science is just no fun anymore

Just what we need, another reason to fall behind the BRIC countries. This paper reports that the science disciplines set up creative and inventive people to fail because the process to become an independent researcher is so tedious, boring, and time consuming.

Happy Birthday Ronald Coase

I have always been a Pigouvian, but Coase had some great insights into methods for eliminating externalities - which is a geeky way to say making life fair through policy.

No wonder he won a Nobel.

Macroeconomics and Fed policy

Another intelligent debate, this one on macroeconomics. I can't afford the time to add a new blog to my daily list (it seems he posts multiple topics per day), but I may not be able to help myself.

Intelligent Health Care debate

It's too bad that all debates on health care reform are not as intelligent as this one. Steven Landsburg's blog is one of my favorites and I am going to have to check out Cutler.

Pro-business versus pro-market

There has been a bit of discussion (for example here and here) on the difference between being pro-business and being pro-market. Pro-market means that you believe that the free market improves general well-being and economic growth because of Adam Smith's "Invisible Hand", Schumpeter's "Creative Destruction" and Keynes "Animal Spirits". This eventually leads to a higher standard of living for all, although admittedly with some bumps along the way.

Pro-business means that you believe that we should give political power to business because they are in the best position to know what is best. For example, we should bring together a group of hospital businesses, drug businesses, and insurance businesses to decide how to fix health care. The big banks should decide how to fix the financial system. And so forth.

Note that these two things are definitely NOT the same. Personally, I am pro-market but definitely not pro-business. I think business should have no more power than other groups. They are just as self-interested as unions, environmental groups, and political parties.

The problem is that many people in power don't see the difference. Ever since the financial/real estate/etc crisis hit, both the Democrats and Republicans have been significantly pro-business but anti-market. But putting all this power and money in the hands of a few big businesses, they are eliminating the creative destruction that could have ironed out many of the problems by now. Yes, banks and builders may have gone under, but something would have emerged to take their place. And the moral hazard that we created by naming many of these companies "too big to fail" will have lasting and devastating effects on entrepreneurship, small business, and I believe our standard of living.

A pox on all their houses.

Do you know WHY you support the issues you support?

I was listening to some discussion of Supreme Court Justice Stephens and his approach to the law and it got me thinking (what else is new?). According to the commentator, Justice Stephens is a supporter of abortion rights, but not because of the “Right to Privacy” that was in the original Roe v Wade opinion. A right to privacy means that the government should not pay attention to what you are doing in private. You could make the same case with the freedom from unreasonable search and seizure. Law enforcement can’t come in to your home or car (or body) without probable cause of a crime. But Justice Stephens justifies abortion rights using the Right to Liberty. The government should not get involved in your activities unless you are infringing on the rights of others. Since the fetus is not a person with rights, abortion does not infringe on the rights of anyone and so the government would need a very significant reason to prohibit it.

In the case of abortion rights, both philosophies support the rights. But other domains are different. Take same-sex marriage. A Right to Liberty would support same-sex marriage because it does not infringe on the rights of others. Some say that just the existence of these unions hurts the institution of marriage, but there is no substantial evidence of that that I have seen. But the Right to Privacy says nothing about same-sex marriage. Marriage is a public contract. It is done before witnesses. It comes with legal benefits and responsibilities. So if you support same sex marriage, you must believe in the right to liberty rather than privacy (of course you can believe in both if you want).

So here is what I was wondering. Take a third domain: single payer health care. To make this work, we would have to tax those with higher incomes to cover a substantial amount of the health care costs of those with lower incomes. In general, progressive income taxes can be justified in a variety of ways. Richer individuals benefit more from the trappings of society, so they should pay more for it. They have more to lose in an armed conflict, so they pay more for national defense. And so on. But with a single payer health care system, this would not be the case. Everyone would be eligible for the same care and the same medical benefits.

So we would be infringing on the rights of the more wealthy to pay for the care of the less wealthy. This goes against the basic right to liberty. That is OK, if you can justify it with a different right that you believe in and believe that it is a stronger argument here than liberty is. But if you support same sex marriage, it means that a single payer health care system violates a right that you believe in. So if you want to support both of these issues, you need to think of a different right that supports single payer but doesn’t contradict your other beliefs.

