Saturday, May 30, 2009

sorry for the delay...

This week is nuts. I will post as soon as I have time! check back soon

Wednesday, May 27, 2009

Our Schools... are fine? Sort of, at least according to Malcolm Gladwell

Yesterday, I read "Outliers," by Malcolm Gladwell. The book attempts to examine factors that influence peoples' successes and failures when traditional explanations don't make sense.

I was surprised to find that I enjoyed the book thoroughly; I'd heard that as a stat guy, I'd get mad at some of the conclusions and the manner in which they were drawn. And yes, there are parts of the book where the conclusion was fundamentally flawed (the portion of the book on affirmative action at Michigan Law School drove me particularly nuts), but overall, the book has a lot of interesting observations and things to think about.

However, there was one portion on education that I thought was particularly interesting and worth sharing here. An educational test was administered to elementary schoolers at the beginning and end of every year, and data were split into low, middle, and upper classes.

As one would expect, there was a moderate difference between the classes in the first grade, and a larger difference between the classes in the fifth grade; Conventional wisdom is that educational quality differs for the classes, so the more years of education, the bigger the difference should be (this is why I roll my eyes whenever anyone complains that Harvard's student body is not socioeconomically representative - it comes at the end of a long educational career, so the best students should, on average, be better off. Harvard is not only full of rich kids, there are plenty of lower-income students here, but the average is quite a bit higher than the population - as it statistically should be for a high calibur school.)

However, the interesting part is that the component of education in which the children differed in their rate of improvement was the portion between June and September, not between September and June. In other words, the children progressed almost equally while in school, even though the lower class children attended worse schools. In fact, if summer did not happen but each school year brought the same rate of improvement as in the study (a large assumption, but even if it's not true, it doesn't completely invalidate the point), the lower class children would have almost caught up with their richer counterparts by the end of fifth grade - a larger gain than their rich counterparts.

Summer vacations, however, show a MASSIVE divergence. Poorer kids show no advancement over the summer on average, while richer kids show an advance roughly equivalent to spending those three months in school. Gladwell attributes this to the differing parenting styles of richer parents vs poorer parents - richer parents schedule their children heavily and encourage them to engage their superiors, while poorer parents leave their kids in unstructured time.

Maybe the answer, then, to issues of education is not to throw more money at improving the process of school, but instead to throw more money at prosperous summer activities. Less conventionally... what if children were forced to attend school in the summer? Or even more interestingly, what if children were forced to attend school in the summer unless they could propose a more worthwhile use of their time? This latter option allows children to explore a number of other opportunities not available in school but which may be important to them, and if they don't have anything, puts them somewhere where they can continue to learn (I know that I, personally, have benefited just as much, and probably more so, from my summer activities than my school ones because I could pursue what I was interested in, but I also know that I was lucky enough to have a mother who encouraged me to think in terms of how I could use my free time to learn new things).

Gladwell has a number of anecdotes about schooling, and other ones about the benefit of spending time learning something (he claims it takes 10,000 hours of cumulative practice to become a master at something, and those hours must be completed by the time you need to be considered a master to advance). Don't believe everything he says, think critically, but it's an interesting book that I liked a great deal.

Conventional IRA Wisdom

My residential dorm just hosted a seminar on personal finance for graduating seniors so that they can be independent and not dig themselves into personal financial difficulties with credit cards, retirement savings, etc.

There were three major lessons (and I'm paraphrasing, because I don't have the presentation yet)
1. Don't be afraid of finances, take control of your budget, taxes and financial decisions.
2. Pay off your credit card bill in full at the end of every month.
3. Contribute to an IRA every year.

The first two I agree with wholeheartedly. Individuals should understand their spending habits and their tax situation, or they'll end up in trouble. I haven't done as much with this as perhaps I should, and after graduation I will spend some time with this. The second one I agree with as well. Credit card debt carries the highest interest rates in existence, and any long-term loans should be obtained from other sources (the bank, most likely) at lower interest rates.

However, the last becomes an interesting case.

There are two major kinds of IRAs that were discussed. There is a traditional IRA, in which you put money in and defer paying taxes on the money until withdrawal (usually for buying a first home or after 59.5). With a Roth IRA, you put after-tax money in, and then don't have to pay tax on the growth.

While for the vast majority of people, it makes sense to contribute maximally to their IRA accounts, it may not be the actual optimal choice.

Let's start with a traditional IRA. You don't pay taxes on the money you put in it, and then pay when you withdraw. The interesting part, however, is that when you withdraw, you pay at the tax rate of your tax bracket at the time, not at that when you put your money in.

It is widely recognized that if you believe you will be in a much, much higher tax bracket at 59.5 than currently, you may not want to put money in an IRA.

However, there's another component. If you believe taxes will be much higher at retirement than you believe now, then an IRA may not be appropriate.

Look at America. The Bush administration unbalanced the Clinton budget and expanded the deficit to half a trillion dollars (and a trillion dollars in the final year). The Obama budgets will likely run 1.7 trillion annually or more, which will swell the debt from 50-60% of GDP, where it is now, to about 80 or 90% of GDP within somewhere from 3 years to a decade.

For a worker in his or her early 20s, who (under current rules, which could quite easily change) will not be able to withdraw until almost age 60, it is a near certainty that those types of deficits cannot continue. The government will need to curtail spending significantly, but it will also need to raise taxes. The rich currently pay the overwhelming majority of taxes in this country. That will go up somewhat. The middle class pay much less taxes than they should, given their income, so their taxes must go up, as much as the current administration is trying to claim they won't.

These tax rates must be somewhat significant. Thus, investing in an IRA may put money into a higher tax regime and may be suboptimal.

This applies less to Roth IRAs, which, as I understand it, have fewer withdrawal restrictions. With Roth IRAs, the tax bracket issue comes up (many people in retirement have low incomes and thus pay low taxes), but it's hard to imagine US income taxes going DOWN, so the point doesn't apply here.

