the ability to get calculations out of a piece of silicon doubles every 18 months. That growth rate will not last for ever; but other aspects of computation, such as the capacity of algorithms to handle data, are also growing exponentially. When such a capacity is low, that doubling does not matter. As soon as it matters at all, though, it can quickly start to matter a lot. On the second half of the chessboard not only has the cumulative effect of innovations become large, but each new iteration of innovation delivers a technological jolt as powerful as all previous rounds combined."

Now, it's of course true that doubling the capacity of computer chips doesn't translate in a direct way into a higher standard of living: there are many steps from one to the other. But my point here is to note that many of us (myself included) have been thinking about the changes in electronics technology a little too much like the king in the checkerboard story: that is, we think of something doubling a few times, even 10 or 20 times, and we know it's a big change, but it somehow seems within our range of comprehension.

But when something has already been doubling every 18 months or two years for a half-century--it is continuing to double!--the absolute size of each additional doubling is starting to get very large. I lack the imagination to conceive of what will be done with all this cheap computing power in terms of health care, education, industrial process, communication, transportation, entertainment, food, travel, design, and more. But I suspect that these enormous repeated doublings, as Moore's law marches forward in the next decade and drives computing speeds up and prices down, will transform lives and industries in ways that we are only just starting to imagine.

Checkerboard Puzzle, Moore's Law, and Growth Prospects

To contact us Click HERE
My father the mathematician first posed the checkerboard puzzle to me back in grade-school, perhaps on some rainy Saturday. His version of the story went something like this:

The jester performs a great deed, and the king asks him how he would like to be rewarded. The jester is aware that the king is a highly volatile individual, and if the jester asks for too much, the king might just kill him then and there. The jester also knows that the king views his promise as sacred, so if the king says "yes" to the jester's proposal, then the king will honor that promise. So in a way, the jester's problem is how to ask for a lot, but have the king at least initially think it's not very much, so that the king will give his consent.

So the jester clowns around a bit and then says: "Here's all I want. Take this checkerboard. On the first square, but one piece of gold. On the second square, two pieces. On the third square, four pieces, and on the fourth square, 8 pieces. Double the amount on each square until you reach the end of the checkerboard."

In the story, the king laughs at this comic proposal and says,  "Your great deed was so wonderful, I would have happily done much more than this! I grant your request!"

But of course, when the king starts hauling up gold pieces from the treasury, he will discover that 2 raised to the 63rd power, the final spot on the checkerboard requires about 9 quintillion gold pieces (that is, 9 followed by 18 zeros). 

I've had some sense of the power of exponential growth ever since.  But what I hadn't thought about is the interaction of Moore's Law and economic growth. Moore's Law is of course named for Gordon Moore, one of the founders of Intel, who noticed this pattern back in 1965. Back in the 1970s, he wrote a paper that contained the following graph showing how much it cost to produce a computer chip with a certain number of components. Here's his figure. Notice that the numbers of component on the horizontal axis and the cost figures on the vertical axis are both graphed as logarithm (specifically, each step up the axis is a change by a factor of 10). The key takeaway was that the number of transistors ("components") on an integrated circuit was doubling about every two years, making computing power much cheaper and faster.


Ever since I started reading up on Moore's law in the early 1980s, there have been predictions in the trade press that it will soon reach technological limits and come to and end. But Moore's law marches on: indeed, the research and innovation targets at Intel and other chip-makers are defined in terms of making sure that Moore's law continues to hold for at least awhile longer. Stephen Shankland offers a nice accessible overview of the current situation in an October 15, 2012, essay on CNET: ""Moore's Law: The rule that really matters in tech"  (The Gordon Moore graph above is copied from Shankland's essay.)

As Shankland writes: "To keep up with Moore's Law, engineers must keep shrinking the size of transistors. Intel, the leader in the race, currently uses a manufacturing process with 22-nanometer features. That's 22 billionths of a meter, or roughly a 4,000th the width of a human hair." He cites a variety of industry and research experts to the effect that Moore's law has at least another decade to run--and remember, a decade of doubling every two years means five more doublings!

It's hard to wrap one's mind around what it means to say that the power of microchipo technology will increase by a factor of 32 (doubling five times) in the next 10 years. A characteristically intriguing survey essay  from the January 10 issue of the Economist on the future of innovation uses the checkerboard analogy to think about the potential effects of Moore's law. Here's a comment from the Economist essay:

Ray Kurzweil, a pioneer of computer science and a devotee of exponential technological extrapolation, likes to talk of “the second half of the chess board”. There is an old fable in which a gullible king is tricked into paying an obligation in grains of rice, one on the first square of a chessboard, two on the second, four on the third, the payment doubling with every square. Along the first row, the obligation is minuscule. With half the chessboard covered, the king is out only about 100 tonnes of rice. But a square before reaching the end of the seventh row he has laid out 500m tonnes in total—the whole world’s annual rice production. He will have to put more or less the same amount again on the next square. And there will still be a row to go.