Do you have one? I know many liberal/progressive individuals who support same sex marriage and single payer. But most of them I think are just making instinctive decisions about how they would like things to be. But when one issue that you support contradicts another issue that you support, either you are being hypocritical or you have a third belief that resolves the issue. I am not calling anyone a hypocrite, I am encouraging you to think about your beliefs and figure out how you resolve the conflict. Do you think it is OK to infringe on the rights of the wealthy, but not homosexuals? That doesn’t seem right (and what about homosexual rich people)? If you can’t think of anything, then . . . .

Some rambling about dumbass government proposals

Anyone who knows me or has been following my blogs knows that I am a strong believer in open free markets as long as two things are true:

> people are given enough information to make informed choices
> there are no externalities that cause my free choice to harm someone else or
prevent them from making their own free choice.

My background in human factors also gives me a good insight into the predictably irrational (thanks Dan Ariely) nature of a lot of human behavior.

This combination often makes me cringe about the workings of government. I know that politicians are not also experts in things like economics or human factors. So I could excuse them if they, as individuals, didn’t understand some of the consequences of their proposals. But they had staffs loaded with people who can look this stuff up. They can call in experts from any field for advice, either informally or to testify at Congressional hearings. And yet, we still get these foolish proposals day after day.

I heard that Nancy Pelosi today decided that the solution to the health care crisis is a windfall tax on health insurance companies. I wish the term “windfall tax” would be removed from the lexicon completely. Profitability and success should never be a criterion for higher corporate taxes.

There is also the FCC’s drive for net neutrality. A good neutrality rule would allow bandwidth providers to charge based on the bandwidth used by the content provider, but to do it anonymously (hence the “neutral” part). But to say that they can’t differentiate on price in any way is simply ridiculous.

The Supreme Court has some important issues on its plate this term as well. My free market principles tell me that government should not ban any activities without a very good reason. So what about Chicago’s ban on handguns? I think there are reasons for some kinds of gun bans. Even though “guns don’t kill people, people kill people,” there is very little reason for someone to have an assault rifle, even for hunting. So banning these seems like it is worth losing a little freedom for the great benefit of getting these off the streets. But to ban all handguns in the entire city? This might be going a bit too far.

And there is also the case regarding the government ceded a small bit of a park to the VFW so the cross can be maintained without violated the separation of church and state. This seems pretty underhanded to me. The government gave only the few square feet of land under the cross to the VFW and only on the condition that they keep the cross there and do whatever maintenance is required. The rest of the park is still government territory. But because the government now doesn’t own the land, there is no first amendment problem. If this is permitted, the government can get around just about every limitation on government action there is, just be privatizing some piece of the process. I usually don’t buy the slippery slope argument, but this would scare me a bit.

Finally, there is the new evidence regarding the NY city law about having nutritional information posted in restaurants. I have blogged about this before, and now we have a real life example of what I have been talking about. It turns out that surveys of NY eaters say that the posted information does affect their choices. But not how you might think if you haven’t read my other blog posts. Just as research has shown, people order main courses with fewer calories. But then they reward themselves for their good choices by ordering more high calorie side dishes, drinks and desserts. So the net change is minimal, or even higher calorie in total. Oops. But the people who may be helped by this are people who really care about their nutrition who can now make truly informed decisions. They eat less because previously they had no clue just how bad some of those meals are. Maybe that’s an OK tradeoff.

Social Sustainability – can’t we all just get along?

The focus of sustainability almost always seems to be environmental sustainability. This is perhaps the most important dimension because if we destroy our environment we could all be dead. But there is more to it than that.

The way our culture seems to be going, we need to focus a little bit of our attention on social sustainability. Think about it.

Politics: Didn’t our politicians used to get together when there were really big problems to solve and work together? I know there have always been conflicts, controversies, and other sources of purely partisan gridlock. There are even some great stories about conflicts among our Founding Fathers. But when push came to shove, they got together. Now it seems like many of our political leaders, while sometimes liking individuals on the other side on a personal level, hate the other side politically and are unwilling to talk, let alone compromise. How could Senator DeMint publicly hope that health care is Obama's "Waterloo"? He should be hoping that Congress and the President can craft some health care reform that works. And he should be helping out in the process.

Media: The recent passing of Walter Cronkite really highlights how the news media has changed. Our leading journalists and news anchors had credibility with politicians and citizens on both sides of the aisle. Now, it seems like all we have are extremist demagogues like Bill O’Reilly and Keith Olbermann who have lost any sense of civility. I think I have blogged on the research that shows that this kind of coverage really hurts the general public’s ability to respect their leaders.

