loss aversion

Here is a nice link between my human factors blog and public policy. The idea of loss aversion says that people prefer (generally with a large subconscious component) to make worse decisions if it means avoiding an overt loss. For example, many people will hold onto a bad stock because they refuse to sell it at a loss. They will wait for it to at least come back to their original purchase price (which most eventually do just because of inflation) and then sell it. Gamblers do the same thing - they keep playing until the are even (or broke). Homeowners have been doing it for the past year, refusing to sell their houses for anything less than they paid for it.

These are poor choices because they take into account "sunk costs" which should be irrelevant if the decision was just economic. But any major decision is not just economic, it is also psychological. Which is where effects like loss aversion comes into play.

So what does this have to do with public policy? I can't say it any better than this. (warning, there is no permalink yet. So if you read this after Oct 5, you will need to find the Sept 30 comic).

statistics and Iraq

I haven't watched the hearings of General Petraeus and Ambassador Crocker very closely, in general because they have so much more information than the rest of us that they can present any conclusions they want and there is no way to really know how "real" a picture they are presenting. Most people know the saying "there are liars, damned liars, and statisticians" and there is a reason for that. The reduction in violence being presented could be the usual seasonal lull in the summer. It could also be temporary because of the surge but ready to come back when the US troop levels return to 130,000. Or it could be that the general and ambassador are cherry picking the stats that look good while ignoring others that don't (an alpha error). Or it could be that fundamental improvements are really occurring (you can stop laughing now).


I fool myself with statistics when my favorite sports teams are failing and I need a reason to keep cheering for them. But to do this with thousands of lives and billions of dollars at stake is really foolish. But as a libertarian, maybe I should be happy that both houses of Congress and all the 24 hour news shows are busy with this and not messing around with the economy. But then again, the Fed meets next week . . .

patents and piracy

The debate over how harmful China's rampant piracy of US technology continues to rage. On one extreme, US tech companies are losing billions of dollars a year when Chinese consumers purchase pirated copies of MS Windows off the streets for $1.50 or when Chinese companies buy fake Cisco routers for half price. If you simply multiply the number of pirated units by the normal retail price of the official versions, the numbers are truly astronomical.

But on the other side of the scale, there are two reasons why the total is not really this high. First, many Chinese consumers couldn't or wouldn't pay for the official versions. So the total lost revenue is much lower. Second, there is some evidence (or at least theories) that when China finally does start enforcing patents and copyrights (more likely because its own companies are developing intellectual property rather than the cajoling of the US trade missions), there will then be a huge base of consumers used to the US style products (and more able to purchase them). The current piracy is sort of like a loss leader where the company loses money now to make more later. Of course, this second reason is not really fair to the US companies, as it should be their choice whether to use a loss leader strategy, not the Chinese government, consumer, or pirates. Stealing can't be justified by saying that it helps in the long run.

But what does matter is how much time, effort, and political capital the US government should use on this issue. Would it be better to work on the currency misalignment? Or China's growing relationship with dictators around the world - helping them economically and enabling them to continue repressive policies? There is no easy answer, but it is worth thinking about.

Primaries v elections

I am not sure what is going in the Democratic and Republican primary races, but it has me worried.

First the dems. When the race started, I thought most of the candidates were pretty moderate. I especially like Bill Richardson - with all that experience and his history of mainstream policy. But after the latest debates and forums, I have no idea what to think. All of the dems now seem to be playing to the extreme. I don't talk in terms of left and right, but rather good policy and bad policy. Readers of this blog know it is because there are good policy ideas from all parts of the spectrum. All of the dems, not just the leaders, seem to be promising all things to all people. To appear strong on defense, Obama is bombing Pakistan. They are all going protectionist - against the free trade agreements with Latin America. They are also going beyond reality in health care - promising that we can have great quality health care at low cost and cover the uninsured simply by browbeating and jawboning the market. They are correct that there is enough waste in the system that we can have our cake and eat it too, but not in my lifetime. The politics, legal and psychosocial context, and complexity of the health care system makes it very hard to streamline and none of these candidates have a clue about industrial engineering, lean process design, etc. I think that they are just promising x, y, and z to get elected. That is the worst thing a pol can do. It just gets expectations up, leads to disappointment among the electorate, and nothing ever gets done because they don't really have a plan.