Monday, May 25, 2009

Ignoring Gay Marriage

This post is a little more confrontational than my usual, but it has become a pet peeve of mine when people make Obama out to be the saint who will save America, instead of recognizing his strengths and weaknesses.

Obama ignoring gay marriage

The key phrase in this article, to me, is "the president shows no signs so far of following the example of L.B.J., who championed black civil rights even though he knew it would cost his own party the South."

LBJ was an opinionated, cranky pain-in-the-neck who figured out what he wanted to do and went off and did it regardless of what everyone thought, which made him exactly the kind of guy who would stand up and say "We're granting civil rights, whether you like it or not." In other words, he had the moral fortitude to cut himself politically to achieve a just end. That (and Vietnam) cost him reelection, but it made him a civil rights advocate.

Obama, on the other hand, is an extremely adroit politician, who still has yet to come out for anything unpopular-but-right*, and has backed a number of policies which were popular-yet-wrong (automaker bond policy, bank bailout terms, tariffs and immigration in the stimulus package, I'm looking at all of you). He stated OUTRIGHT during his campaign that he opposes gay marriage, so I don't know where all of this optimism that he will champion gay rights comes from.

Anyone looking for the current White House to have the LBJ testicular fortitude to back gay marriage, good luck to you. I'll bet the first comer 20 bucks that gay marriage hasn't been legalized by the time people vote on his reelection. I'll bet another 20 bucks that he doesn't propose new gay marriage legislation before a reelection. If there were a way of verifying this, I'd bet another 20 bucks that he doesn't come out in strong support of any existing gay marriage legislation. If he were going to risk himself politically, he would have done so already. He'll wait til a second term or not do it at all.

EDIT: As further evidence that Obama is NOT the second coming of Susan B. Anthony, he is on track to be the first president ever to pass a law legalizing preventive detention. It's to deal with the Bush-era holdouts, but Bush never even tried to pass a law to the effect. I don't think he wants to use it, as Bush did, but the fact that this shows up in legislation sponsored by him tells you something about his willingness to take the political easy way out. Source.

*To those who would say "stem cell research" was something unpopular that he supported, know that an overwhelming majority of Americans support stem cell research, it's just that the minority who oppose it are very loud: sources

Sunday, May 24, 2009


Is this a good thing or a bad thing?

I hadn't known that celibacy for priests wasn't always a part of Catholic doctrine. Revoking the celibacy rule will likely make lives better for priests... but if it causes people to flock to priesthood (perhaps even for guaranteed food and shelter) instead of more societally-progressive and productive tasks, will that be a big problem for poor, religious areas of South America, Africa and Asia?

The individual human right (as opposed to religious right) of priests to be in love and be with one they love should not, in a humanist perspective, be abrogated. However, if the church revokes the celibacy rule, governments should respond in ways to ensure that priesthood doesn't become a refuge away from other important jobs.

In the words of Philip Arthur Fisher, "Consider what might have been accomplished if half as much thought had been given to fighting hunger, disease and greed as was devoted to debating such points as the number of angels that could balance on the head of a pin."

Problematic European Policymaking

Bad organizational structuring

The article says "from the right", but reading the article, it's more accurately "from the extreme right and the extreme left".

Either way, I don't know who thought it would be a good idea to give a centralized body so much control over individual national policies.

Is this a joke?

Is this a joke?

And people wonder why Africa is absolutely devastated?

Saturday, May 23, 2009

Can banks/automakers/airlines turn around?

Faster than you'd think.

It's not easy... around 70% of turnaround attempts fail (something like 30% are out of business 5 years later, and 40% are in the same position or worse), but it can happen. The article highlights Fiat, Boeing and HP. All three had different strategies (Fiat negotiated with unions and improved worker relations while cutting costs, Boeing read demand better than Airbus did and came out with a better plane, and HP cut fat, laying off workers and trimming overhead), but all three worked.

Other historical or current examples that spring to my mind: Chrysler, Toys R Us, Kmart, MCI, Nucor, Circuit City, Burger King.

Why do I post this? Not only because I like stocks, but because this should give people a) hope that some of the banks can be rescued, because their problems are balance-sheet related, not brand or operations related, b) hope that GM can be resuscitated with a restructuring, given some of the work they've done recently on reviving a few of their brands, and c) extreme skepticism about government and union involvement in laying strategy. None of the companies I listed above turned around by conceding to the shortsighted interests of unions or bondholders. Unions and bondholders have rights (the latter currently being abridged by the Obama auto plan, in the case of GM, and likely to not hold up in court), but giving them more than the bare minimum you can fight for is not a recipe for a turnaround. This is especially true of the government as a creditor, because the government is not exactly known for its farsighted organizational skills and investing patience.

How to prevent state and federal budget meltdowns.

New Jersey's municipal bonds face a severe crisis.

They are unlikely to be the last ones.

The fact that most of our state governments and our federal government are completely unable to manage a budget without personal political considerations outweighing what's best for the state and country probably indicates that there's something structurally wrong with how we make our fiscal decisions.

One South American country (Chile?) has a fiscal czar. That could work, but it opens the possibility of corruption.

I've mentioned this before, but I prefer a system where America, and each of its states, have to have balanced budgets or surpluses over every 10 (12, 15, whatever) year period. If there is a crisis, as there is now, deficits can be run, as they should be. However, there is a strong political incentive for new policies to last forever, so budget deficits grow forever. This would reverse that.

In fact, if you wanted to create a little more flexibility, you could say that the country needs to have a balanced budget over the last 8 years, 10 years or 12 years at any given time. If 2 of those are out of budget, but one of them is inline, it allows for freak crises (2 recessions in one ten year period), and it actually does allow debt to grow, but hopefully it'll be much slower - debt growth that is slower than inflation is actually a debt shrinkage in real terms.

You can do that with states, as well. It'd be tougher, because so much of state budgets are funded by the federal government, but there needs to be some sort of fiscal accountability. The current system is crap.

Britain's Debt Load

Britain's debt outlook gets bleaker.