The town hall meetings over the health care debate are good illustrations of what we have to look forward to unless some major changes are made. This is really scary. Sarah Palin’s comment that a “death panel” would have decided if her Down syndrome son Trig merited treatment is just irresponsible. And shouting down the Senators and Representatives trying to host these town halls is not just rude but counterproductive to positive debate. But I suspect that is not the shouters’ true purpose anyway.

I call this social sustainability because I see us on just as much of a downward slope in our civil discourse are we are with global climate change. At the pace we are going now, the environment could be so far gone in 10-20 years that we won’t be able to stop it without significant pain and suffering. I am afraid that the same thing is happening in society. Something has got to give.

How do YOU define a crisis?

Dean Kamen (the incredibly successful and therefore wealthy inventor) has a great comparison. In the health care debate, the $260 billion we spend on pharmaceuticals (including marketing and profit) is called a "crisis." But we also spend $409 billion on professional sports and $121 billion on soft drinks. Everything is relative.

Charlie Crist's turnaround shows what is wrong with DC

Charlie Crist used to be a free thinker who did what he thought was right. As Florida Governor, he didn't feel constrained to follow the Republican platform. He did what was best for Florida.

Now he is running for Senate on the GOP ticket. It is amazing how fast he has changed. He switched from supporting Sotomayor to opposing. He switched from supporting cap and trade to opposing. And on and on.

Regardless of what you think about these policies, the fact that he reversed 180 degrees on them all when he decided to run for Senate is a great illustration of what is wrong in Washington. Governors have some latitude. The special interests are somewhat less entrenched and governors do not have to conform to the party leadership to get anything done. They don't have to be independent thinkers, but at least they can be.

But in the Senate, this entrenchment and top down leadership style is suffocating. Both parties do it. It is the heart of what is wrong with US politics and why I have become very cynical about the government's ability to get anything positive and productive accomplished over time.

Pigouvian taxes for obesity?

I have always been a supporter of Pigouvian taxes (to replace other kinds, not in addition to them). The basic idea is that you tax things that have negative externalities to compensate society for the extra costs. If a company emits greenhouse gases, you can either fine them directly for the amount of the cleanup (if you can calculate it) or indirectly as a carbon tax. If someone smokes, you can tax their cigarettes based on what you expect them to cost society in added health care costs (i.e. Medicare). The added benefits of this approach is that people are discouraged from doing these things, so you get less smoking and less emissions.

Some recent debates have got me thinking about how to apply the idea in reality. There has been a lot of debate lately on curbing obesity because of the $150 billion per year that obesity costs the US healthcare system. Can we use Pigouvian taxation? We would have two choices.

We can be proactive by taxing foods that the best science tells us lead to obesity. But this gets tricky for several reasons. First, is the science reliable enough to tell us? Nuts are very healthy in moderation, but not in excess. Should we tax those? Second, what about skinny people who enjoy a Big Mac and never get fat? Why should they have to pay taxes for externalities they never create? My biggest fear is that lobbyists would have a field day influencing Congress on which foods to tax (or not to). McDonalds v the pork industry v Coke v Hostess . . .

The second option is retrospective. We can charge higher insurance premiums for people who are obese and use the extra money to pay for the externalities that these individuals create. This is more direct and therefore more fair economically. But of course there would be a huge debate as to whether this is discrimination. We would have to have very accurate actuarial data on the increase in costs. The second problem with this approach is behavioral. It would not be nearly as effective in reducing obesity because it is unlikely someone would push away from the McDonalds counter because of the fear of future increases in insurance premiums. A tax right then and there would be more salient.

Despite all these challenges, I suspect that either one is better than using income taxes to raise the money that pays for obesity related costs. But because of the complexity, I have this nagging feeling that Congress would find a way to make it worse.

Congress, please stay out of executive pay

There are several reasons why the government should not get involved in executive pay .

1.From a purely philosophical point, the government has no business interfering with private contractual agreements between people or groups of people. With the bailout funds, they have some excuse for this limited set of companies. But otherwise, it’s simply not their job. I agree that encouraging companies to switch to long term goals for bonuses is a good idea, but it’s not for Congress to mandate.

2.Even if you disagree with #1, the government has competing objectives. You can’t expect any bill coming out of Congress to be effective because they would be trying to serve way too many masters in constructing the bill and it would turn into a mess.

3.Even if #2 didn’t happen at first, in order to get anything passed the legislation authors would have to do enough horsetrading to make a small mess into a big mess.

4.Even if the legislation turned out OK, the private sector is excellent at finding loopholes. This is how we got into the current financial mess in the first place. By discouraging executive salaries, Congress encouraged the use of stock options. These are easier to give out, so companies gave out more of them.

