Monday, December 28, 2009

Happy holidays

I've been away (back in a few days), but I just want to wish everyone
a happy holidays and safe travel!

Monday, December 21, 2009

Spartan Congress

I had a highly impractical idea today to reduce the political careerism that plagues Washington, D.C.
Eric, a friend, pointed out that government from the left or the right inevitably ends up awful, and even government from the center ends up a compromise of pieces from the left and right instead of a coherent center framework.
I believe political careerism (wanting the fame, wanting the glory, wanting to be reelected) is a part of this. How do you reduce careerism? By making it a tour of service, rather than a cushy job. If politicians weren't paid, and had to spend their time in office living in college dormitories on meal plans, stripping away the power and the perks, political office becomes about serving your country.
That's how we treat our military servicemembers; why should politicians have an easier life than those they send overseas to do a much tougher job?
Of course the irony is that legislators would have to pass that legislation, and they're far too self-serving to ever do it. But this country would be better off for it.

To everyone complaining about the filibuster

A lot of people on the left have been complaining about the filibuster recently.
The filibuster is an important part of Senate procedure, and always has been, because it prevents "tyranny of the majority" and forces bipartisanship. It means that temporary majorities (and every majority is temporary - if every senator and congressperson were reelected tomorrow, it's likely there'd be a Republican legislature) can't pound through large-scale reforms without incorporating the best ideas of the minority. The Democrats used the filibuster when the Republicans wanted to privatize Social Security, because they were concerned (not altogether unreasonably) that privatizing social security would remove part of the safety net component. (It's a little confusing why  Social Security wasn't partially privatized - half privatized, or something - but anyway). The Republicans are using it to try and prevent the Democrats from ramming through unpopular healthcare legislation with absolutely no bipartisanship and no consideration of Republican worries. This is the whole reason the filibuster exists  - to prevent one side from forcing its ideas on everyone.
Without the threat of a filibuster, it's likely that abortion and gay marriage would be illegal. It's possible welfare would have been crushed, also. Majority rule has big, big problems. Obviously, unanimity rule is impossible, but some sort of bipartisanship should be required for big legislation, which makes this healthcare bill all the more disgraceful.
Unfortunately, in situations with 60+ senators from one party (like now, after Massachusetts unethically pseudo-gerrymandered their way into having an interim senator), once things pass, it makes it very difficult to repeal anything.
And as an aside, the most comical part of this is that Congress is now going onto a job creation bill. A large number of corporate leaders have already stated that the healthcare bill will make it too expensive for them to hire Americans, and I question whether we can stimulate enough to offset the jobs damage done by the healthcare bill.

Friday, December 18, 2009

Follow up from Paul on China

trevor - nice post on china.  and thanks for the shout-out, too.  i think you make many good points, and i agree with you on the scope of the problem and some of the potential (partial) solutions.  it is going to be messy, and any major periods of instability from these problems might fuel certain politically charged problems on both sides.
i agree that domestic consumer spending is a possible solution, and from what i've been reading from michael pettis, other china hands here at Harvard, and the soon to be defunct Far Eastern Economic Review, there are two sides to the debate over this shift.  there are those who see this as a solution, and are advocating for a major shift in the economy to encourage this more; this transition might result in lower growth for a few years as industries adjust to working with new markets, but in the long run will help tremendously and avoid disaster.  the other perspective would like to keep the status quo and continue enjoying rapid [growth].  the latter group is winning at the moment.

to expand [on my point,] china's ethnic nationalism is directed at japan, but it is also directed elsewhere around the world.  remember back to when the olympic torch was moving around the world in the leadup to the beijing olympics.  the chinese were livid that there were so many protesters throughout the west; they found it disrespectful and a charge against them as people.  ever since the expansion of european imperialism into china (ie, the british occupying the summer palace in beijing in 1860, the british and french occupying parts of shanghai until WWII, the british winning land in 1842 on what would become hong kong, and a joint european-american army putting down the Boxer Rebellion in 1900), the chinese have been characterized as "the sick man of asia" that used to be a great power.  after the qing dynasty fell in 1912, things fell apart even more, and various nationalist movements in china (this includes both chiang kai-shek in the 1920s/30s and Mao Zedong in the 1930s onwards) have largely been attempting to help "the nation stand up on its own two feet" and gain respect and prestige again.  the beijing olympics mollified some concerns that they weren't respected, but there is still a large, silent, lingering distrust of the rest of the world.  this is a slowly bubbling pot.

Perpetual Improvement

Three of the leading management philosophies today are "continuous improvement" (kaizen), "six-sigma" and "lean manufacturing". The former refers to continuously looking for small efficiency gains and never being complacent (putting printers all around the office instead of one central printer can save our workers 70 minutes of work time per year!). The second tries to identify and fix causes of defects so that you can improve quality and minimize variability in manufacturing (and it has been extended to other business processes also - it has been criticized for harming innovation, actually, because new processes usually have defects). The last tries to reduce wasteful activities that are unproductive, focusing on (from wikipedia): Overproduction, unnecessary transportation, inventory, motion of workers or equipment, defects, overprocessing, waiting, and also a secondary focus on latent skills, danger poor information, material efficiency and maintenance/breakdown.
Lean and Kaizen are pretty similar, intuitively, and they're something I've always had an interest in because of their applications to so many other areas. "Capitalization" is a concept popularized by James Flynn (a psychologist) to describe how close a population or person is to working to their potential. An example given by Gladwell is that physicists have a poor capitalization in sub-Saharan Africa - there are many more people with the ability to be physicists there than there are physicists from there. The converse is hockey players in Canada, where if you can play hockey, you will be found.
This paragraph, from a Bill Simmons-Malcolm Gladwell chat, was an incredible example of how somebody driven to perpetually improve can become superior, even when many others with the same natural ability exist:

"Flipping it around, Kobe is the best overcapitalization example other than [Karl] Malone (who came along in the right era and had the perfect teammate and coach for his game). Kobe works harder off the court than anyone in the league; we have so many ways for him to improve in 2009 that he's like a kid in a candy store. We've all heard the story about how he worked out with Hakeem all summer to refine his post game [he's a guard and Hakeem is a center, so this is unique], so here's one you might not have heard: When I visited Nike last month, we toured the development building (in which they customize sneakers for specific athletes), and the guy who ran it told us that Kobe was their favorite client. Why? Because he kept pushing them and pushing them to make the right shoes for him, even flying there for days at a time just to put himself through grueling workouts with sensors all over his body. This past summer, he pushed them to create a special low-top sneaker that also would prevent him from rolling his ankles -- which seems incongruous on paper -- yet they feel as if they pulled it off. And only because he kept pushing them. Forty years ago? He's wearing crummy Chuck Taylors like everyone else.

... [somewhat unrelated but from the sane article and also interesting:]

"In that generation, the people with extraordinarily long careers were true outliers: They were physical freaks. Roger Craig has run a half-dozen or so marathons since retiring from the San Francisco 49ers. Can you believe that? I've been a long-distance runner my whole life. I weigh 100 pounds less than Craig, and I did not spend my formative years getting beaten up on a football field -- and I would never race at that distance. It's too punishing. But I'm not Roger Craig -- who somehow emerged from 10 years of getting pounded on every play in the NFL feeling so spry that he decided to take up marathoning. What's happening now is that medicine is allowing the rest of us to catch up with the outliers. The impact of scientific progress on human performance is greatest not at the top but in the middle: It helps the guy who would have played five years play 10 years. It doesn't help the Nolan Ryans or Roger Craigs all that much. They don't need any help."