The article notes that one-time, exogenous debt-affecting events (this recession, for example) don't affect outlook for a country nearly as much as constant evolution of debt. I think this is correct, in theory... in practice, it becomes much more difficult to ascertain. It's the "unreliable friend" scenario - a friend who cancels once may have a good reason, a friend who cancels all the time is flaky and unreliable, even if each time seems like it's a reasonable "exogenous" event. A good fiscal policy and financial system shouldn't have very many large debt-affecting events. Wars and recessions happen, for sure, but without a plan for paying back the money, it still doesn't justify spending.

That, I suppose, is my biggest objection to the Obama budget. It defers pain in order to reengineer American social norms towards greater government management of America. Even if you believe that greater government management of America is a good thing (which I do NOT at all - I think it's a pretty fast way to a ruined country), doing that at the expense of government management of government is a very dangerous precedent.

By the way, a decrease in the British debt rating would be very, very bad for Britain... it would increase the interest rate Britain had to pay on its bonds, which would cause greater deficits, and has the potential to spiral out of control without much better fiscal management. The US can face the same problem... and if China stops buying our bonds, it would happen quickly. As long as China's growing fast, they should keep buying our bonds because it helps them develop. As soon as Chinese growth slows, inflation accelerates, or (most dangerously), they actually reach capacity in terms of their utilization of their substantial labor supply, the United States is in a world of trouble.

Monday, May 18, 2009

Men hit harder by recession than women

Male unemployment has gone up much more than female unemployment

I actually disagree with the notion that companies may be less likely to lay off lower-paid workers. Typically, lower-paid workers are less skilled, and are thus less costly to retrain when they're needed again. Thus, a college cuts its janitorial staff but not its assistant professors.

Universal Healthcare in MA

Universal healthcare has caused waiting lists to see specialists to grow hugely. We would expect doctors to be more hurried, make more errors, etc.

Most of the responses to this by proponents of universal healthcare in the article are invalid - these people refer to conditions that did not change before and after the universal healthcare legislation was passed in MA.

Krugman gets political

A story outlining Krugman's shift from an economic to a political view on income redistribution: here. Some of this is very educational on standard of living improvements and fallacies in trusting what you read about how policies affect the rich and the poor.

Reducing problems with air travel in NY

Closing down LaGuardia could possibly make travel easier from NYC. (The link to the slot auctions story is interesting, also)

potty training and making kids eat their vegetables

I'm not a huge fan of the "lying to your kids" parenting strategy, because I think it creates all sorts of long-term issues between kids and their parents.

But it does work:

Kids who are told they loved asparagus as a younger kid start eating more asparagus

An anecdotal story about a kid who wouldn't potty train being told he learned in his sleep and having no trouble with potty training

How to make people drive slower

Make the painted lines on roads crooked.

More information here

Perils of Regulation

Niall Ferguson on Regulation

Couldn't agree more. Phenomenal article on how humans overreact to crises because they don't predict them intelligently enough, and thus they respond with an overreaching raft of regulation. Better regulation is important, not more regulation.


The Becker-Posner blog has 4 great articles on conservatism (in order):





Another fascinating article about the effects of demographics on elections: McCain likely would have won this election in 1992, and what that says to Republicans

Consumption tax

Consumption tax.

I've seen a number of different blogs recently mentioning the possibility of a consumption tax - in essence, a federal sales tax.

There is one good thing about a consumption tax, one fallacy, and two problems with a consumption tax.

The good thing about a consumption tax is that it would raise money for a government with a massive, massive deficit. I've talked about this a lot, and I won't touch it further.

A major fallacy spread by proponents of a consumption tax is that it would prompt people to save more, which would be good in a society with a (until recently) negative savings rate. The reason this is a fallacy is that unlike choosing between two goods, where you choose one and you've done it, choosing to save is functionally choosing future consumption. On a macro, societal level, people will only choose to save more if a) they can expect to grow their money faster than inflation, which is generally a reasonable assumption but results in a far smaller increased-savings impact than is being touted, and b) if they think the savings tax will go away in the future. Introducing a national sales tax is a big deal, and I don't know if it'd be easy to get rid of once the political system had adjusted to having it. Thus, the saving more argument doesn't hold much water, and it CERTAINLY doesn't make much sense to reduce income taxes along with it.

The first problem is that instituting a consumption tax incentivizes leisure as an alternative. If people choose between leisure and consumption (not working and working, if you will), then making consumption more expensive makes people work less. If people work less, they earn less and spend less, which means on a tax basis, the consumption tax won't raise as much as the government thinks, income tax receipts will drop, and GDP/standard of living rate of improvement will drop.

The other problem is one of incentivizing saving. A new consumption tax punishes people who chose to save not expecting a consumption tax who would have otherwise spent more in prior periods. If we need the US savings rate to be higher, then setting a precedent of punishing savers for not expecting government profligacy makes it less likely the public will save, not more, as we see increased risk of increasing consumption taxes in the future to offset a ballooning national debt.

Overworked Americans

An interesting look at trends in the employment to population ratio here and in Europe

An excellent resource for tracking gvt spending

CNN recession government spending tracker

terrible epidemiology of sex

The Myth, The Math, The Sex, from the NY Times

Someone sent this to me and asked for alternate explanations. How is it that men can report so many more sexual partners on average than women when men have sex with women?

There are a number of major reasons, with an important lesson to be learned that applies to many things outside this topic.

EDIT: So Annetta demonstrated my first example as wrong. I'll replace it here (oops...) by pointing out that the article refers to the median number of sexual partners, not the mean... which is IDIOTIC. You can explain the discrepancy by saying there are a lot more women having little or no sex, and a few women having lots and lots of sex, while men are more evenly distributed. In any case, mea culpa.

Another reason is that men die off younger, and older women may be likely to have had fewer sex partners than younger women and men because of different sexual mores. Thus, the increased number of old women in the sample relative to old men may skew women's numbers down. this may be especially true if women with fewer sex partners live longer than women with more sex partners, but men aren't as affected by that difference. I don't know if this is biologically accurate, just hypothesizing.

A third reason is the existence of gay men and women. Gay men and women may be a substantial portion of the population - as high as 10%, although no survey can get good numbers on this. Almost every study shows that there are more gay men than gay women, and that gay men, on average, are much more promiscuous than straight men. If homosexual intercourse is counted in the number, then the increased number of gay men in the sample may skew men's numbers up. If the definition of "sex" in these surveys requires penetration, then one instance of gay sex would count twice, and one instance of lesbian sex would not count at all. That's a big skew. Even if people are instructed only to count heterosexual sex, they may not only report heterosexual sex.

A fourth reason is that there are more women than men in the population, a difference which gets more drastic as you get older and into sexual maturity, so finding the "average" number of partners skews women's numbers down. If each of 5 men has sex with each of 6 women, then there will have been 30 partnerships, and each man averaged 6 partners and each woman averaged 5 partners.

I understand 7 lifetime partners (the male average) vs 4 lifetime partners (the female average) is a big difference, and much of it may be reporting issues, but a math professor such as the one in the article should understand a lot of this.

This kind of statistics and logic is a common problem in epidemiological papers, where doctors and public health people have learned outdated, inaccurate or incomplete statistics and then use it and publish it. Read sources carefully.

Friday, May 15, 2009

Cheerios... a DRUG?

Cheerios warned by the FDA

This borders on ridiculous.

Carbon tax vs Cap and Trade

A little support for a Carbon Tax

A much better explanation than I can give about the systems

Problem with cap and trade is that it creates no incentives to reduce emissions below the cap, and it is a lot easier to cheat. There will be a lot more administrative paperwork. It also requires accurate projections for demand, which given how poorly the government predicted this recession, probably isn't a good thing.

Carbon taxes, however, are simple, hard to cheat and have the benefit of reducing payroll taxes concurrently. Geographic inequality is tough to deal with, so cap and trade has an advantage there, but by the same measure, you want to hit the highest carbon regions the hardest so that they change fast - ways of life get ingrained into culture, so gradual shifts can be hard.

The issue with cap and trade isn't economic, it's enforcement and logistics. I just don't think we'll be able to enforce it that well. I tend to prefer a carbon tax.

Edit: Krugman makes a very good point:

It would be very hard to figure out if China's actually taxing its factories, while it's much less difficult to monitor the overall level of Chinese emissions. That's a HUGE benefit I hadn't thought of. I suppose given that, cap and trade looks much better.

Krugman was wrong

never been the biggest Paul Krugman fan... too much of a political cheerleader and often prioritizes political points over good economics, doesn't listen to critiques of his work, assaults other high-profile economists on topics they've done a lot more work on, etc. Generally, just disagree with him on a lot.

Krugman called Mankiw an idiot, basically, because Mankiw didn't believe in Obama's projected growth forecasts, which Krugman supported. Mankiw thought they would be way too high.

Without acknowledging being wrong, Krugman just switched to the Mankiw viewpoint.

I don't know what I think or that I agree with them... it seems to me that what we need to worry about most right now is inflation. I don't think the recent rally was overdone because I think the recent rally brought us from hysterical lows to more moderate lows. I do remain optimistic, as a lot of indicators seem to be at the very least hitting a second derivative point, and a lot of the sources of the credit freeze seem to be improving. Even if credit hasn't unfrozen quite yet, there's a time lag to it all.

Stronger Antitrust Policies

I see antitrust policy as requiring some sort of insight into the pace of particular industries. Tech heavyweights have a tendency to turn over very, very quickly, so antitrust regulations there are not a good thing because they retard progress. Attacking Google, Intel and Microsoft is probably a really bad idea.

Things like cable networks are a lot easier to maintain a competitive advantage in because they require so much capital to create and it's hard to come up with a product that's decisively better. Antitrust regulation of the Comcasts, Time Warners, AT&Ts, etc makes a lot more sense to me.

Overall, this seems like it will be used to attack the tech titans more than anyone else, which makes it a net negative for the country.

big gvt vs big business

Firstly, Americans as a whole are more worried about big government than big business. Big labor is a distant third.

Secondly, there's a big party difference - Republicans are overwhelmingly more worried about big government, Democrats are mildly more worried about big business, and independents are moderately more worried about big government.

I predict inflation will be a big, big problem in a couple years down the road. Can't be sure, but if that is the case, then that big government fear will get a lot, lot worse.

In other news, I predict Republicans will gain a lot of power in 2012. In the Senate and House, where there are Democratic supermajorities, bringing it back to slightly democratic or even would be a good thing. Jury's still out on whether Obama knows what he's doing. I think he'll have a rough go of it, but he's charismatic enough that we'll see.

Obama's Auto Shenanigans

Sparing the UAW at the expense of secured creditors is a very, very dangerous precedent. Firstly, organized labor managing its own negotiations is absurd - the companies will be set up for bailout again.

Secondly, the government rewriting the capital structure to destroy creditors in order to prevent a bankruptcy and turn over ownership to the UAW... that's textbook socialism.

Bankruptcy with warranties guaranteed by the government would have been much, much better.

(I'm no lawyer, but I get the feeling Obama's auto plan is not legal... if this were France, where civil law dictates our creditors' positions, perhaps it would be, I don't know enough about France, but our credit laws are derived from English Common Law, under which this is almost certainly illegal. Here's hoping the law wins.)

More regular posting

It was suggested to me that it would be better to do one post per day than it is to do ten posts in one day and nothing for nine, because nobody has the time to read 10 posts.

From here on out, I will try to do exactly this.

Wednesday, May 13, 2009

peak coal?

Can't comment on this right now, exam tomorrow, but definitely need to post this.

This definitely changes the energy equation on the investment side. Does this mean we shouldn't bother looking into "clean coal"?

Thursday, May 7, 2009

One man's speculation on why the Republicans will recover

I'm not saying I'm pleased about it, but I do think he's right. The Democrats will figure out a way to screw this up with bad policy and politics. See bottom for my commentary.

(CNN) -- "It is important for us to have a strong Republican Party," Democratic Speaker of the House Nancy Pelosi tauntingly told a press conference on April 23. "And I hope that the next generation will take back the Republican Party for the Grand Old Party that it used to be."

Thanks Mrs. Pelosi, for your best wishes. But be careful what you wish for. I wouldn't write the obituary for the Republican Party quite yet.

Sure, things are looking grim at the moment. Yes, our Republican Party Chairman Michael Steele stumbled out of the starting gate, making several verbal gaffes, and raising questions about his competence. Yes, the latest poll numbers are in the toilet, showing only 21 percent of the American people call themselves Republicans. Yes, Arlen Specter decided the GOP was a drag on his personal political future. And yes, we lost a special election in upstate New York that maybe we should have won.

But things change. Remember a year-and-a-half ago, when everybody thought the election would be a referendum on the Iraq war. Remember 10 months ago, when everyone thought that expensive gas was going to drive people to the polls. It turned out that, by the time of the election, the most important thing that people cared about was their declining 401ks or their lost job.

Here are five reasons why the Republican Party will be back and perhaps sooner than anyone thinks:

1) Overreach: Several of my Democratic friends over the last several months have tried to comfort me when discussing the fall of the Republican Party with one consoling thought: Don't worry, we will screw it up. And on that one thing I agree with them. The liberal Democrats that currently run the Congress are destined to overreach on the legislative front. Pelosi and her California allies, like Reps. Henry Waxman, George Miller and Pete Stark, tend to think the rest of America wants the same things they do, from higher taxes on energy to a national health care plan that could be a blueprint for socialized medicine, from abortion on demand to gay marriage. But most Americans actually look at California as an economic basket case and social mess. It is a beautiful state, but it is also completely screwed-up, thanks largely to liberal governance. The Democrats are certain to overdo it on the liberalism, and that will make the Republicans much more attractive in two to four years.

2) Checks and balances: Unlike the parliamentary governments of Europe, where one party runs everything until they mess up, the American system actually gives a preference to both parties having skin in the game. While most voters don't actually think "divided government" when they go to the polls, they do think that one-party government tends to lead to excess and corruption. That is why the people have a chance a mere two years after the president gets elected to give him a midterm report card in the form of Congressional elections. Most polls now show voters prefer a candidate who will serve as a check on President Obama's power. And for most voters, who see Pelosi and Nevada Sen. Harry Reid as even more liberal than the president, Republicans will serve as that check.

3) Crisis breeds renewal: When things are going well, a political party tends to discourage independent thought and enforce philosophical orthodoxy. But when a political party faces crisis, all of that goes out the window. It is a wide-open world right now for Republicans as they debate amongst themselves what the party truly stands for. The debate will be painful, as neoconservatives, paleo-conservatives, progressive conservatives, moderates and libertarians battle it out to chart the course for a new and more vibrant party. Republicans can afford to have these debates now when they are in the minority, because frankly, they have nothing else to do. The Democrats went through this process in the mid-90s, and they built a new party that attracted centrists like Mark Warner, without alienating old-line liberals like Pelosi or Waxman.

4) Talent senses opportunity: Investors know that the time to buy is not when the market is at its peak, but when the market is at the bottom. But it is not always easy to know when the bottom hits. In politics, it is pretty easy to know when a party has hit the bottom. And for the Republicans, it is now. Talented political entrepreneurs look to the GOP and see nothing but opportunity. The old bulls have been wiped out. The new guard is ready to start leading. In the House, young guns like Eric Cantor, Kevin McCarthy and Paul Ryan are charting the future for the next Republican takeover. Adam Putnam of Florida and Mark Kirk of Illinois are getting ready for state-wide runs. But it is not just the young guns. It also more experienced politicians, John Kasich and Rob Portman of Ohio, Tom Ridge of Pennsylvania, Jeb Bush of Florida, who see an opportunity to lead the party back to power.

5) The Republican Party is the de facto Libertarian Party: Most people I talk to think of themselves not as Republicans or Democrats, but as libertarians. Not libertarians in the political party sense, but libertarians in a deeper philosophical sense. They tend to want government to stay out of their lives as much as possible. They tend to distrust all politicians, and when they hear someone say, "I am from the government, and I am here to help," they tend to laugh uproariously. It was Will Rogers who said, "I don't make jokes. I just watch the government and report the facts." The Republican Party does best when it seeks to reform government, to lessen the power of the bureaucrat, and to fight to give more freedom to the people. When the GOP returns to that philosophical creed -- which it will do in the face of the Obama administration's vast expansion of government power -- its fortunes will brighten again.

If the Republican Party were a stock, the smart investor would start buying it now. Yes, things look grim at the present time, but things change. The GOP is not dead yet, and Speaker Pelosi may see her wish of a resurgent Republican Party come true quicker than she anticipated.

The parts of the CNN article which seemed most legitimate to me were the "overreach" portions and the "libertarian" portions. Yes, if the Democrats play their policy right, the demographics are absoutely on their side - Republican power base consists of old white males and far right wing evangelical Christians, who are shrinking as a portion of the population and localized more and more in the South. But 21% self-identified Republican becomes a lot more potent if Republicans capture a significant amount of the 38% independents. As a left-of-center independent, I become extremely concerned looking at Pelosi and the Democratic legislature (sometimes with Obama mixed in, and sometimes with Obama opposing them) and some of the policies they're trying to force through because they can.

This takes two forms. The first are the policies rewarding their own electorate - strengthening union leaders at the expense of union workers, "buy American" provisions and tariffs, price controls, etc - which usually are terrible for the country as a whole even as they help the far-left voting bloc. Secondly, a vast expansion of government becomes more than the sum of its parts because we have to afford it, which means we're trading off future taxation and ability to spend for present spending.

The best way to avoid those policies while still maintaining Democratic social policy is a slight Democratic majority with enough Republicans to cut away the dead weight and keep the Democrats moderate. That Republican bloc isn't there now, and you have to figure more than half of independents are right-of-center, because many of them are from the Republican party, which means the Republicans aren't going to have a hard time getting many independent voters if the Democrats aren't very, very restrained. They haven't been restrained, thus far - the words that come to mind are that they're "celebrating like it's Christmas." That's gotta stop if the Democrats don't wanna turn right around in 2-8 years and give back their majority just as quickly as they got it.

As a side note, Palin can be viewed as accelerating a decline of the Republican party, as many pundits are claiming, but she can also be viewed as an anomaly that won't be there to help the Democrats again.

(And as a side note, yes I said this under Bush, yes the Obama budget is significantly larger than anything Bush did, and yes I voted Democrat last election, largely because of Palin.)

Venezuela is Stupid

...Venezuela is having trouble maintaining their own oil fields, and their oil fields are not cost competitive as it is. This is somehow going to make their operations more efficient? And when it fails, it's not going to make everything cost more because of the risk of seizure?

Appropriation is never the answer.

On taxing the wealthy

Successful entrepreneurs are leaving London because London raised its highest marginal tax rate to 50%.

That is not a good thing for England.

The most disturbing story I've read in a while

This is not for the faint of heart or stomach.

I post this not because I have any clever solution or anything else, but because I think it's something that needs more publicity. France has a raging anti-Semitism problem that because of changing demographics and French legal precedent is almost certainly going to get worse, not better, unless France makes some serious changes in enforcement, punishment and education. I hope you'll all follow. (Which will be difficult, because against almost any precedent of human rights or common sense in the face of clear evidence, France closed the trial to the public and their police investigators still claim that the crimes were not motivated by religious hate.

Kyle, a friend of mine, constantly sends out headlines from CNN next to headlines from the BBC or Al Jazeera from that day to show that CNN ignores important stories to tell completely trivial ones. Today Kyle found out from CNN that the embattled Miss California is dating Michael Phelps. Kyle sent out an article from Al Jazeera that can't be found on CNN, in which Secretary Gates states that military aid to Egypt will not be made conditional on democracy or human rights (which then sparked a debate on whether that statement was a continuation of US policy ignoring human rights in favor of national defense or whether the statement could potentially have been made because stating otherwise may damage human rights more than it would help it.) I then found this article.

The state of our media is truly atrocious. It's not going to get better as news bureaus get shut down in favor of catchy multimedia (like blogs). The blogosphere tradition of "short and witty posts" makes things worse.

Blog commentary I fully agree with:

And it seems that the perpetrators of the crime were linked with Hamas. I find it absolutely stunning that the same people who get so upset about some of the things done at Guantanamo and favor prison for the soldiers believe that Hamas needs to be treated with the respect of state sovereignty in its dealings with Israel. Say what you like about the need to get the support of the populace of Gaza, but be consistent. Remember when you're opposing Israeli action against Gaza that the people of Gaza, in supporting Hamas, are like the people in America supporting Guantanamo, except they're supporting something much, much worse. You can't be critical of the Americans and not of the Gazans, as a large number of my uber-liberal friends have been.

As a side note, I oppose torture, and I criticize both the people in America who support Guantanamo and the people in Gaza who support Hamas. I don't particularly want to see anyone imprisoned or killed, but if Gaza is bombing Israel and Israel can't stop it by peaceful means because terrorists don't negotiate easily, I believe Israel is fully justified in treating the state as an anarchy and the "government" as criminals. This seems like quite a plausible outcome to me. Similarly, if we cannot stop future torture by any means other than imprisoning soldiers (I have trouble buying this one), then yes, the soldiers should be imprisoned, because they did commit crimes.

And yes, this edit is a direct response to a number of claims by some of the most educated people I know incorporating bizarrely poor logical analysis of ethical responsibilities and individual agency of members of a country's populace. I suppose this has to do with the fact that Americans are "us" and it's a lot easier to say "they should know this" than it is to say that someone of another culture "should know" the same things about human rights. I don't buy it.

An example of excellent college science fostering

at NC state, some students have developed by far the simplest and fastest reliable TB test in existence.

Read down below:

"The groundbreaking device is just the latest technological marvel to emerge from NC State, where university officials launched a campuswide entrepreneurship initiative last year to expand on the success of the engineering program. NC State holds 641 active patents and has another 141 pending. It's spun off 72 start-up companies based on technology developed by university researchers.

Programs like the Engineering Entrepreneurship Program are transforming students' classroom experiences, confronting them with real-world problems and training them to think like the world's most successful entrepreneurs."

Awesome device, equally awesome program. Good job, NC State.

An alternate reason why colleges oppose the SAT

Just like my theory that college presidents oppose the drinking age not out of any belief that a drinking age is bad but because it absolves colleges of liability when stupid drinkers are legal... here is a good reason why colleges are dropping the SAT that has nothing to do with the fairness of the SAT.

Questions for Buffett

Don't know if he answered any of these, but these are all really interesting questions for the Buffett-o-philes out there (which, given the limited size of this blog's readership to date, is probably just me ( : )

Nudges to reduce credit card defaults

Credit card debt's a big problem. This article is cool.

Reading List

Someone asked me to put together a reading list (I'm flattered... I'm sure other peoples' reading lists would be much more useful than mine). But for posterity, these are books I feel have been tremendously instrumental in my development as a thinker through the end of college. They're in no particular order and vary from ethical philosophy to political thought to economics to literature to investing.

Plato: Complete works, but particularly
Euthyphro, Phaedo, Meno, Apology, Crito, Symposium, The Republic

All of them are fast reads except the Republic, which is basically the foundation of much of how we view political philosophy. The first 6 are tremendous examples of how logic works. Certainly many of the conclusions are absurd, and I find the subject matter of Symposium to be jarring to my modern tastes, but they shaped my understanding of reasoning, cause and effect and counterargument. Best thing to do with these is to analyze the argument, and come up with problems. Then come up with problems with your problems, and keep going til you can't do any more. Then read on and see how Plato deals with them, and repeat. The Republic is extremely interesting as a political work and shows where a lot of what we believe in comes from.

Machiavelli: The Prince and Discourses on Titus Livy

The Prince is an introduction to political strategy, and Titus Livy is the first book I've ever read that proposes a more constructive republic based on incentives for leaders and the people. It's important to remember who each of the books were written for before criticizing the ruthlessness of The Prince too harshly (The Prince is supposed to support the notion of empire because it's written for a prince, while Discourses on Titus Livy shows how to construct a good republic).

Hamilton/Madison/Jay: The Federalist Papers

The ultimate introduction to how our government is supposed to work, as envisioned by the founding fathers. An absolute masterpiece.

De Tocqueville: Democracy in America

Another masterpiece, this time on what makes democracy work and what makes it stop working. Unbelievably prescient about both good and bad aspects of our society 200 years later.

The Bible

The Bible shapes so many arguments in ways that aren't entirely clear without reading it that I would assert it's a necessity to be educated to read it from a critical point of view. It's also a pretty cool work when examined as literature. (I should probably read the Koran, as well)

Victor Hugo: Les Miserables
The French Shakespeare, he illuminates the devastations of poverty, the potentially positive power of religion in society, and questions what it means to be an honorable person. His prose is by far the most beautiful of any prose I've ever read.

Shakespeare: EVERYTHING
Brilliant. Absolutely amazing - powerful speeches, powerful concepts, amazing use and invention of the English language. I would recommend reading "The Elizabethan World Picture" by Tillyard first - it's very, very dry, but you will enjoy Shakespeare infinitely more. My personal favorites are Henry IV part II, Henry V and Macbeth, though the Merchant of Venice, Hamlet, Lear, Tempest and Winter's Tale are interesting, as well. Everything (except maybe Merry Wives of Windsor) is worth reading for SOMETHING though.

Dostoevsky: The Brothers Karamazov
Beautiful prose, more interesting religious vs intellectual themes, and one particularly beautiful chapter called "The Grand Inquisitor."

JS Mill: Utilitarianism
Utilitarianism has plenty of problems, but it's certainly an interesting way to think about things.

Warren Buffett: Berkshire Hathaway Shareholder Letters
The man is brilliant. Ignore the Berkshire specific observations, if you want (I learned a lot from them)... the man is one of the most common-sense economists, psychologists and financiers I've ever seen. Does a better job examining mass psychology than almost anyone else I've read.

Mankiw: Principles of Economics
Economics is an exceedingly useful topic, even if you have no interest in anything to do with money.

Any solid introductory statistics or econometrics textbook
Numbers can be manipulated in a million different ways. Understanding how these work is imperative to good analysis.

Faulkner: The Sound and the Fury
PHENOMENAL. 1/4 written from the perspective of a mentally-challenged person with no conception of the notion that time moves linearly, 1/4 from the perspective of an insane person about to commit suicide, 1/4 from a cynical sociopath and the final 1/4 from an omniscient narrator on Easter. You can see why this is brilliant.

RL Stevenson: Treasure Island
Just plain entertaining

Michael Porter: Competitive Strategy
As a confession, I've never read this book cover to cover. It's too dry. But I've excerpted a significant amount of the book and it's extremely useful in understanding the dynamics of capitalism.

Philip Arthur Fisher: Common Stocks, Uncommon Profits
Fisher was the original growth investor, who also happened to be one of the first to connect competitive advantage with long term sustainable growth. His book is very investment focused, but the reason I think it's cool is that it expounds on the types of conditions we should want to foster in American entrepreneurs as a whole to help create sustainable growth for America. If you're not interested in the investment conclusions, it still has lots of policy implications.

If I think of others, I'll post them.

For blogs, I also strongly recommend Greg Mankiw's and Tyler Cowen's Economics blogs. They tend to be done pretty well.

The first step for fixing our legislature

Problem: Our legislature is populist and members of Congress are far more interested in getting reelected than in creating policy that works

Solution: Institute term limits for congresspeople.

There are many situations in which legislative experience can be valuable, but there is a large network of advisers, thinktanks and consultants in Washington that former legislators can become.

Meanwhile, term limits ensure that congresspeople don't feel the need to hold onto their positions quite as violently because they'll be forced to give them up in the near future anyway. The fact that reelection happens at all helps to weed out the people who disregard public will entirely, but term limits insulate congress a little bit from people whose only goal is to stay in power.

Popular support for Capitalism vs Socialism

I found this stunning but unfortunately not unbelievable:

An excerpt:

"Only 53% of American adults believe capitalism is better than socialism.

The latest Rasmussen Reports national telephone survey found that 20% disagree and say socialism is better. Twenty-seven percent (27%) are not sure which is better.

Adults under 30 are essentially evenly divided: 37% prefer capitalism, 33% socialism, and 30% are undecided. Thirty-somethings are a bit more supportive of the free-enterprise approach with 49% for capitalism and 26% for socialism. Adults over 40 strongly favor capitalism, and just 13% of those older Americans believe socialism is better.

Investors by a 5-to-1 margin choose capitalism. As for those who do not invest, 40% say capitalism is better while 25% prefer socialism.

There is a partisan gap as well. Republicans - by an 11-to-1 margin - favor capitalism. Democrats are much more closely divided: Just 39% say capitalism is better while 30% prefer socialism. As for those not affiliated with either major political party, 48% say capitalism is best, and 21% opt for socialism."

There's a point to be made here about popular government and the media. As the media becomes more pervasive, it forces government officials seeking reelection to be more accountable to the populace. This is widely viewed to be a good thing, and I certainly think a government should be accountable for passing the policy that is best for its people, and elections are the best way to accomplish that.

However, the United States is not a democracy, it is a republic. The difference is that in a democracy, a government is entirely dependent on popular will for setting policy, whereas in a republic, people choose who to elect, and the elected official then decides what makes the most sense for the nation and his electorate.

For example, states and nations vote to limit civil rights all the time. Gay marriage repeatedly loses in elections outside of the northeast, even though it is the classic civil right in that it harms nobody to allow it and confers equality onto a population that had otherwise been underserved (the usual justification is barely-hidden religion, which has no place in a government whose foundations lie in a separation between church and state). Jim Crow laws had tremendous popular support in the South. Heck, this past November, the populace of Florida just voted against the repeal of a law forbidding Asians from owning land.

In other words, the people of a country should be the intended beneficiary of policy but absolutely can wield a "tyranny of the majority" (de Tocqueville's expression - everyone should absolutely read "Democracy in America") if it's given too much power over policy.

The economist in me screams at the stupidity and entitled nature of Americans who want the government to take care of all their problems (find me a socialist state and you will be showing me a state that has failed its people). However, that's only the first big takeaway from this poll. The second big takeaway needs to be a recognition of a growingly glaring flaw in the legislative portion of our government: the party system and reelections incentivize mindless public following, which means a series of badly calculated and overreactionary steps designed for political approval.

I have a proposal for a fix coming up.

Tuesday, May 5, 2009

Bizarro Affirmative Action

Ricci v DiStefano is being heard this week by the Supreme Court. This has extreme implications.

A good explanation of what happened:

How the Supreme Court Judges seem to view it:

One opinion (the comments are kind of interesting, too):

The two points that made the most sense to me.
From the Times article:

"Near the end of the argument, Justice Breyer asked a series of hypothetical questions to test the contours and limits of the white firefighters’ position.

What if, Justice Breyer asked, an employer sets an application deadline but receives an insufficiently diverse mix of applicants? May the deadline be extended?

What if, he asked, a university is dissatisfied with the number of female professors gaining tenure under its usual requirements? May it suspend the requirements?

What if Texas, which admits high school students graduating in the top 10 percent to its public universities, becomes dissatisfied with the resulting racial mix? May it switch to 15 percent?

Justice Breyer, characterizing the white firefighters’ argument, more or less answered his own questions. If employers know the identities of those who would benefit under the old rules and nonetheless adopt new rules based on racial or similar grounds, Justice Breyer said, the new rules would have to be struck down."


"Individuals, not groups, have rights in American law."

It is my opinion that a "fair" test is one that gives everybody a chance to pass that is equally commensurate with the combination of their innate ability, experience and level of effort for preparation, and is directly related to the privilege for which you are testing to be able to do.

Firefighting does entail a lot of facts that you need to be able to pull up under pressure. You need to know about structural engineering, you need to know about fire and the rate of its spread, for which you need to know about chemistry and electricity. The best way to do that is either oral exams or written tests, and written tests entail much less bias in grading. In other words, you're graded on important skills most equally through a written test.

Thus, giving a written test to firefighters probably does fall under the "directly related" portion the same way a written test is appropriate for a license - maybe answering on paper is not directly what you're doing when you're driving, but if you can't answer it on paper, it's a safe bet you're not going to be able to do it when you're driving.

The question then is, does this test give everyone a chance to pass that is equally commensurate with the combination of their innate ability level, experience and level of effort in preparation - in other words, their intellectual capital, stripped of other components (like race).

The evidence here says yes, it does. The test was designed by a company whose specific intention is to scrub tests of racial bias. Additionally, a man with severe learning disabilities managed to overcome them to score very highly on the test through hard work. This was a test where every indication is that no matter what your race, you could do well.

As a result, reverse engineering the results (throwing out the test) isn't justified by a notion that the test was somehow unequal solely because you don't like who scored well. "Unequal" results occur all the time among potentially equal actors - it's quite likely, statistically, that a test can be fair to blacks and whites and have white firefighters score highest by far. If you see that a coin flips heads five times in a row, you cannot use the results to say that the coin is unfairly weighted. Perhaps the results mean that you reexamine the coin, but the results are not conclusive evidence in and of themselves - there's a very decent chance (1/32, or about 3%, probability) that you just happen to have picked 5 flips that are heads. Larry Bird's 3 point % is only a little above average for his career, but he's regarded by any fair basketball observer as one of the most lethal 3 point shooters to ever live, because of the situations in which he had to play and the way other teams played him. Results are significant only in light of the particular circumstances of the measurement, not because of the results themselves. (Side note, this is why I believe every college student should be forced to take statistics). The results of test themselves are not evidence that the test is biased; it could be a product of the particular firefighters taking the tests and how hard they're working. All other circumstantial evidence (The fact that Ricci managed to score 6th on the exam, the fact that it was created by a company that specializes in race-scrubbed test design) points away from the notion that the test is unfair, so a conclusion of an unfair test does not seem to be warranted.

Additionally, saying it's "fair" to throw out the test results because you're treating everybody equally is misleading. Yes, you are throwing out the test for everybody, but you are throwing out different results for everybody. It is no different than throwing out everybody's resumes when applying for jobs, or throwing out everybody's behavior records when applying for parole - technically, you're throwing out the exact same document, but the existence of a record doesn't imply the same inputs by every actor into what's on that record. Throwing out every resume means you're throwing out the extra effort, experience or ability of people who are more qualified or worked harder. That's completely unfair by any definition of fairness. If you're doing so because the people who happen to have scored higher are white, then that's a racial reason for doing so, and does constitute reverse racism.

As a depressing side note, it looks like the frontrunner for the new Supreme Court spot, Sonia Sotomayor, voted against the white firefighters and for the city of New Haven's decision.

Legislating executive pay is bad: part 100

Citigroup, which needs to turn around more than any other bank, is in trouble because all of their good employees are leaving for hedge funds and foreign banks cuz they can't get paid. They may have to spin off their most profitable businesses (Phibro, etc) because otherwise they become valueless.

Legislating positional externalities (in this case, that of inflated executive compensation) for some actors and not others is a formula for the legislated actors to die if the positional externality affects performance... which in the case of Citi would cost taxpayers a lot more than executive compensation.

Friday, May 1, 2009

One Student's Argument against Affirmative Action