5.Even if none of the above happened and the legislation started out effective, Congress can’t react quickly to changes in the marketplace. So over time, it would get outdated. The harm it could cause in our unknown future is likely to be greater than the short term benefits we see in the present.

So given all this – please Congress, please stay out of executive pay except in very limited circumstances (temporary limits on TARP recipients maybe).

Racial profiling is not that complicated an issue

I have blogged before on what profiling really is, but I think in light of Gates-gate we need a refresher. The funny thing is that profiling really comes down to three components that we all agree on. The problem is that when we talk in general or don’t think about the facts, it’s easy to let emotions or our own assumptions get in the way. So here are the three factors to consider about profiling and the easy solution to keep it straight.

1.It is a simple statistical fact that some demographic categories (gender, age, race, religion) commit some crimes more than other demographic categories. This information can be used in law enforcement to facilitate their investigations.

2.The statistical relationships between demographics and crimes are small. This means if you use demographic profiles too much, you do more harm than good. So investigators can consider demographic profiles along with lots of other data in their investigations, but should definitely not use them too much.

3.Even if demographic categories are associated with certain crimes, we can choose not to use them for purely philosophical reasons (in the interest of creating a race-blind society for example). We need to recognize that this would reduce the speed and effectiveness of investigations, but if we are willing to make that tradeoff, that is a decision we can make as a society.

So, here is the action plan:

1.Decide if we want to use demographic categories to assist in law enforcement in situations where the statistics show a link.

2.Analyze the data to quantify what the links are and how strong they are.

3.Develop law enforcement procedures and training to make sure investigators use profiles no more and no less than warranted.

4.Monitor law enforcement to make sure they are following #3. If they use profiles too much or too little, retrain.

5.Continuously monitor the statistics and update the demographic-crime links accordingly.

It’s not that complicated. The only emotionally hard part is #1. The only practically hard part is #3.

Another wasted opportunity

I have hesitated about how to comment on Gates-gate. The cynic in me responded first. There are examples like this (he said-he said about whether an event was racial profiling) every day. Why did this one get national exposure? Because Gates is a friend of Obama. Heck, for a trip to the white house and the great national exposure both of these guys are getting (the book deals are already on the agents’ desks), I would gladly volunteer to be profiled and arrested.

If the result is a real and productive conversation about race and police procedures it would be useful enough that I will sacrifice the last two weeks of national attention on the more pressing matters of housing, health care reform, the economy, Afghanistan, Iraq, etc. But if not, what a waste!!! All I have seen lately is discussion of which beers they selected and if Obama selecting Bud Light was a political calculation because it’s the most popular beer in America.

So far, it hasn’t been much better than the Michael Jackson coverage, which also could have resulted in some real conversation about race, popular culture, and some other useful issues. But they never materialized in that case. All we got there is the debates about who will get custody of the kids and memorials about his music, his skin color evolution, and random gossip.

Another wasted opportunity. This is what I expect from US news these days.

Tech rally is an anti-politician indicator

As much as CNBC’s Jim Kramer has taken a beating in the past year from Comedy Central fans, he still has a die hard set of fans who keep his Mad Money ratings and book sales high. He said something last night that seems very insightful, but I hope it is not true.

He noted that it is the tech companies that are leading the stock market rally over the past few months. The NASDAQ index is way way up. He speculated that the tech sector is the one industry that the government is not trying to “reform.” We have tons of reform and regulation activities already in the finance/banking sector. Health care is being debated and something will come out of that. The cap and trade bill and other environmental reforms will change energy and utilities hugely. Real estate will be affected by the financial reforms and probably the energy reform. The auto industry is virtually owned by the feds. Tech is the only one they have left alone.

So why would that make the tech sector rally? The idealist in me really wants to believe that the government can improve our lives by making intelligent decisions regarding how to regulate industries and the market. But the evidence tells another story. Our government is made up of politicians – not policymakers. They are electioneers – not statesmen (or stateswomen). Senator DeMint (R-SC)’s exultant comment about health care reform being Obama’s “Waterloo” tells the story. He would rather achieve a political gain for the GOP in the 2010 elections than to see a successful reform of the nation’s biggest albatross.

And its why being left alone is the best indicator of success. Because government intervention invariably leads to losses, not gains. This is very sad.