Erik Brynjolfsson and Andrew McAfee of MIT make use of this image in their e-book “Race Against the Machine”. By the measure known as Moore’s law, the ability to get calculations out of a piece of silicon doubles every 18 months. That growth rate will not last for ever; but other aspects of computation, such as the capacity of algorithms to handle data, are also growing exponentially. When such a capacity is low, that doubling does not matter. As soon as it matters at all, though, it can quickly start to matter a lot. On the second half of the chessboard not only has the cumulative effect of innovations become large, but each new iteration of innovation delivers a technological jolt as powerful as all previous rounds combined."

Now, it's of course true that doubling the capacity of computer chips doesn't translate in a direct way into a higher standard of living: there are many steps from one to the other. But my point here is to note that many of us (myself included) have been thinking about the changes in electronics technology a little too much like the king in the checkerboard story: that is, we think of something doubling a few times, even 10 or 20 times, and we know it's a big change, but it somehow seems within our range of comprehension.

But when something has already been doubling every 18 months or two years for a half-century--it is continuing to double!--the absolute size of each additional doubling is starting to get very large. I lack the imagination to conceive of what will be done with all this cheap computing power in terms of health care, education, industrial process, communication, transportation, entertainment, food, travel, design, and more. But I suspect that these enormous repeated doublings, as Moore's law marches forward in the next decade and drives computing speeds up and prices down, will transform lives and industries in ways that we are only just starting to imagine.

Obesity and Healthy Snacks

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The rise in American rates of obesity can be traced back to what seems like a fairly small rise in daily calories consumed, I learned this lesson from an article on the causes of obesity about 10 years back in my own Journal of Economic Perspectives. In "Why Have Americans Become More Obese?" David M. Cutler, Edward L. Glaeser and Jesse M. Shapiro wrote that the "10- to 12-pound increase in median weight we observe in the past two decades requires a net caloric imbalance of about 100 to 150 calories per day. These calorie numbers are strikingly small. One hundred and fifty calories per day is three Oreo cookies or one can of Pepsi. It is about a mile and a half of walking."

Elizabeth Frazao, Hayden Stewart, Jeffrey Hyman, and Andrea Carlson apply a similar logic in "Gobbling Up Snacks: Cause or Potential Cure for Childhood Obesity?" which appears in the n the December 2012 issue of Amber Waves, published by the Economic Research Service at the U.S. Department of Agriculture. 

When I was a child, my mother had a clear-cut policy on before-dinner snacks: I was allowed to eat all the raw carrots I wanted. The parental philosophy appears to have gone out of date. The USDA economists explain: "Consumption of snacksamong children has increased markedly over the last 35 years. Inthe late 1970s, American children consumed an average of only onesnack a day. Today, they are consuming nearly three snacks per day.As a result, daily calories from children's snacks have increasedby almost 200 calories over the period." They propose that a shift to healthier snacks could play a useful role in cutting childhood obesity.

As a starting point, here's a table showing the calorie count for some fruit and vegetable stacks, compared with some commonly consumed snack foods. As a parent of three, I confess that I can't see my children snacking on broccoli florets. But grapes, strawberries, cantaloupe, or apples are all possibilities, and even among the snack foods, some choices like popsicles or fruit rolls are at least better than the alternatives.

One common reaction to this sort of list is that the healthy snacks cost too much. It is true that cookies, crackers, and chips make a relatively cheap snack, and some of the healthier choices, like tangerines, grape tomatoes, and strawberries are a costlier snack. But some of the unhealthy choices like muffins and Danish are also on the costly side, while bananas, oranges, and those good old carrot sticks are not especially pricey. Here are their calculations of cost-per-snack.

 Generalizing wildly from personal experience, as social scientists are wont to do, it feels to me as if a cultural shift has occurred about a "suitable" snack. Two of my children were, at different times, in soccer leagues where the parents organized themselves to make sure that each child got a "treat" of a cookie or chips and a large sugared drink after each game. When I coached a different youth soccer team, I brought bags of orange and apple slices for the players. As far as I could tell, the kids were equally happy with the oranges--at least once it was clear that cookies and chips would not be forthcoming.