Now the GOP. They aren't even talking about policy. I am not even sure what any of them stand for. I respect Guiliani for sticking to his pro-choice position, not because I agree with it (although I do), but because it is unusual for reps to go against the base in the primary phase. But each one of these candidates has so many bad qualities. Guiliani has no cred whatsoever. All he did was look tough after 9/11. He didn't actually DO anything. Romney has a great financial background so I have the highest hopes for him. And he was an effective governor in a state with a huge majority of the legislature in the opposite party. That is impressive. But what does he think about foreign policy, industrial policy, etc? It never comes up. Fred Thompson, if he runs, will be running on image rather than policy. Can't blame him for that, but it wouldn't make me support him. And poor McCain - what happened there?!? Maybe he really is just too old and he ran out of steam. Hopefully, some new people will enter. Maybe Chuck Hagel. I even have some new respect for Newt Gingrich. Even though I disagree with some of his policy positions, at least that is what he focuses on. Often, its better to have a bad policy than no policy at all.

Any - that's my rant for the day.

Public Policy and workforce productivity

My Performance Management course is having its last class Thursday and we are covering how public policy can have an impact on workforce performance. As an instinctive libertarian, I hesitate to recommend that government get involved in the inner activities of a company. But there are definitely places where it can make sense if the government does it correctly and minimalistically (a big and often failing assumption).

One is training credits. I don't want the government deciding what to train former manufacturing workers in when their jobs migrate overseas. But training credits can work. Companies can develop their workforce in skills that will remain in the US. And perhaps research funding can be allocated towards new training models and economy-wide resources. Especially for workers who are already employed, independent training sources can also be supported, although again I would like to see it be private organizations (perhaps professional societies) with some government financial support. I would rather spend government money on retraining than long term unemployment.

There has been research that workers who are afraid to take risks tend to stay in dead end jobs out of fear (of losing health care, pension benefits, etc). They are more afraid to take risks when there is no safety net. Companies don't want employees to stay in these dead end jobs either because the employee is usually not the most productive at that position, but maybe not bad enough to warrant firing.

What we want is to create a balance between stability and mobility. Lets find a way to get workers moving around more and always moving up the skills-ladder. We can then encourage sending lower skilled jobs overseas and bringing in immigrants to do the ones that can't move overseas. All we need is a reliable mechanism to retrain workers in the new industries that the US has been so good at developing. And with an ingrained process to do this, maybe we won't be so afraid of losing our global economic influence and success.

Then on top of this, we can fund a few great futurists to predict the 20-50 year future industries and we can start the basic research and maybe even adjust K-12 education to get our future workforce ready for it. Get rid of the standardized tests in the No Child Left Behind model and start teaching creativity, critical thinking, information literacy etc.

Maybe this is just a pipe dream, but it is MY pipe dream ;-D.

At what cost growth?

There has been some debate on my favorite economics blogs (Mankiw, econlog), about the old saw that the best way to reduce poverty is to grow the economy as fast as possible and let the rising tide lift all boats. A recent paper by Larry Summers suggests that the calculus may have changed. Lately, the benefits of the rising economy have gone disproportionately to those in the upper income brackets and those in the lower ones have stagnated or even fell.

So here is the policy issue. Conservatives/libertarians want to stick with the rising tide theory and focus only on maximizing growth. Unfortunately, without smart social policy, there are a lot of starving poor people out there who are drowning in the rising tide. Liberals are willing to sacrifice a bit of growth to protect these poor people. Unfortunately, they seem to have a knack for screwing it up and so they hurt growth more than expected and don't help as many poor people as intended.

What we need is a smart combination of economic/social policy that minimizes the limit on growth the get the maximum protection for those truly in need. The public emergency safety net needs to be efficient and effective (get some Industrial Engineers with expertise in Lean Six Sigma to implement it) and focused on those with no reasonable other options. Then put the bulk of the safety net into "teach them to fish" rather than "give them a fish" kinds of programs. Vocational training, child care subsidy, earned income tax credit, etc. And encourage the private sector to support microfinance and other programs that require selecting winners.

While I am on the subject, these are also my prescriptions for saving the health care mess, protecting the environment, and just about every other domestic policy.

government response to high gas prices

This article in Business Week really pissed me off. It lists five proposals that the US government is considering to address the high retail price of gas. They are all ridiculously naive about macroeconomics. What is wrong with our government these days? Are they really that ignorant, or are they pandering for votes - counting on the US population being ignorant? The problem with both of these, is that it encourages voters to remain ignorant, for the reasons described in earlier posts and in other places on the irrational voter.

There was also an article on North Korea that also showed the ignorance of US policy. With North Korea, there are justifiable competing objectives. We want to help their economy to prevent starvation and to encourage them to pursue an open economy. But we also don't want the hard currency to go to Kim Jong Il's nuclear weapons program or to his Swiss bank account. But the article says that South Korea has grown the Kaesong special economic development zone to provide jobs to 15000 N Korean workers but under the control of S Korean companies. This seems like a pretty good way to balance the objectives. But the US government places a 90% tariff and strict quotas on the products coming out.