Michael Jackson

For weeks, I have been complaining about the extensive coverage of Michael Jackson’s death. I freely acknowledge that he was the King of Pop and had a huge impact on American culture. But all of the other TV news was pre-empted for weeks. No matter how important he was, there were still wars in Iraq and Afghanistan going on, financial and economic messes to clean up, health care and climate change bills being debated in Congress, and all of that was limited to a 30-second update at the top of each hour. The coverage didn’t even talk about his impact on American culture. It was all about who is going to get the kids.

But then I read this. It makes some very good points. I still don’t think the coverage focused enough on the issues that would make the discussion relevant and important, but at least I am less ashamed to belong to the same population of TV viewers that demands 24/7 coverage of celebrities and their spectacle. Not happy about it, but maybe a little less ashamed.

Conflicts of interest.

This is just WRONG (full post here).

After I handed the book into the publisher (McGraw Hill), they let me know they had problems with my assessment of the Ratings Agencies. They were unhappy with my calling them “Pimps & Hos“, or describing their business model of rating junk bonds as AAA for big fees as “Payola.” (What else would you call it?)

Not coincidentally, McGraw Hill owns of the largest Rating Agencies, Standard & Poor’s.

My compromise was to change the tone — namely, to remove the reference to Pimps. However, in its place I was going to add publicly available data and congressional testimony, more detailed analysis, and quotations from experts. When it was finished, I found the revised section to be less vitriolic — but far more devastating to S&P. They (along with fellow rating agencies Moody’s and Fitch’s) were key enablers to the entire crisis. There were many other guilty parties, but I simply could not under-emphasize the ratings agencies.

When McGH rejected it again, I exercised my right to buy the manuscript back from them in January 2009 (I returned the advance). Numerous publishers were interested, but I went with Wiley — they have a great deal of experience publishing business/investing related books, and as a publisher, had no conflicts of interest that would interfere with telling the full story.

Aren’t there supposed to be firewalls or something to prevent this? After the Washington Post’s “error in judgment” last week, I guess we can’t be too confident that editorial firewalls are effective. The cynic in my always expected this from Rupert Murdoch’s publications, but Wapo and McGraw-Hill!! I am sooooo disappointed!!

the switch to digital TV

Business Week reports that the switch to digital TV is not going quite as planned. The local stations are all ready to add extra channels in their new bandwidth. Local weather, local sports, Spanish versions, even movie channels. But the national cable and satellite companies won’t add these channels to their lineups. So the bandwidth is going to waste.

Oh well. Nice try.

New Haven firefighters promotion exam

Despite all the controversy and the close vote surrounding the Supreme Court’s decision in the New Haven firefighter promotion exam case, it’s really not that complicated. Industrial engineers and hiring managers have been dealing with this kind of issue forever. From a purely “workplace efficiency” point of view, it makes sense to have exams that directly test someone’s ability to do a job before assigning them to that job. We call these KSAs, for knowledge, skills, and abilities. It makes no sense to have an exam that tests irrelevant KSAs – it would hurt the company’s (or firefighting unit’s) performance by hiring and promoting less qualified candidates.

The Civil Rights Act made an important contribution to this. The clause in question says that if there is a big disparity between the scores of minorities and non-minorities, then we should look at the exam with suspicion. That’s a good idea even if there was not a law requiring it. If the test is biased, it’s not good for the company either because it leads to less qualified individuals getting the job (or promotion). The Civil Rights Act was necessary because of the prevalence of discrimination at the time, which could lead companies to prefer less qualified workers that were white males. But even if that is no longer true today (a complicated question that is beyond today’s post), the idea to check our employment tests for subtle bias is still a good idea. There is evidence that ethnic minorities are not as good at pencil and paper exams but are just as good at realistic job simulations (which are better predictors of job performance anyway).

So it would make sense to look “with suspicion” at a test in which the white and Hispanic firefighters passed at much higher rates than black firefighters. That’s what the district should have done. They should have hired a professional to look at the exam and see if it effectively focused on real firefighting KSAs. If it did, then their "suspicions" should have been alleviated and they could have promoted the passing firefighters. If the test did not, then they should have thrown it out.

The problem was that they didn't do this. They got scared that different passing rates would lead the black firefighters to sue, so they threw the exam out without the necessary evaluation. With a small sample size, like in this case, it is possible than an unbiased test will lead to different passing rates of different groups. This is especially true if there are other differences, for example socio-economic, between the groups as well. If the white firefighters had more money to prepare, that could explain the difference in passing rates as well.