Consuming healthier (and fewer) snacks could make a real difference to child obesity--and it makes sense for adults, too.

Checkerboard Puzzle, Moore's Law, and Growth Prospects

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My father the mathematician first posed the checkerboard puzzle to me back in grade-school, perhaps on some rainy Saturday. His version of the story went something like this:

The jester performs a great deed, and the king asks him how he would like to be rewarded. The jester is aware that the king is a highly volatile individual, and if the jester asks for too much, the king might just kill him then and there. The jester also knows that the king views his promise as sacred, so if the king says "yes" to the jester's proposal, then the king will honor that promise. So in a way, the jester's problem is how to ask for a lot, but have the king at least initially think it's not very much, so that the king will give his consent.

So the jester clowns around a bit and then says: "Here's all I want. Take this checkerboard. On the first square, but one piece of gold. On the second square, two pieces. On the third square, four pieces, and on the fourth square, 8 pieces. Double the amount on each square until you reach the end of the checkerboard."

In the story, the king laughs at this comic proposal and says,  "Your great deed was so wonderful, I would have happily done much more than this! I grant your request!"

But of course, when the king starts hauling up gold pieces from the treasury, he will discover that 2 raised to the 63rd power, the final spot on the checkerboard requires about 9 quintillion gold pieces (that is, 9 followed by 18 zeros). 

I've had some sense of the power of exponential growth ever since.  But what I hadn't thought about is the interaction of Moore's Law and economic growth. Moore's Law is of course named for Gordon Moore, one of the founders of Intel, who noticed this pattern back in 1965. Back in the 1970s, he wrote a paper that contained the following graph showing how much it cost to produce a computer chip with a certain number of components. Here's his figure. Notice that the numbers of component on the horizontal axis and the cost figures on the vertical axis are both graphed as logarithm (specifically, each step up the axis is a change by a factor of 10). The key takeaway was that the number of transistors ("components") on an integrated circuit was doubling about every two years, making computing power much cheaper and faster.


Ever since I started reading up on Moore's law in the early 1980s, there have been predictions in the trade press that it will soon reach technological limits and come to and end. But Moore's law marches on: indeed, the research and innovation targets at Intel and other chip-makers are defined in terms of making sure that Moore's law continues to hold for at least awhile longer. Stephen Shankland offers a nice accessible overview of the current situation in an October 15, 2012, essay on CNET: ""Moore's Law: The rule that really matters in tech"  (The Gordon Moore graph above is copied from Shankland's essay.)

As Shankland writes: "To keep up with Moore's Law, engineers must keep shrinking the size of transistors. Intel, the leader in the race, currently uses a manufacturing process with 22-nanometer features. That's 22 billionths of a meter, or roughly a 4,000th the width of a human hair." He cites a variety of industry and research experts to the effect that Moore's law has at least another decade to run--and remember, a decade of doubling every two years means five more doublings!

It's hard to wrap one's mind around what it means to say that the power of microchipo technology will increase by a factor of 32 (doubling five times) in the next 10 years. A characteristically intriguing survey essay  from the January 10 issue of the Economist on the future of innovation uses the checkerboard analogy to think about the potential effects of Moore's law. Here's a comment from the Economist essay:

Ray Kurzweil, a pioneer of computer science and a devotee of exponential technological extrapolation, likes to talk of “the second half of the chess board”. There is an old fable in which a gullible king is tricked into paying an obligation in grains of rice, one on the first square of a chessboard, two on the second, four on the third, the payment doubling with every square. Along the first row, the obligation is minuscule. With half the chessboard covered, the king is out only about 100 tonnes of rice. But a square before reaching the end of the seventh row he has laid out 500m tonnes in total—the whole world’s annual rice production. He will have to put more or less the same amount again on the next square. And there will still be a row to go.

Erik Brynjolfsson and Andrew McAfee of MIT make use of this image in their e-book “Race Against the Machine”. By the measure known as Moore’s law, the ability to get calculations out of a piece of silicon doubles every 18 months. That growth rate will not last for ever; but other aspects of computation, such as the capacity of algorithms to handle data, are also growing exponentially. When such a capacity is low, that doubling does not matter. As soon as it matters at all, though, it can quickly start to matter a lot. On the second half of the chessboard not only has the cumulative effect of innovations become large, but each new iteration of innovation delivers a technological jolt as powerful as all previous rounds combined."