Wednesday, December 16, 2009

Getting concerned about China, and what it means for the US

I've been getting more concerned about how badly China can hurt us.
It starts with the fact that 35-50% of China's GDP is construction, much of it financed with credit, with plenty of evidence that many projects don't earn their cost of capital, many are shoddy, and most are underdepreciated.
Thus, China seems to definitely be in a construction bubble. As soon as projects aren't able to pay down their interest payments, it necessarily comes crashing down, similar to the subprime crisis here, but bigger, because it's a bigger percentage of GDP.
Thus, their banks will need a bailout (in fact, many already do). Presumably, the government will do exactly what ours did - drop interest rates to 0 and print bucketloads of money.
There are a number of very big issues with this. They can't be described sequentially because they're interrelated, but I'll do my best to be clear.
Firstly, there's a major human rights issue in China. There is speculation that the populace tolerates the ruling party because it can deliver growth. When growth is not coming, however, it is possible the ruling party will be thrown into turmoil because of its lack of protection of the welfare and rights of its citizens. Paul, a friend of mine knowledgeable on the topic, has noted two big components: a strong ethnic nationalism, currently directed against Japan, that could either strengthen the party or destroy it, depending on how well the government is able to direct it, and a highly professional military with the ability to maintain order. These factors could strongly influence the Chinese government's response to economic crisis, which is why I list them first.
Asset bubbles in the US and elsewhere:
Firstly, the Chinese savings rate is mid double digits. The government very well could decide not to backstop private savings the way that the FDIC does in the US (because of different senses of property rights and national priorities of infrastructure investment over private consumption), or it could decide to backstop savings because of the potential unrest if it doesn't (savings does constitute a large proportion of household wealth), or it could do some sort of intermediate step where savings is only backstopped if kept in the propped-up bank.
With a full backstop and recognition of property rights, it is not absurd to think that 0 interest rates in China could cause savers to look for better rates of return. This would create an asset bubble elsewhere in the world on a scale not seen in a long time. That's a lot of people, and a large percentage of their net worth in savings. Seeing as we're still recovering from the last asset bubble, another one would force us to raise interest rates quickly and keep us in recession.
With no backstop or an intermediate backstop, there aren't any moveable current savings, but future savings will likely be put in foreign assets. This results in an asset bubble, as well - smaller, and slower, but still destructive at this point. The intermediate backstop would be easier to pull, because banks would lose less credibility in the eyes of Chinese savers. This still isn't a great option. Either way, we're possibly looking at asset price inflation moving forward.
Inflation in the US:
With the credit bubble popped, just to avoid a liquidity trap/deflation, the government will need to print Yuan at a fast enough rate to make overcorrecting towards inflation a concern; if the government needs to keep delivering growth in order to quell human rights-related uprisings, it will be forced to start printing tremendous amounts of Yuan and actually cause purposeful inflation. Either way (and especially in the latter case), their currency will weaken. Especially if the country is chasing growth, it may no longer find it quite as appealing to use Yuan to purchase raw materials. Most countries wouldn't have a choice (the US didn't, and their currency actually strengthened because of the "risk-free" nature of treasuries), but China will have ~20% of the US monetary base sitting in the bank. It can use dollars to buy raw materials internationally and use the printed Yuan domestically (perhaps in a price-controlled manner, so they can get more "bang for the buck" at the expense of their populace). If China decides to start using significant numbers of dollars internationally, it could cause US inflation. This would require the raising of US interest rates, but it gets worse - because Chinese dollar holdings would be insensitive to interest rates, we'd have to raise interest rates on an artificially small portion of the monetary base, meaning rates have to increase more to stem inflation. Having just gone through a credit crisis, stagnating the economy won't be very popular. The most likely outcome is stagflation, 70s style. I'm going to come back to this point in a second.
Unemployment in the US:
The other problem is that massive excess capacity in China and a Chinese Yuan that's weaker (or, if you hold the Yuan to be artificially weak now, as most do, a Yuan that doesn't strengthen) means a whole lot of very cheap Chinese goods coming our way. Either we become protectionist (I'm against protectionism on particular industries, but an "import certificate" system or equal % tariffs on all Chinese goods may actually have to happen), or we get flooded with cheap Chinese goods. If US goods are getting more expensive but Chinese goods stay cheap, substitution towards Chinese goods would reduce US output and keep unemployment high. This is why on the inflation point, it is possible the US would let inflation happen  - it'd be better for us to have inflation if the real cost of living isnt rising bc of cheap imports than it is to have stagnation with a high unemployment rate.
Now, I do believe we see more protectionism, but that just means that when the current imbalances have worked themselves out and the Chinese deleveraging is over, we slow our economy down and cause more unemployment. So unless we time the removal of protectionism correctly (fat chance, given the way Congress works), we're still going to see more US unemployment.
How do we solve this?
The only way I can see out of an asset bubble and some combination of stagnation and inflation is increased consumption and decreased investment by the Chinese. This would help to fill up some of their excess capacity and mitigate the severity of their credit crisis. It would mitigate an asset bubble (less savings means less overseas investment), and presumably strengthen the dollar (so that Chinese government spending of dollar reserves doesn't weaken the currency as much). We see less inflation, and we don't see a flood of Chinese imports, so we recover more strongly. China has less overcapacity, so it gets hit less.
One way to facilitate increased Chinese consumer spending would be adjusting the tax code to stop favoring investment and to implement access to credit, health insurance, welfare, social security, etc. One reason the Chinese save so much is that they are encouraged to by their government, and there are no credit or social safety nets available to consumers. Most can't get loans, so any future spending - education, a house, getting sick, retiring, losing your job - has to get paid for from savings. Reducing the need for paying from savings would allow more to go towards consumption.
Of course, we can't implement that directly - we can only pressure the Chinese. In terms of how we can protect ourselves, general import certificates (closing the trade deficit without advantaging or disadvantaging any country or industry) is another way we could partially shield ourselves. It's not perfect by any stretch - the asset bubble could still occur and inflation from spending of dollar reserves could still occur - but it mitigates the unemployment issue. It still hurts American consumers because we have to pay more for our preferred goods (protectionism is almost never a good idea, except when your biggest trading partner is artificially manipulating their currency, as the Chinese are, or with specific brand-heavy but quality-neutral goods, as I've outlined before), but it hurts less than any other policy we could take at this point. Implementing this would almost certainly require a reduction in government spending, because we wouldn't be able to export dollars through trade anymore, which reduces demand for government bonds. If we don't cut government spending, interest rates/inflation go up anyway, and we have the stagflation conundrum again.
A temporary "hot money" tax could theoretically be helpful but is very difficult to implement in a country as dynamic as ours, and produces highly undesirable side effects, so that may be a poor policy option.

Looking back on TARP

The last major bank (Wells Fargo) paid down its TARP debt yesterday, after the two weakest banks (BofA and Citi) had paid theirs back within the prior two weeks. There are some regional banks (PNC and Suntrust, I think, are two of the bigger ones).
The Federal Government lost money on CIT, which went bankrupt, and profited substantially from the other banks who used TARP. It was a tremendously successful program - it kept the banks afloat and also made money for the government. Forcing all of the banks to participate was a lowlight (JP Morgan, for one, certainly didn't need it, and it cost their shareholders millions), but on the whole, TARP was administered very intelligently on the banking side.
The extension of TARP to the automakers has been far less successful. It was rightly criticized at the time as being protectionist and union-oriented, and the government is very likely to lose a lot of money on its automaker investments.
The moral of the story is that intervening to save competitive, viable industries in the middle of a liquidity crisis is advisable. Intervening to save obsolete, inefficient companies that were dying anyway in order to save jobs is a far more dangerous and questionable game. Not to say it's entirely wrong (who knows what the consequences would have been of adding another couple million unemployed to the ranks), but the use of the TARP bailouts on the automakers can be fairly questioned, while the use of the TARP on banks was correct. The moral hazard issue with banks will have to be addressed, but that's a better problem to address than the unwinding of ~15% of the US economy in one year.

Reviewing the Senate health bill

Here were the problems with the health bill as it stood a month ago:
1. Public option threatens a healthcare monopsony that could compromise quality of care and R+D
Addressed? Thanks to Joe Lieberman, yes.
2. Will be very expensive.

Addressed? Not sure it can be.
3. Doesn't do enough to lower costs (changing reimbursement structure, tort reform)
Addressed? No. The biggest flaw in the bill.
4. The penalty for not getting insurance is too low, leading to a major, major adverse selection problem when guaranteed issue and community rating happen.

Addressed? No. The easiest flaw to fix in the bill.
5. Subsidized people have very high implicit marginal tax rates because the subsidy rolls off as income increases.
Addressed? No. This could be solved, but not easily in the structure being proposed. It'd have to be more like "the government will pay the first $5000 of everyone's insurance, and everyone gets taxed at %X, unprogressively, to accomplish it."
6. Employers of low-skilled labor have incentives to look for illegal aliens.
Addressed? No.
7. Doctors have an incentive to stop treating Medicare and Medicaid patients.
Addressed? Sort of. If the current bill were to actually stand in its current form, this would be a disaster. Fortunately, only Paul Krugman believes this will actually reduce the deficit, and nobody believes the payouts to Medicare will actually drop 25%. So call this one an incomplete.
8. Insurance companies have an incentive to try and get out of treating high-risk customers because they can't charge high enough premiums.
Addressed? We won't know until we see the ways that insurance companies respond to the bill. Dropping coverage is one possibility, but this will probably be cracked down on. However, if everyone tries to scare off high risk clients, quality of service could be bad.
On the whole? The bill still has lots of problems. I'm glad problem 1 has been addressed. If they don't fix problem 4 before passage, it'll be seriously disgraceful.
The more interesting question is, "Is this bill better than the status quo?" or, more accurately, "would I vote for it in its current form, assuming the Medicare payouts don't drop and nobody uses this to try and springboard into a public option?"
That's a very difficult question. I think the answer is "no", simply because I don't see this program as being sustainable because it costs too much - I see it turning down dangerous "cost reduction" roads in the future, and I see the public option as the hydra that will never die. However, the no is much less emphasized than it was a month ago.

Tuesday, December 15, 2009

On chinese overcapacity

Jim Chanos (a legendary short seller - if anyone can find me a book by him or about him I will be very appreciative) pointed out on CNBC today that it's very ironic that people in the US, who are so skeptical of government regulation and its ability to manage the economy, are willing to put so much faith in a 25 person Chinese politburo to successfully manage the Chinese economy. It's a good point.
I've mentioned a few times on this blog that China has way overbuilt and seems destined for a collapse, and that I'm scared to bet on it. Chanos reaffirmed that viewpoint and believes it's going to be even worse than that. He noted that Chinese firms underdepreciate, so overcapacity doesn't look so bad and earnings stay high. He also noted that bubbles are formed not on overvaluation but overexpansion of credit, and China has significantly overexpanded its credit (and its valuation). He noted that 35-50% of China's GDP is construction, and construction has a rate of return, and if the rate of return is low, the country's going to slow. He sees China as another subprime situation ("Dubai times 1000").
He's worth listening to. Be careful.
The interesting question, of course, is what happens to the Yuan, and how does this affect the rest of the world? Will China try and weaken its currency more and more to try and get the rest of the world to take its goods? Will it simply not strengthen to where it should be strengthening to currently? Does this help or hurt the American economy (flooding us with cheap goods makes everything cheaper for us but also hurts manufacturing...)

Menu profits, fair trade, a clever carbon tax, Bhutan's stock market, education policy and paul samuelson

I have decided to cut down on the links posts, because every day is excessive. I will, periodically, write up posts which I think are particularly interesting.
Using the psychological concept of anchoring (in this case, you see a really high price and thus everything else looks lower priced), positioning on a page, illustrations without negative associations, and boxing/bracketing, restaurants can significantly improve revenue from peoples' ordering choices without restricting them. From "The Myth of Fair Value (and How to Take Advantage of it) by William Poundstone.
The Fair trade movement ends up hurting many, many farmers. It locks them into producing the crops that have made them poor to begin with, reduces the incentive to diversify crop production, encourages the utilization of resources on marginal land that could be better used in another setting, forces farms to eschew benefits of scale and technology and remain small (sapping migrant workers of employment opportunities and ensuring low profits for lots of farmers), guarantees market oversupply that causes depressed global commodity prices for other unprotected growers, and is grossly inefficient at transferring the price markup on fairtrade goods to the actual poor producers.
An incredible interview with Paul Samuelson. A brilliant and levelheaded economist who revolutionized the field. We could use more like him! He will be missed.
Did you know that Bhutan makes significant numbers of policy decisions based on "gross national happiness?" Here's how the head of their exchange justifies only having stocks trade twice a week and not allowing foreigners to trade:
"Isolation from global markets means little price movements. People just collect their dividends, content with the return while companies just raise capital, the original idea of stock exchanges... If people make money, that makes them happy. If they lose, it makes them sad."
An idea that sets an international carbon tax (easily modifiable into cap and trade, I think) at a level based on the rate of warming in the troposphere around the equator. If the world warms, the tax gets high. If the world doesn't warm, then the tax stays low. Anyone who really believes their own global warming prediction should be ok with this. It can never get implemented, but it's not a bad foundation to think about.
Unlike other subjects, math seems to be one where "tracking" students - placing them into honors or remedial or normal classes with equivalent peers - significantly helps all students achieve more. Other subjects have seen achievement go up when students are untracked.

Monday, December 14, 2009

How to spot a rat?

How would one assess a New York City construction firm that has changed accounting firms twice in three years (for "cost reasons", but going to more expensive firms each time) that also has a growing receivables balance? In other words, what is a really creative way to "smell a rat", so to speak?

Friday, December 11, 2009

Science for Sciences' sake


I don’t like the author or the article, particularly, but the following line stood out:


“The resulting gushers of raw data will be winnowed in real time, both automatically by software algorithms and on the fly by human number crunchers. The distilled one-tenth of 1 percent of the data—the equivalent of 55,000 CDs’ worth of information each day—will be sluiced out to 160 different academic institutions. To be sure, says Gillies, “it wouldn’t be possible without the Web.” How fortunate, then, that at the very moment the L.H.C. was being dreamed up at cern, 20 years ago, so was the World Wide Web, by a computer programmer at cern named Tim Berners-Lee. The moral: cern-style science for science’s sake is not to be pooh-poohed, even when it seems impossibly arcane.

Business Rules of Thumb
If you don't like what you're hearing, respond with a question, even if it's no more than "Why are you saying that?" - Mark McCormack

Successful negotiations are 70% preparation, 20% implementation, and 10% acting. - Robert Olson

Email is a communications medium, not a collaboration medium. When confused as a collaboration tool, efficiency plummets. - Ben Casnocha

In dealing with community groups, you must allow the groups to have a pound of flesh in the first meeting (let them shit all over you). Once they have voiced their anger they'll be more trusting. - Kirk Hanson

Stratify suppliers into those that: a) must be paid currently, b) accept late payment occassionally, c) take late payment as a matter of informal policy. - James Wicker

Before going into a partnership with someone, spend time with them in three different kinds of situations: a relaxing one, a competitive one, and an intellectually stimulating one. - Joan Kelly

Sprinkle your sales letters or presentations with references to your subject's first name. - Mell Holloway

If you're only there to sell one thing, make a suggestion or assumption and let them tell you you're wrong. People have a need to feel smarter than you are. - Mark McCormack

"Career Networking" events are filled with people you don't want in your network. - Ben Casnocha

People don't steal ideas. Ideas are cheap. Implementation makes the difference. - Seth Godin

Rather than telling an associate, "You look good in that suit," tell the person, "That suit looks good on you." - Dale Carneigie

If you're interested in obtaining something from someone else, always preface your request with "I have a favor to ask you" as people hate turning down favors. - N. Bruce Ashwill

The best way to find good ideas is to let people tell you what the good ideas are. - Niel Robertson

Give everyone a title. Nothing pleases mankind as much and costs as little. Give everyone their own coffee cup. - Jerry Favretto

A bad reference is as hard to find as a good employee. - Robert Half

The 10/20/30 Rule of PowerPoint: a PowerPoint presentation should have ten slides, last no more than twenty minutes, and contain no font smaller than thirty points. - Guy Kawasaki

Exercising during the lunch hour makes your afternoon twice as productive. - Grant McLaren

The success of a chief executive officer is directly proportional to the length of time he has worked with his executive secretary. - Chip Conley

In a negotiation, he who cares less, wins. - Anonymous
Counter: In a negotiation, he who prepares best and knows his own and his counterpart's situation best, wins.

Don't go into a negotiation without listing every issue beforehand. Establish an aspiration level, a minimum, and an initial asking price for each issue. - Charles Karrass

If you're planning on doing business with someone again, don't be too tough in the negotiations. If you're going to skin a cat, don't keep it as a housecat. - Marvin Levin
Counter: It's hard to predict when you will run into someone again. It's always better to "leave a little money on the table" than try to "skin a cat."

Talk about price last. People have tremendous anxieties about hearing the price, so use preliminary negotiations to get all the auxiliary issues resolved first. Say "If the price is OK, would you be willing to..." - Jay Kaplan

Round numbers beg to be negotiated, usually by counteroffer round numbers. Odd numbers sound harder, firmer, less negotiable. - Mark McCormack

As a buyer approaching a negotiating meeting, be sure to trumpet any bad economic news headlines as much as possible. - Chip Conley

Throw a temper tantrum within the first ten minutes of the negotiating -- nine out of ten times it will effectively intimidate your opponent. - Mark Randall

Successful negotiations are 70% preparation, 20% implementation, and 10% acting. - Robert Olson

Never negotiate on a full stomach. - Victor Antonetti

A negotiation starts when people try to understand why they want something. As long as you don't know this, the deal will always be disapointing for both teams. - Volkan Demir

If negotiations are a regular part of your business, make sure all your negotiators have been to Karrass training. The amount of anecdotal and just plain bad information about "how to negotiate" provided by supposed experts is staggering. - S Milford

Create value before you demand it. - Gabe Rosen

You will never make more money per hour than when you are negotiating. - Stephen W. Gibson

The next best choice after Win-Win is No-Deal - Steven Covey

Offer customers a guarantee on an aspect of the business that is routinely performed. - Customer Service in Action

Read and listen for what is missing. Many advisers - in and out of government - are quite capable of telling the President how to improve what has been proposed, or what's gone wrong. Few seem capable of sensing what isn't there. - Donald Rumsfeld

It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently. - Warren Buffett

Sweep your own floors. It reminds your employees that there is nothing you won't do for your business and that no task is below you as a leader. - Something my dad told me when I asked why he didn't hire a cleaning crew.

If you are not criticized, you may not be doing much. - Donald Rumsfeld

You should be suspicious of someone who nods and speaks in the affirmative, but has their arms crossed. - Dale Carnegie

Sandwich every bit of criticism between two heavy layers of praise. - Mary Kay Ash
Counter Rule: If someone is truly underperforming, don't sugarcoat it. Be direct. - Ben Casnocha

Don't cut off the early chatter and small talk of a new group -- the tendency of people to tell stories that seem irrelevant is part of the process of group integration. Don't interrupt them as irrelevancies which must be suppressed. - Harold Leavitt

You will always be associated with what you rebel against. Don't rebel against what you hate, since it will stick to your name. - Ruben Meulenberg

When you win a useless discussion, you still lost. - Ruben Meulenberg

Remember: The person you are talking to is always more important than the point you are trying to make. - Jimmy Parsons

If you need someone to write a letter on your behalf, write it for them. It's easier for them, and you have more control over what they say if you give them a finished draft.

Never, ever, ever pay compliments that contain comparatives (e.g. "than").

Wednesday, December 9, 2009

Cap and Trade Implementation Shenanigans

I’ve mentioned before that the problem with both cap-and-trade and carbon taxes incentivize companies to shift production to countries that don’t impose carbon costs, and that it’s going to be a difficult problem to avoid.

Cap-and-trade as implemented in Europe (and possibly in America as well) has the ugly distinction of actually paying people to cut carbon, leading to outcomes like these:
A steel company is closing an efficient steel plant to get money for the carbon, and shifting production to India. This is of no benefit to the environment, but a substantial cost to Britain and the EU in jobs and transfer payments to steel companies.

The Privatization of Chicago's Parking Meters

One of the dumber municipal initiatives I have heard in a while is Chicago’s recent sale of the rights to its parking meters to a group of private investors, detailed here:

Setting aside the major, obvious problem that the deal was never scrutinized by anyone, and thus the city sold the rights for half of what owning the parking meters would actually be worth, without saving any costs at all… parking meters are a terrible candidate for mass privatization, and especially without price controls (and think about how often you hear me saying THAT!)

Parking meters are a public service, and thus it is in the interest of Chicago to ensure that said public service is provided as efficiently and effectively as possible.

Privatization of something tends to work better than public ownership when there is vigorous competition in that area. Competition drives down prices, promoting cost efficiencies that drive down prices further. As long as reasonable safety and quality regulations are in place with sufficient penalties for noncompliance, competition provides a significantly better outcome for consumers.

The problem with parking meters is that parking meters are a local monopoly. The fixed stock of parking meters in front of a store is likely the only parking that’s as close to the store, so parking meters don’t lend themselves to competition very well. Instead, they lend themselves to monopoly pricing, which hurts consumers, and if high enough, actually can reduce utilization of the parking meters, which is the opposite of what a public service is supposed to be able to do.
The other problem with privatization is that the state is still bearing most of the costs associated with the parking meters. Not only are prices higher for consumers up front, consumers don’t even realize any major tax savings by allowing a private company to slash costs and increase operating efficiency to improve profits. In a sense, the privatization of Chicago’s parking meters is the worst of both worlds – the inefficiency and arbitrary nature of public bureaucracy, and the rent-seeking-at-any-cost behavior of the more unsavory parts of corporate America. The fact that anyone thought this was a good idea is stunning, and more importantly, the fact that it was not subject to a legitimate review process is a disgrace to Chicago’s democracy.

Reducing chemical intake from plastics

A PSA from the NY Times:

"I asked these doctors what they do in their own homes to reduce risks.
They said that they avoid microwaving food in plastic or putting
plastics in the dishwasher, because heat may cause chemicals to leach
out. And the symposium handed out a reminder card listing "safer
plastics" as those marked (usually at the bottom of a container) 1, 2, 4
or 5.

It suggests that the "plastics to avoid" are those numbered 3, 6 and 7
(unless they are also marked "BPA-free"). Yes, the evidence is
uncertain, but my weekend project is to go through containers in our
house and toss out 3's, 6's and 7's."

From what I understand, I think 7 is a "grab bag" category - any
plastics that don't meet the 1-6 numbering are placed in 7, so I'd
imagine some 7s are fine and some aren't.

More mathematical incompetence in the media


This one’s simple and just kinda hilarious. Please explain how this paragraph is possible:


“The survey by the Centers For Disease Control and Prevention says that 26 percent of Hoosiers smoke. I wonder if that same survey was conducted on drinkers what the result would be. I'd bet there are 20 people who drink to every one person who smokes. Why should the state keep raising taxes on tobacco and not alcohol?”



(If you didn’t catch it, I’d say it’s a safe bet that there are not 5.2 Indiana residents who drink for every resident of Indiana.)

Tuesday, December 8, 2009

Why it's difficult to make Progressivism fiscally sustainable

I applaud progressives in their aims. Their methods are not always very smart, but the idea that the government should protect those unable to fend for themselves very well is an attractive one. Doing this efficiently is wonderful.

Of course the problem is that there are always more problems to fix than there is money to use to fix it, and politicians don’t like to compromise. Let’s walk through the current Federal budget to understand why America’s deficits aren’t going down anytime soon, meaning that the country will be on an unsustainable path and will likely end up in a crisis that puts this one to shame at some point in our lifetimes.

The Federal budget in 2008, as laid out by the CBO:




Defense and Security: 21%

Social Security: 21%

Medicare, Medicaid and CHIP: 20%

Safety Net Programs: 11%

Interest on Debt: 8%

Benefits for Federal Retirees and Veterans: 6%

Scientific and Medical Research: 3%

Transportation Infrastructure: 3%

Education: 2%

Non-security International (aid, etc): 1%

All other: 5%

Here are the sources of revenue:

45% Individual income tax (levied on the top approx. 52% of earners)

36% Payroll tax (flat tax with a ceiling to pay for social security and medicare)

12% Corporate tax

3% Excise taxes

4% other

Of course, just looking at this, we could just say “fine, double taxes, and we don’t have deficits anymore”. As any good economist knows, you can’t really do that. This requires a simple model of the economy. For those of you not too numbers oriented, skip the model and look at the conclusion.

Choosing the macro model is the hardest part, because every macro model has problems, and I’d like this post to be reasonably simple and illustrative, instead of technically correct.

Let Y sub n equal GDP in period n

C sub n equals consumption in period n

I sub n equals investment in period n

G equals government spending in period n

t sub n is the tax rate in period n

s sub n is the savings rate in period n

A is the return on savings invested in the prior period, which is consumed this period.

Start with the basic IS-LM equation (I know, it’s basic, but it should get the orders of magnitude correct enough for what we’re going to use it for), except we adjust for the fact that the tax elasticity of pretax income isn’t 1. As taxes go up, pretax income goes down. We call this factor z. It will equal 1/(1+e), where e is the elasticity.

Yn = Cn + In + Gn

Cn = (1-tn)(1-sn)Yn + AIn-1

I = sn(1-tn)Yn

G = ztnYn

This simplifies into:

Yn = Asn-1(1-tn-1)Yn-1 / [tn(1-z)]

Which means economic growth, period to period, is equal to:

Asn-1(1-tn-1) / [tn(1-z)]

You can write this out to look simpler:

(Asn-1 – Atn-1sn-1) / (tn – ztn)

I sincerely hope that the n’s and n-1’s came out subscripts; if they did not, I apologize, I haven’t figured out blogger’s technical nuances yet.

You’ll note that as savings goes up, this period’s consumption goes down, but next period’s goes up. Duh.

As tax rates increase, growth decreases if z is less than 1.

So given all of this, let’s set constraints on our little budget exercise.

Because we don’t have info for individual income groups, we’ll use Chetty’s determination of a 0.5 tax elasticity of pretax income (In other words, when you multiply tax rates by (1+x), you have to multiply pretax income by (1-0.5x) (I use this terminology to avoid confusion about how big a shift in tax rates from 50% to 51% is… is that 1% or 2%? By the definition of elasticity, that’s 2%, but that gets confusing). This sets z at 1/ (1 + 0.5) = 2/3.

Capital investment by businesses in 2006 was 1.31 trillion on a GDP of 13.06 trillion. Thus, I set a savings rate of 10%. I’ll also arbitrarily assume that in the long run, there’s an equilibrium savings rate, so last period’s savings equals this period’s savings.

Historically, I believe A has been in the vicinity of 1.1, so let’s keep it at that (that’s certainly what most people in finance use for the weighted average cost of capital). In reality, the savings rate isn’t exogenous, so A won’t be exogenous, but for simplicity, we’re keeping them both exogenous, especially since the other inputs are similar to recent times (this helps the case of those who want to see a European welfare state, doesn’t hurt it).

I will similarly make the assumption that you can’t keep fueling growth with tax cuts forever, so prior t must equal present t.

This simplifies things into

(1.1*.10 – 1.1*t*.10) / (t- (2/3)t)

Which means growth is

(.33 - .33t)/t

This breaks down at extremes because z changes. (it’s unlikely you’d see 0 growth at 100% taxation – it’d almost certainly be negative, because z would get very, very negative - whatever side you think we're on of the Laffer curve, a 100% taxation would almost certainly be on the wrong side of it).

However, if we’re targeting the same growth we’ve had for the last 50 years (about 2.5% real GDP growth), it’s much more reasonable to assume the elasticity remains the same. To account for some level of acceptable slowdown but still leave a margin of safety, let’s say that we need to clear 2% annual GDP growth. If we’re not growing at all, then you’ll end up with some very bad externalities caused by massive gains in geopolitical power by developing countries with unstable governments. There will always be exogenous shocks (wars, resource crises, etc). With 2.5% GDP growth, the US’s share of world GDP budged only slightly. Asking us to maintain that growth rate is tough (and even maintaining that growth rate, we’ll lose a world GDP share), but for the US to remain strong, we need to grow. So 2% is the arbitrary limit. I’d be very scared to go much below that.

Setting (.33-.33t)/t = 1.02, this means that taxation cannot be higher than 24.44%.

Government spending as a percentage of GDP was 45% this year. This is artificially high because of the bailouts. It’s expected to be a little over 42% next year, so we’ll use that as a baseline.

About half of that was debt, indicating the current tax load is about 21%, normalized. You can thus only increase tax revenues by about 16% and still have a stable country.

This is supported by the tax share data. Here are the appropriate tax shares with the threshold for hitting that salary. What this means is that the top 1% of earners in the country pay 40.42% of all income taxes. The bottom 50% of earners pay 2.89% of all income taxes.

99%+: 40.42% ($410,096)

95-99%: 20.21% ($160,041)

90-95%: 10.59% ($113,018)

75-90%: 15.37% ($66,532)

50-75%: 10.52% ($32,879)

0-50%: 2.89%

For reference, the shares by the top 1%, 5%, and 10% are the highest shares of any developed country, indicating that the tax burden is more progressive than elsewhere. This lends further credence to the idea that you can’t really add that much more in terms of taxation, because eventually, the wealthy will just leave the country (meaning everyone is in big trouble), and the poor don’t have that much to give.

So let’s say we can increase Federal revenue by 16% through clever tax increases. This means that taxes can support 58% of the current Federal budget. Let’s round up - it’s not unreasonable to assume there may be a few “free lunches” out there, like cigarette taxes, or infrastructure spending, which actually boost Y as they go up, and provide government revenue. It also acknowledges that this model is imperfect. Finally, the fact that we’re growing at 2% a year in this model means that if debt grows slower, we’re improving things. So let’s say that the revenue side and efficiency side can support 2/3 of all government spending.

To balance the budget, we need to eliminate about 1/3 of all Federal spending. Because I posted the percentages much higher on the page, I repost them here. I’m converting percentages into points to make it less confusing to subtract.

Points of spending

Defense and Security: 21

Social Security: 21

Medicare, Medicaid and CHIP: 20

Safety Net Programs: 11

Interest on Debt: 8

Benefits for Federal Retirees and Veterans: 6

Scientific and Medical Research: 3

Transportation Infrastructure: 3

Education: 2

Non-security International (aid, etc): 1

All other: 5

How would you cut 33 points from that budget?

A few other notes:

About 8 points of the 21 Defense and Security points are revenue positive (technology and patents), and another approximately 5 points are uncuttable - we still need a military, and we need to support the rest of the world. So you can take 8 points of defense and security.

You cannot touch the interest on debt, and scientific and medical research is revenue positive. At least some component of education and transportation infrastructure is revenue positive, and they’re small anyway.

So cut 25 points from:

Social Security: 21

Medicare, Medicaid and SCHIP: 20

Safety net programs: 11

Benefits for Federal Retirees and veterans: 6

Non-security International (aid, etc): 1

All other: 5

(and for those of you wondering, almost everyone thinks that the healthcare bill will increase Medicare’s portion, not decrease it. Things must be cut.)

Does this make it any easier to understand why rapid expansion of government has occurred? And does it provide any sort of insight into some of my opposition to socially beneficial programs? There’s an opportunity cost to everything, we must cut if we want the country to stay afloat, and so some socially beneficial programs can’t be done.

US innovation

Brooks with a very well done article on innovation. I think R+D tax credits, structured correctly and targeted at the correct industries, can actually make a lot of sense (see my “ideal healthcare reform” post). Otherwise, I agree with almost everything he says.

“…The first thing to say is, let’s not get carried away with the malaise. The U.S. remains the world’s most competitive economy, the leader in information technology, biotechnology and nearly every cutting-edge sector.

The American model remains an impressive growth engine, even allowing for the debt-fueled bubble. The U.S. economy grew by 63 percent between 1991 and 2009, compared with 35 percent for France, 22 percent for Germany and 16 percent for Japan over the same period. In 1975, the U.S. accounted for 26.3 percent of world G.D.P. Today, after the rise of the Asian tigers, the U.S. actually accounts for a slightly higher share of world output: 26.7 percent.

The U.S. has its problems, but Americans would be crazy to trade their problems with those of any other large nation.

…Governments that try to pick winners “too often end up wasting resources and stifling rather than promoting innovation.” But there are several things the government can do to improve the economic ecology….

First, push hard to fulfill the Obama administration’s education reforms. Those reforms, embraced by Republicans and Democrats, encourage charter school innovation, improve teacher quality, support community colleges and simplify finances for college students and war veterans. That’s the surest way to improve human capital.

Second, pay for basic research. Federal research money has been astonishingly productive, leading to DNA sequencing, semiconductors, lasers and many other technologies. Yet this financing has slipped, especially in physics, math and engineering. Overall research-and-development funding has slipped, too. The U.S. should aim to spend 3 percent of G.D.P. on research, as it did in the 1960s.

Third, rebuild the nation’s infrastructure. Abraham Lincoln spent the first half of his career promoting canals and railroads. Today, the updated needs are just as great, and there’s widespread agreement that decisions should be made by a National Infrastructure Bank, not pork-seeking politicians.

Fourth, find a fiscal exit strategy. If the deficits continue to surge, interest payments on the debt will be stifling. More important, the mounting deficits destroy confidence by sending the message that the American government is dysfunctional. The only way to realistically fix this problem is to appoint a binding commission, already supported by Republicans and Democrats, which would create a roadmap toward fiscal responsibility and then allow the Congress to vote on it, up or down.

Fifth, gradually address global imbalances. American consumers are now spending less and saving more. But the world economy will be out of whack if the Chinese continue to consume too little. The only solution is slow diplomacy to rebalance exchange rates and other distorting policies.

Sixth, loosen the so-called H-1B visa quotas to attract skilled immigrants.

Seventh, encourage regional innovation clusters. Innovation doesn’t happen at the national level. It happens within hot spots — places where hordes of entrepreneurs gather to compete, meet face to face, pollinate ideas. Regional authorities can’t innovate themselves, but they can encourage those who do to cluster.

Eighth, lower the corporate tax rate so it matches international norms.

Ninth, don’t be stupid. Don’t make labor markets rigid. Don’t pick trade fights with the Chinese. Don’t get infatuated with research tax credits and other gimmicks, which don’t increase overall research-and-development spending but just increase the salaries of the people who would be doing it anyway.”


Monday, December 7, 2009

Carbon Taxes vs Cap and Trade, and a third alternative.

I’ve been thinking a lot about this issue. Carbon taxes and cap-and-trade both have unique good and bad features, but they also share one critical weakness that may sink the whole enterprise. I’ll go over those here.


Carbon taxes have the inherent advantage that they are very simple. There will be few transaction costs involved with reducing carbon emissions. You also have the wonderful factor that everyone has an incentive to look to replace emitting technologies, and while the government may not be very good at determining which industries have ready substitutes in waiting, the industries themselves certainly do. So it will create the “maximal” level of shift over… it doesn’t put a ceiling on the amount of emissions we cut, and it gets every industry thinking about how to reduce emissions, not just the ones the government thinks can do it easily / the government doesn’t get money from.


There’s also a government issue – it’s a lot harder for the government to move the goalposts. With cap and trade, the government can allow more emissions during a recession, but reestablishing a lower cap will be very politically difficult. Tax rates may (I emphasize may) be harder to shift around, slightly.


The disadvantage, however, is that there are some industries that are harder than others to reduce emissions in, and the tax will cause a lot of hardship there, and possibly disincentivize production or expansion in highly innovative, important, but carbon-intensive industries (portions of manufacturing or chemicals, for example). Cap and trade, in its best form with a government with perfect information, lets the government allocate carbon credits based on ease of substitution. An industry where there is no substitute for carbon emissions (perhaps some sort of fertilizers or other chemicals) would not suffer, whereas an industry with easy substitutes (switching types of energy or production processes, or building more efficient buildings, etc) would switch. This is highly unrealistic, but it’s a model. The other problem is that emissions reductions are hard to measure ahead of time with a carbon tax, whereas cap and trade lets us set a cap and thus gain credibility in trying to force China/India/Middle East/Europe/everywhere else to match us.


The problem with BOTH of these approaches is that they don’t address imports. If I’m an American manufacturer, and I see America making it more expensive to manufacture, I shift production offshore and export to America. That becomes much harder to tax or cap because you have to establish how much every good consumed in the US produces instead of just every form of energy used in the US to manufacture, and assess it at ports, and catch smugglers, etc.


The easiest solution, of course, is to Pigouvian tax consumption goods that emit a LOT of carbon. Instead of taxing production, you tax consumption, which addresses the imports/exports issue. Tax the hell out of bottled water, incandescent lightbulbs, gasoline, residential utilities, whatever else has a ready substitute and produces a lot of carbon. Black markets need to be avoided but at least that’s easier. It’s just doubtful that’s enough to stem the tide.


So we look bigger at consumption goods that can shift over time. Emissions by sector in 2004 were as follows: Electric Power (39%), Transportation (33%), Industrial (17%), Residential (6%) and Commercial (4%). So why not a specialized sector by sector attack instead of a blanket policy?


Industrial and Electric power need to be grouped together, because you can’t reduce electricity consumption quickly without reducing industrial output. So a slowly stepped up carbon tax on electric and heating utilities may be the best approach – it can’t be sudden, because utilities need time to develop alternatives. It has to be the utility so that it’s a consumption, not a production, tax. You may even want to exempt manufacturers from this tax and just levy it on retail stores and homes. This would entail an immobile rate ceiling (no rate increases), and also entail penalties to utilities (including mandatory equity issuance to pay the government) for not reducing emissions fast enough, because the nature of rate regulation is such that some of these utilities have monopolies and thus have some market power (state congresses can’t let utilities go out of business, so the utilities can go to the brink and force congresses to let them raise rates – it’s the same moral hazard issue people are so worried about with the bank bailouts). This would have to be managed very carefully – the idea is to tax consumption of electric power by people, not by companies that employ people. Because of the escalating tax, one would expect that utilities would not add significant incremental fossil fuel plants. Incremental power would come from more efficient sources, and as we work out kinks in green energy and the tax gets high enough, you could start seeing fossil fuel plants get phased out.

Transportation can be dealt with as a gasoline tax and efficiency mandates (MPG, etc) for cars/buses/trains/planes and the military. This gas tax can escalate faster and faster so that as people replace their durables, they buy efficient ones. Short term, durables don’t get replaced, but intermediate term, they do. (Meanwhile, Warren Buffett makes another fortune on his BNI purchase, as railroads stand to benefit more than anyone else from a gas tax).


Construction and agriculture (not listed) are a massive proportion of the remainder. Construction could be handled with changes in building codes, as well as the electric power solution up above. Cash for caulkers may actually be helpful, and requiring every building to meet some insulation standard (tested every X years – like Radon, I think, or at least like Radon should be) would do a lot in the construction arena.

Agriculture is the hardest to find a simple solution, because unlike electric power, there isn’t a potential solution even remotely on the horizon. A meat tax would hit consumption somewhat, but meat consumption may not be that elastic, and subsidy of methane reactors (from animal excrement and decaying plant matter) would help with a more efficient way to address CO2 from waste, but that’s expensive and not necessarily an efficient use of cash. All of these aren’t very palatable options as you may not hit carbon emissions much and you don’t want to send every farmer out of business.


You can also tax things that consume a lot of water (water treatment is very carbon inefficient, and water is going to be key to green energy), or update residential code to limit things like grass backyards or pools in areas with water shortages.


The general idea is that big taxes or bans on inefficient components of these industries may be enough – you don’t have to tax all carbon, because there are a very small number of replaceable sources that account for a lot of US emissions. That also reduces the offshoring-manufacturing issue, because you could target consumption with all of these. Consumers get walloped a little bit, but they’re getting walloped by any carbon-reduction solution (and healthcare, and trade-deficit…). This wallops them less, because it eliminates a lot fewer jobs.


Friday, December 4, 2009

The other side of depleted inventories

I mentioned in my last post that inventories have been so depleted that maintaining current consumption will require an uptick in production. That still holds.

However, tax revenue and corporate earnings may have been inflated by this. Many, many US companies use an inventory system called LIFO - last in, first out. The inventory values they carry on their books are thus the costs required to produce the first units that entered their books. These often happened a long, long time ago, and thus way underestimate the actual cost of production.  These lower costs are recognized when inventory is depleted, however, which has just happened. This would a) goose profit margins, making earnings look higher than they actually are, and b) increase tax revenues, because profits look higher.

A recovery may improve jobs quite a bit, but accounting earnings may not reflect the extent of improvement actually observed, and corporate tax receipts may not improve at the rate the corporations do. This is something to keep an eye on.

The effect of Chinese overcapacity and US underproduction on the end of the US recession

China has overinvested and created mass overcapacity. Their economy has been propped up by stimulus, but it cannot last.

What I'm very interested in is the idea about what happens to us when their economy finally does crash - and it will, though the delay caused by the stimulus meant that our recession was worse and theirs will be milder, because we'll already be recovering and can consume some of their overcapacity.

If their overcapacity means they cut prices in America to try and stimulate purchasing in the US, US purchasing power will be increased. The end result is a form of stimulus - people can save more and consume more. It's unclear what would happen to employment - the substitution effect would say it goes down and the income effect would say it goes up - but it still should make US consumers better off. Banks that don't invest in China should be better off, as well, as consumers can save more, infusing them with fresh capital, which means they can lend more, also helping the credit markets and reducing interest rates.

It'll be interesting to see if a Chinese overinvestment-led recession can help pull us up. Today's jobs report indicated that perhaps we're on the upswing anyway (unemployment fell from 10.2% to 10%), so maybe this is a little juice to get us back on our feet.

I still think everyone is a little bit too pessimistic about the recovery - the only big qualification on that is the healthcare bill, which could quite easily stifle employment recovery, both by hitting America's future growth industries hard with taxes and lower prices, and by encouraging industrial and other production employers to shift production offshore. It may be a highly inflated recovery - with real GDP ahead of expectations but with lots of inflation, and it may be a recovery that's led by unexpected sectors (ie, tech, durables and consumer, not energy, metals and materials).

Theres also the US inventory effect - every firm has let inventories crater to save money, but to maintain the same level of sales as the highly depressed last year, production has to rise significantly because we don't have an inventory base to narrow. So that'll help stimulate US jobs, production and consumption.

Thursday, December 3, 2009

New "Original Material" section and Search Box

Hey guys -
Because of the tremendous number of "links" posts I create (as much for archiving as anything else), I've decided to create an "original material" section. In it are all of the articles in which I am creating a standalone point instead of just responding to someone else or posting. Sometimes they are prompted by something else and sometimes they're just because I'm interested, but hopefully they'll provide a useful set of primers or points I've made instead of just referencing a million other peoples' viewpoints. I don't want to become an aggregator!

They're in chronological order, oldest to newest. I would have done newest to oldest, but there wasn't that option. If anyone knows how to fix that, please let me know!

I've also included a search box that will search the blog for keywords. It's not quite perfect but it's better than nothing!


Wednesday, December 2, 2009

Statistical Mistakes in the News

This time, courtesy the Wall Street Journal:

Arguing that this recession is worse than the prior recession because of Simpson's paradox is fallacious because it ignores the fact that a) college education is endogenous to any measure of economic performance and b) there is intergroup mobility.

Basically, it's misleading to say that everyones worse off by looking at simpson's paradox when the actual act of moving to the college education part is a choice designed to (successfully) minimize how worse off you get. Thus, the shift towards more education is endogenous to the system, and
you can't treat it like an exogenous divider of the population and call this recession worse when it's not a fair divider. You need the period in which they're measured to be uncorrelated, and you need the actors to be consistent and exogenously separated. The latter is not the case here. We should care far more about overall employment numbers.