But the point is that looking at the exam with “suspicion” is different than throwing it out. The Supreme Court got it right this time. Companies should look at their exams to see if they are biased. If they are, they should change the exam. If not, they should keep the exam until a better one comes along. That’s what civil rights is all about. Knee jerk reactions are not the answer.

Fun with political stereotypes

Everyone has heard the saying “Give a man a fish and he will eat for a day, but teach a man to fish and he will eat for a lifetime.” I always really liked this.

A few years ago, I heard someone that I think was Al Sharpton say that "sometimes you also have to give the guy a ride to the river so he can fish." That got me thinking that the original saying is not quite so simple as it seems. It also got me thinking of fun other ways to expand on it.

Republicans:

• You also need to give the guy (or girl) a tax break on his income to encourage him to fish more,
• You need to give the guy a waiver on environmental regulations so he is allowed to keep whatever he catches and can use his old gas guzzling boat.

Democrats:

• You have to give the guy a subsidy to purchase fishing equipment.
• You need to force banks to finance low income fishermen at decent interest rates.
• You need to stoke demand for fish through public service announcements or restaurant sales quotas.
  

Taliban

• You have to give the female fish a hijab to shade their nakedness from the male fish in the net.

In the comments, please add more. I am interested to see what other stereotypes arise.

What defines true sustainability?

The idea of sustainability has been around for some time, but I think it is worth some reflection to decide what it really means. True sustainability has to beyond an environmental focus. We have seen in the past few years that financial sustainability is also something that deserves more attention. I wonder what other kinds of sustainability we should be considering in our lives.

Before starting to make a list, let’s revisit what sustainability means in general terms. For something to be sustainable, it means you can keep doing it forever without any degradation in performance. So of course environmental sustainability means that a particular behavior doesn’t cause environmental damage at a faster rate than the environment can repair itself. The related idea of resource sustainability means that a behavior does not use up resources faster than they can be replenished. Financial sustainability means that a behavior doesn’t require more money than it produces and that it doesn’t transfer money from one group to another in a way that would cause the giver to run out.

So what other kinds of sustainability are there? How about political/social sustainability? This would be a behavior that does not alienate others to the point that they would enact a law banning it (political) or to ostracize the actor (social).

How about emotional sustainability? This would be a behavior that does not emotionally drain the actor faster than available rest and relaxation can replenish him or her.

Personal health sustainability would be a behavior that does not damage the actor’s health faster than the body can repair itself (smoking or bad eating habits for example)

And for all of these, we can think in terms of an individual, group, or the world at large. I may do something that is financially sustainable personally, but has externalities on the world that are not sustainable. And the opposite can also be true – I can do something that is not sustainable in some way to myself, but doesn’t impact anyone else. Or maybe the behavior is not sustainable to myself if I do it alone, but as long as other people also do it, we become sustainable as a group because we balance each other out.

Maybe if we put more time into ensuring that the things we do personally and professionally are sustainable in all of these ways, we could really make the world a better place. Or at least avoid destroying it!!!

Better than regulations

Larry Fink, the CEO of Blackrock (the investment company) had an idea to reduce the chances of future financial crises like the one we are coming out of that does not involve more regulation. He suggested eliminating the tax on really long term capital gains (> 5 years) and balancing it with an increase in short term (< 1 year) capital gains and dividends. This would incent people on the long term investments that really benefit the economy while disincenting the short term trading that was part of the problem. Because its not a regulatory solution, it avoids the frictional costs and externalities that usually accompany regulations. It also may be possible to sell, even though there is a tax hike (oh no, not that!!!) inside, because it is balanced and it is clearly related to the emergency.

I think this is a great idea. Hopefully the pols in DC were listening.

Media Hype

When swine flu first hit the news, it was overhyped the way the 24/7 news industry typically does it. We got 24-hour coverage for several days and they made it out to be a disaster just around the corner. Of course they are chasing ratings, which is their business model, so it's hard to blame the media. We should blame ourselves for watching.

Then, after a few days of this, we all realized that is wasn't nearly as bad as all that, and we got burned out of the coverage. Now, we see very little. Again, without demand, there is no supply.

But I suspect the pendulum has now swung too far the other way. Reading about the NY school assistant principal who died from the swine (oh sorry, the H1N1) flu and the predictions of some experts that it could really get worse makes me a bit concerned. When we really do need to pay attention, which will be when the normal flu season hits us next winter, we probably won't. It will be really old news by then.

Usually, I criticize the hype the media gives these stories as a waste of time and for taking away time that should be spent on important issues and debates. But this time, it could cause actually hurt - or even kill people. This may sound like hyperbole, but if no one is paying attention, any future pandemic will be much worse.

I wonder if some enterprising person will think to sue the media over the issue after a loved one dies from the flu. They could claim that the hype cycle was in part responsible for the death because it reduced the public response. I doubt this would stand up in court, but the media would probably settle (without admitting guilt) to avoid the bad PR. If the settlement is large enough, maybe they would be forced to be more responsible and we would get less hype in the future. In general I hate frivolous lawsuits, but if this happens, I won't complain.

Liars, damned liars, statisticians, and then pundits

The jobs report today is a great example of how statistics can be represented to make just about any case you want.

The number of jobs lost last month was reported as 539,000. This compares to an adjusted 680,000 average over the past five months. But the unemployment rate increased from 8.5% to 8.9%.

Anyone who wants to say that this is good news points to the decrease in jobs lost. Anyone who wants to say this is bad news points to the unemployment rate increase. The statistician points out that past numbers have been adjusted higher every month for quite a while, so the 539k will not stand up to the test of time.

Or if someone wants to say this is not as bad as previous recessions, they can point out that the unemployment rate is still much lower than in the 1980-1982 recession. But after adjusting for the older population (which any good statistician SHOULD do), it's actually worse.

Which brings me to pundits. Every news program brings on between 1 and 4 "experts" who opine about the numbers. It is really important to the general public to get a sense of what is going on so they can prepare themselves. Is the economy getting worse, in which case I need to save more, suck up at work more, and in general decrease my risk taking? Or is it getting better, in which case I can start spending again, look around at opportunities, and in general increase my willingness to take risks? So pundits are not just for entertainment; they provide an important service.

Except that they are not. They pick and choose the numbers that make the points that they prefer to make based on politics, selling their latest books, or just to get on TV. The general public are not statistics experts, macroeconomics experts, or mind readers. They need the news to give them a sense of reality. So these pundits are really doing us all a disservice. Shame on them!!!

Immigration as an applied ethics question

The basic premise of libertarianism is that any action is OK as long as it doesn’t infringe on someone else’s rights. So you would be in favor of legalizing drugs, but not drugging and driving which can put others in danger. It gets hard with things like putting junk cars on your front lawn, which could lower the property values of your neighbors’ houses. But you start out with the assumption that actions are permissible and you have to PROVE that they infringe to get them restricted.

But a prima facie rights violation starts with the assumption that something is not permissible and then only becomes permissible when you can prove it is beneficial. For example, take the death penalty. In this case, we start out with the premise that it is banned because it infringes on the right of the convicted. You would need to have really hard evidence of substantial benefits to get it approved.

This is more important than you think because of the behavioral science research that has been done in the past ten years on defaults. A study of 401(k) investments found that when the plan was set up as an opt-in (you had to fill out paperwork to enroll), 36% of new employees enrolled. But when it was opt-out (you had to fill out paperwork not to be enrolled), 86% stayed enrolled. The implications of this for the retirement security of the population are huge.

So how do we consider something like a 401(k) plan? Economics aside for a moment, what is the prima facie assumption? Is it ethically OK to automatically sign people up for things, knowing that it will influence their behavior even if they are allowed to opt-out? 401(k)s may seem like a good thing to promote, but we can use this same strategy for all kinds of programs. Think of all the things that are now “optional.” Newsletters, sex-ed in grammar school, allocating $3 of your tax refund to federal elections, etc, etc., etc. Imagine switching the defaults on all of them.

Then I read a great blog post on immigration by Bryan Caplan at George Mason who discusses an even better essay by Michael Huemer. The economic evidence of whether immigration helps or hurts the domestic economy is so politicized that it’s impossible to get a real sense of the implications. We know it helps some and hurts others. But what is the overall impact? But what we also need to ask (and probably the first thing) is what the prima facie assumption should be. Do we let in groups unless we can authoritatively PROVE that it has an overall negative impact? Or do we keep out groups until we can authoritatively PROVE that it has an overall positive impact?

Read the blog post (and the essay if you have time). They are really worth it.

The King is dead. Long live the King

James De Long has an interesting piece today in The American. I just want to comment on one small part of his essay.

Today's society has become much more complex than the Founding Fathers could ever have envisioned. This creates the unfortunate (to De Long and I agree) circumstance that strong special interests are inevitable. There is no way to become a powerful advocate of anything anymore without specialization. And only special interests with real money at stake can afford that kind of time commitment (by hiring full time lobbyists, etc). And each interest group plays a sort of prisoner's dilemma with each other so that they can all keep their power.

This also guarantees an ever expanding government. The only way new ideas can gain any traction is to carve out a new government agency so that they aren't butting heads with entrenched interests that have more power. So instead of rethinking the crazy bureaucracy, we just add to it.

But De Long makes a very interesting observation. As the special interests control a larger percentage of the government, and the government controls a larger percentage of our lives, the special interests are starting to bump heads. You can't play the prisoner's dilemma game with too many simultaneous players because someone is bound to defect each round. So at some point, and he thinks this point is upon us, the system will break down.

What will come next? He suggests perhaps a new Constitutional Convention (which would require 2/3 of state legislatures to call). I think the lack of civic engagement would prevent this from happening. State legislatures have special interests too. His other suggestion is a third political party will grow based on the promise to exclude special interests. This may be more possible, but how well did Ross Perot do? Maybe someone like Michael Bloomberg could pull it off, being a centrist, rich, and well-respected.

I am hopeful that things will change because I don't like the long term (decades) path we are on. But I am concerned about what the change will be as I have become a bit cynical about our society. The innovation and creativity of the American people has been our greatest strategic advantage. But we haven't applied this to government very well in the past hundred years.

Root causes are hard to solve, whether drugs or CDS

Stratfor (one of the best geopolitical intelligence companies in the world – and that published a great global intelligence report weekly on their website) recently published a report on the drug trade.

One key takeaway is how flexible the drug supply chain/logistical operations are. When the US and its South American partners started achieving success in thwarting the transfer of drugs (primarily cocaine) from Colombia and Peru to the US by ship and air, they switched to overland routes through Mexico. This is one of the reasons for the tremendous growth in the Mexican drug cartels and the shrinkage of the Colombia cartels. If you have been watching the news lately, you can’t avoid seeing story after story about the Mexican cartels. Because Mexico has a much bigger economy than Colombia or Peru, and it has such a porous border with the US to bring in money and guns, it was easier for the Mexican cartels to branch out into other industries than it would have been for the South American cartels. The “war on drugs” may have been a critical tipping point in creating the problem.

Now that the US is turning to the Mexican cartel problem, there is emerging evidence that the logistics chain is shifting more volume back to air and sea. It’s still going through Mexico, but that could change as well if the US and Mexico have success against the cartels.

So what do we learn from this? Solving problems is a lot more complicated than finding a proximate cause and mitigating it. The root cause is always much deeper. Whether it’s addressing demand in the US as stated by Hillary Clinton in her recent speech or legalizing marijuana as requested by the posters to Obama’s Town Hall meeting, what we do know is that the supply chain is not the problem.

Also, this should give us pause as we re-regulate the banking industry. When the G-20 meets this week, that is #1 on the agenda. But if they focus on the proximate cause(s) like the CDO market or AIG, it will all be a waste of time and we will just be setting the world economy up for another crash in the next decade.

The problem wasn’t specific investment types or specific regulations. The problem, as it has been for millennia, is that almost every transaction has asymmetric information. The seller usually knows more about what he/she is selling than the buyer can possibly know. And the buyer knows more about what he/she is paying with than the seller. Capitalism is based on mutual gain through trade. But what looks like a great deal (7% annualized return on mortgage-backed securities backed by the US government through Fannie Mae and insured through an AIG credit default swap) may not be so tasty when you unpeel the fruit.

But regulating MBS and CDS will just shift the financial industry to start dressing up some other investment type. I think that the proposal to require all financial institutions that create derivatives to keep at least 20% of the derivative in house would be a good start. Whatever they dress up, at least they eat 20% of the losses.

The next challenge is the personal incentives. When an investment banker (or anyone else) can get their money out before the market realizes the true worth of what they created, even the requirement I just described won’t work. It would be easy for someone to convince themselves that their newly invented derivative is a great product (not that anyone would do this on purpose), get their millions in annual bonus, and then watch while Rome burns from the comfort of their estate in the Hamptons. This requires moving incentives from short term to long term, perhaps matched to the duration of the securities they work with. If you sell 6-month bonds, you can get 6-month incentives. I’m not sure how to make this work for 30-year bonds, but you get the idea.

I know that if we are true free marketers, this should be done by the banks, not by the feds (or the G-20). But since the banks are run by people getting these same incentives, I think that at least for now, we may need it to be enforced at the government level.