Now, it's of course true that doubling the capacity of computer chips doesn't translate in a direct way into a higher standard of living: there are many steps from one to the other. But my point here is to note that many of us (myself included) have been thinking about the changes in electronics technology a little too much like the king in the checkerboard story: that is, we think of something doubling a few times, even 10 or 20 times, and we know it's a big change, but it somehow seems within our range of comprehension.

But when something has already been doubling every 18 months or two years for a half-century--it is continuing to double!--the absolute size of each additional doubling is starting to get very large. I lack the imagination to conceive of what will be done with all this cheap computing power in terms of health care, education, industrial process, communication, transportation, entertainment, food, travel, design, and more. But I suspect that these enormous repeated doublings, as Moore's law marches forward in the next decade and drives computing speeds up and prices down, will transform lives and industries in ways that we are only just starting to imagine.

Maybe Too Big To Fail, but Not Too Big to Suffer

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Which financial institutions are "too big to fail"? According to a report from the international Financial Stability Board, a working group of governments and central banks that tries to facilitate international cooperation on these issues, here's the list as of November 2012.

 Ready for a nice bowl of acronym soup? This list is actually the "global systemically important banks," known as the G-SIBs, which are a subcategory of the "global systemically important financial institutions," or G-SIFIs.  Already finalized, as the Financial Stability Board (FSB) explains, are guidelines for the "domestic systemically important banks," the D-SIBs, which national governments are expected to implement by 2016. Meanwhile, the International Association of Insurance Supervisors (IAIS) has proposed a method of deciding who is a "global systemically important insurers," the G-SIIs. The Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO) are now working on a method to idenfity the systemically important non-bank non-insurance financial institutions (no acronym yet available).

Meanwhile, the Financial Stability Oversight Council (FSOC) within the U.S. Department of the Treasury is working on its own lists. In its 2012 annual report, it designated eight systemically important "financial market utilities"--that is, firms that are intimately involved in carrying out various financial transactions. Here's the list: the Clearing House Payments Company, CLS Bank International, the Chicago Mercantile Exchange, the Depository Trust Company, Fixed Income Clearing Corporation, ICE Clear Credit, National Securities Clearing Corporation, and the Options Clearing Corporation. (And I freely  admit that I have only a fuzzy idea of what several of those companies actually do.)

In addition, the Dodd-Frank legislation presumes that U.S. banks are systemically important if their h holdings exceed $50 billion in consolidated assets. David Luttrell, Harvey Rosenblum, and Jackson Thies explain these points, along with a nice overview of many broader issues, in their Staff paper on "Understanding the Risks Inherent in Shadow Banking: a Primer and Practical Lessons Learned," written for the Dallas Fed. For perspective, they offer a list of the largest U.S. bank holding companies, all of which comfortably exceed the $50 billion benchmark for consolidated assets.


This litany of who is "systemically important" feels disturbingly long, and it's only getting longer. But ultimately, it's a good thing to have such lists--at least if they lead to policy changes. Once you have admitted that a number of financial institutions are too big to fail, because their failure would lead to too great a disruption in financial markets, and once you have then made a commitment that government should not bail out such institutions, what policy prescription follows?

The proposal from the Financial Stability Board is that the G-SIBs (global systemically important banks, of course) should face a different set of regulatory rules. As the Dallas Fed economists explain, these could include "higher capital requirements, supervisory expectations for risk management functions, data aggregation capabilities, risk governance, and internal controls." There are two difficulties with this approach. First, it may not work. After all, a considerable regulatory apparatus in the U.S. did not prevent the financial crashes from 2007-2009. And second, it may work with undesired side effects. In particular, if there are heavy rules on one set of regulated financial institutions, then there will be a tendency for financial activities to flow to less-regulated financial institutions. "If regulation constrains commercial banks’ risk taking, many questionable assets may simply migrate to less-regulated entities."

I don't oppose regulating the SIFIs (that would be "systemically important financial institutions") more heavily. But it's important to be clear on the limits of this approach. After all, it's not that these institutions are big, but rather that they are so tightly interconnected with other institutions. As Luttrell, Rosenblum, and Thies explain: "TBTF [that would be "too big to fail] is not just about bigness; it also includes “too many to fail” and “too opaque to regulate."”

It seems to me that the key here is to remember that maybe some institutions are too big to fail, but they aren't too big to suffer! In particular, they aren't too big to have their top managers booted out--without bonuses. They aren't too big to have their shareholders wiped out, and the company handed over to bondholders--who are then likely to end up taking losses as well. One task of financial regulators should be to design and pre-plan an "orderly resolution" as they call it. The trick is to devise ways so that if these systemically important firms run into financial difficulties, the tasks and external obligations of certain large financial firms will not be much disrupted, for the sake of financial stability,but those who invest in those firms and who manage them will face costs.