The disaggregated data aren't worthless; disaggregated data are still very accurate at determining trends in what is happening intragroup. It's just that examining lots of disaggregated data cannot tell you about the aggregate here because the method of disaggregation removes a very important variable.

edit: I wrote the author of the article and a number of the people quoted in it. Professor Meng's gracious responses:
Dear Mr. ***,

Thanks for your email. I was asked to provided examples of Simpson's paradox, and the kidney stone example came to me immediately because I used it in one of my classes.
As for the unemployment rate example, I was not consulted for it (indeed I just read the article from a forwarding by a colleague) nor should I have been as I have no expertise in that area other than to confirm that it is a case of Simpson's paradox, statistically. But I certainly agree with you in terms of the general principle, that is, the causal interpretation of any Simpson's paradox requires substantive knowledge, just as a causal interpretation of any association.

With best wishes,
Xiao-Li Meng

and more:
Dear Trevor,

You are welcome. Incidentally, I saw on your blog that
you removed your original question to protect my
identity. Whereas I very much appreciate your being considerate,
I don't mind being identified if you think posting
your original question helps more people to think
deeper, which was the key point I tried to make when
Ms. Tuna called me.

As a statistician, I am also on the lookout for
statistical mistakes in the news (and in other media), so
I appreciate your effort. However, I hope you don't
mind that I point out a "mistake" in your blog title:
the type of potential mistakes you refer to is not
"mathematical mistakes", but rather "statistical mistakes"
or "inference mistakes". If there were any calculation
errors in the article, that would be mathematical mistakes.
What you were arguing is not the errors in the numerical results
(or in any mathematical formula), but rather the potential
errors in interpreting such results, an exercise belongs to
inferential reasoning, not mathematical

An immediate relevant consequence of mixing
"mathematics" with "statistics" is the common mis-perception that
for a given data set, there should be one correct answer,
just as with almost all the mathematical homework we have done.
But as you may understand well, for real-life inference
problems, there can easily be several competing interpretations/answers,
all well articulated but based on different assumptions. Indeed, I am curious how different economists may respond to your question differently, perhaps based on different
assmptions of the degree of endogenous?

Keep up with your good effort,


Done and done. Thanks so much, Professor Meng!

On Afghanistan
I've mentioned a few times that I can see both sides of the Afghanistan debate and I don't think the choice is an easy one. Thomas Friedman articulately lays out the best case I can think of for not sending more troops.
This happened in South America. The problem with this is that you can't easily reverse it - the second you nationalize everything, it becomes very hard to do business with you (one reason Venezuela suffered so much from lower oil prices this recession was because no international companies would help them cut costs for fear of having their assets seized). So it's important to prevent this happening in the first place.
Stock exchanges to back Somali piracy. This would be hilarious if it weren't so serious.
subsidizing PUPPIES.
Why China saves so much, and how to fix the imbalances this causes.

some real doozies today

The plan will raise, not lower, healthcare costs.
Why do we make it so hard for talented immigrants to work or start companies here?
I hate politicians. spending $3000 on FLOWERS? and another $2500 on bottled water?! Seriously?
Hezbollah, who claims that the US is the source of all terrorism in the world, currently leads Lebanon. I'm not joking.

Tuesday, December 1, 2009

important lessons for looking at current events

"The magic moment of maturity in every voter's life comes when he or she accepts the fact that no candidate is right on every issue. At that moment, one becomes either a chooser or a loser....

I will not say here how I will vote, partly because it's against my newspaper's rules, but mainly because millions of undecideds would follow like lemmings and make me responsible for the result and unable to creatively backbite or pettily bicker."

-- William Safire, "The Clothespin Vote," The New York Times, Nov. 6, 2000
[To those who crown Sarah Palin, Barack Obama or anyone else as anything other than politicians with a heap of ambition and a tablespoon of slime. They key is to choose between whatever options there are, understanding the true quality of the options, and remain critical and skeptical. I voted for Obama because I'm more scared of Palin than of Obama, but I think he's done a horrible job thus far. Would we have been better off with McCain? Probably, as much from a maturity and experience standpoint as from any other. Would we have been better off with McCain with a non-zero probability of Palin? I don't know how to measure the apocalypse, so that expected value will remain a mystery]

"Good vs. evil thinking causes us to lower our value of a person's opinion, or dismiss it altogether, if we find out that person has behaved badly.  We no longer wish to affiliate with those people and furthermore we feel epistemically justified in dismissing them.

Sometimes this tendency will lead us to intellectual mistakes.

Take Climategate.  One response is: 1. "These people behaved dishonorably.  I will lower my trust in their opinions."

Another response, not entirely out of the ballpark, is: 2. "These people behaved dishonorably.  They must have thought this issue was really important, worth risking their scientific reputations for.  I will revise upward my estimate of the seriousness of the problem."

I am not saying that #2 is correct, I am only saying that #2 deserves more than p = 0.  Yet I have not seen anyone raise the possibility of #2.  It very much goes against the grain of good vs. evil thinking:  Who thinks in terms of: "They are evil, therefore they are more likely to be right."

(Which views or goals of yours would you behave dishonorably for?  Are they all your least correct views or least important goals?  With what probability?  Might it include the survival of your children?)

I do understand that this line of reasoning can be abused: "The Nazis went to a lot of trouble, etc."  The Bayesian point stands.

Another example of misleading good vs. evil thinking stems from the budget.  Many people believe:

3. "If the Republicans win, they will irresponsibly cut taxes and do nothing real to control spending."  You may have even seen this view in the blogosphere.

One response to this is 4. "We should ensure that the Republicans do not win and criticize them every chance possible."

An alternative response is 5. "Sooner or later the Republicans will in fact win and I cannot prevent that.  Right now the Democrats should spend less money, given the truth of #3.  In this regard the Republicans, although evil, are in fact correct in asking the Democrats to spend less money, if only to counterbalance their own depravity."

I do not see many people entertaining #5.  #5 implies that a group judged as dishonest should be granted some probability of speaking the truth on an important issue.  (Nor will pro-Republicans be attracted to a claim which portrays their group as dishonest.)  Note also that by accepting #5 you are admitting and partially accepting the ability of the Republicans to "out-game" the Democrats.  That makes #5 even harder to accept.

Again, I am not asking you to buy #2 and #5 outright.  I am simply suggesting they have a higher "p" than many people are willing to grant them.  And that is because we are accustomed to judging the truth of a claim by the moral status of the group making the claim." - Tyler Cowen.


[Common sense says it's unlikely you can spew lots of carbon dioxide into the atmosphere and not see negative effects. It also looked far more to me that the scientists were taking science that they believed in and trying to insulate it from the attacks of the ignorant. Were they stupid? yes. Were they dishonorable? yes. Does that mean global warming doesn't exist? Not to me. Anyone with a better understanding of the science want to comment?

and on the Republican vs Democrat snipe, if the next president is like Bush, then the statement is true. The Democrats are doing the same thing, however, so it's hard to see them as being any more honest.]


[and for something very, very different:]


The study: A single computer was placed in a monkey enclosure at Paignton Zoo to monitor the literary output of six primates.

Who and when: Students at University of Plymouth, 2003, paid for from a £2,000 Arts Council grant

The aim: To test the "infinite monkey theory", which states that if a monkey hits keys at random on a typewriter keyboard for an infinite amount of time, it will almost surely type a given text, such as the complete works of William Shakespeare.

What was learnt: The theory is flawed. After one month - admittedly not an "infinite" amount of time - the monkeys had partially destroyed the machine, used it as a lavatory, and mostly typed the letter "s".


-Eric Barker


[Math majors, it's been 7 years since I studied the different types of infinity. If you could actually get the monkeys to type, which type of infinity would the "infinite monkey theory" fall into? Would a particular type of infinity mean that the probability they write the complete works of William Shakespeare (which has a finite number of permutations, as opposed to writing "a coherent story", which has an infinite number of permutations) over time would not be 1?]