The National Taxpayer Advocate Speaks Up

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Yes,.there is a National Taxpayer's Advocate, and her name is Nina E. Olson. She has just released the National Taxpayer Advocate 2012 Annual Report to Congress. The report covers a lot of ground, each year looking at issues like taxpayer rights, taxpayer rights, identity theft, and other topics. Here, I'll just focus on one topic:  "The most serious problem facing taxpayers — and the IRS — is the complexity of the Internal Revenue Code." Here are some samples of the comments (footnotes omitted): 

• "According to a TAS analysis of IRS data, individuals and businesses spend about 6.1 billion hours a year complying with the filing requirements of the Internal Revenue Code. And that figure does not include the millions of additional hours that taxpayers must spend when they are required to respond to IRS notices or audits. If tax compliance were an industry, it would be one of the largest in the United States. To consume 6.1 billion hours, the “tax industry” requires the equivalent of more than three million full-time workers. ... Based on Bureau of Labor Statistics data on the hourly cost of an employee, TAS estimates that the costs of complying with the individual and income tax requirements for 2010 amounted to $168 billion — or a staggering 15 percent of aggregate income tax receipts."
• "According to a tally compiled by a leading publisher of tax information, there have been approximately 4,680 changes to the tax code since 2001, an average of more than one a day."
• "The tax code has grown so long that it has become challenging even to figure out how long it is. A search of the Code conducted using the “word count” feature in Microsoft Word turned up nearly four million words."
• "Individual taxpayers find return preparation so overwhelming that about 59 percent now pay preparers to do it for them. Among unincorporated business taxpayers, the figure rises to about 71 percent. An additional 30 percent of individual taxpayers use tax software to help them prepare their returns, with leading software packages costing $50 or more."
• "IRS data show that when taxpayers have a choice about reporting their income, tax compliance rates are remarkably low. ... [A]mong workers whose income is not subject to tax withholding, compliance rates plummet. An IRS study found that nonfarm sole proprietors report only 43 percent of their business income and unincorporated farming businesses report only 28 percent. Noncompliance cheats honest taxpayers, who indirectly pay more to make up the difference. According to the IRS’s most recent comprehensive estimate, the net tax gap stood at $385 billion in 2006, when there were 116 million households in the United States. This means that each household was effectively paying a “surtax” of some $3,300 to subsidize noncompliance by others."
• "From FY 2004 to FY 2012, the number of calls the IRS received from taxpayers on its Accounts Management phone lines increased from 71 million to 108 million, yet the number of calls answered by telephone assistors declined from 36 million to 31 million. The IRS has increased its ability to handle taxpayer calls using automation, but even so, the percentage of calls from taxpayers seeking to speak with a telephone assistor that the IRS answered dropped from 87 percent to 68 percent over the
  period. And among the callers who got through, the average time they spent waiting on hold increased from just over 2½ minutes in FY 2004 to nearly 17 minutes in FY 2012."
• "The IRS receives more than ten million letters from taxpayers each year responding to IRS adjustment notices. Comparing the final week of FY 2004 with the final week of FY 20102, the backlog of taxpayer correspondence in the tax adjustments inventory increased by 188 percent (from 357,151 to 1,028,539 pieces), and the percentage of taxpayer correspondence classified as “overage” jumped by 316 percent (from 11.5 percent to 47.8 percent)."
• "In 2012, TAS [the Taxpayer Advocate Service] conducted a statistically representative national survey of over 3,300 taxpayers who operate businesses as sole proprietors. Only 16 percent said they believe the tax laws are fair. Only 12 percent said they believe taxpayers pay their fair share of taxes."
• "To alleviate taxpayer burden and enhance public confidence in the integrity of the tax system, the National Taxpayer Advocate urges Congress to vastly simplify the tax code. In general, this means paring back the number of income exclusions, exemptions, deductions, and credits (generally known as “tax expenditures”). For fiscal year (FY) 2013, the Joint Committee on Taxation has projected that tax expenditures will come to about $1.09 trillion, while individual income tax revenue is projected to be about $1.36 trillion. This suggests that if Congress were to eliminate all tax expenditures, it could cut individual income tax rates by about 44 percent and still generate about the same amount of revenue."

Finally, I'm not the biggest fan of infographics,which often seem to me like overcrowded Powerpoint slides on steroids. But for those who like them, here's one from the National Taxpayer Advocate summarizing many of these points: