Wednesday, March 31, 2010

Abstinence only education

"The health care reform legislation that President Obama signed recently isn't only about insurance coverage -- there's also a renewal of $50 million per year for five years for abstinence-focused education.

Programs that receive this funding must "teach that abstinence from sexual activity is the only certain way to avoid out-of-wedlock pregnancy, sexually transmitted diseases, and other associated health problems," according to the Department of Health and Human Services. To qualify, they must also teach that sex before marriage is "likely to have harmful psychological and physical effects." These are part of the "A-H definition," requirements for programs to receive abstinence funding under Title V of the Social Security Act."

I already hated this bill. I now hate it more. Attacking abortion and abstinence-only education is not a way to get educated independents, moderates or other people who vote on issues rather than parties to support Democrats in November.

Corporate Writedowns, post-Obamacare

"A White House staffer told the American Spectator that "These are Republican CEOs who are trying to embarrass the President and Democrats in general. Where do you hear about this stuff? The Wall Street Journal editorial page and conservative Web sites. No one else picked up on this but you guys. It's BS." (We called the White House for elaboration but got no response.)

In other words, CEOs who must abide by U.S. accounting laws under pain of SEC sanction, and who warned about such writedowns for months, are merely trying to ruin President Obama's moment of glory. Sure.

Presumably the White House is familiar with the Financial Standard Accounting Board's 1990 statement No. 106, which requires businesses to immediately restate their earnings in light of their expected future retiree health liabilities. AT&T [$1billion+], Deere & Co., AK Steel, Prudential and Caterpillar, among others, are simply reporting the corporate costs of the Democratic decision to raise taxes on retiree drug benefits to finance ObamaCare.

When the Medicare prescription drug plan was debated in 2003, many feared that companies already offering such coverage would cash out and dump the costs on government. So Congress created a modest subsidy, equal to 28% of the cost of these plans for seniors who would otherwise enroll in Medicare. This subsidy is tax-free, and companies used to be allowed to deduct the full cost of the benefit from their corporate income taxes (beyond the 72% employer portion).

Democrats chose to eliminate the full exclusion and said they were closing a loophole. But whatever it's called, eliminating it "will be highly destabilizing for retirees who rely upon employer sponsored drug coverage" and "will impose a dramatic and immediate impact on company financial statements."

That's how the AFL-CIO put it in a December 10 letter. The Communications Workers of America and the International Brotherhood of Electrical Workers—also known as the AT&T and Verizon workforce—were opposed too. So much for White House claims that reporting these facts is partisan.

As for whether this change is better tax policy, the new health-care bill creates a similar $5 billion fund that will subsidize health costs for early retirees between the ages of 55 and 64. These payments won't be subject to taxation, and companies will likely be able to deduct the full cost of such coverage. (The language is vague and some experts disagree.) The Democrats now feigning tax outrage—but who are really outraged by political appearances—didn't think twice about writing the same loophole back into the tax code. This new reinsurance program was a priority of the United Auto Workers.

The deeper concern—apart from imposing senseless business losses in a still-uncertain economy—is that companies will start terminating private retiree coverage, which in turn will boost government costs. The Employee Benefit Research Institute calculates that the 28% subsidy on average will run taxpayers $665 in 2011 and that the tax dispensation is worth $233. The same plan in Medicare costs $1,209.

Given that Congress has already committed the original sin of creating a drug entitlement that crowds out private coverage, $233 in corporate tax breaks to avoid spending $1,209 seems like a deal. If one out of four retirees is now moved into Medicare, the public fisc will take on huge new liabilities.

Meanwhile, Democrats have responded to these writedowns not by rethinking their policy blunder but by hauling the CEOs before Congress on April 21 for an intimidation session. The letter demanding their attendance from House barons Henry Waxman and Bart Stupak declared that "The new law is designed to expand coverage and bring down costs, so your assertions are a matter of concern.""

Tuesday, March 30, 2010

Important Notes about Financial Exchanges/Clearinghouses

I've mentioned a few times that I think that putting standardized off-exchange securities on an exchange would be useful. I still stand by that point.
However, there's a tendency to believe that exchanges are invincible, and thus that putting EVERYTHING on an exchange would be a good thing. 
This is a terrible, terrible idea. Exchanges are just as able to fail as any other institution - it just makes the threshold of failure much higher because you don't have an "individual actors are interconnected" problem. The exchanges can still be left holding the bag and require large bailouts if quoted prices don't reflect the actual prices available for that security at quantity.
Thus, exchanges only work for standardized contracts. There are many types of futures and swaps which have standard terms and could be easily exchange-placed. There are many other kinds of forwards and other derivatives that cannot and should not be exchanged - that just obscures the risk picture and makes participant have to judge the viability of the exchange and all of its partners, instead of just its particular counterparties.
"In order to properly manage counterparty risk, a clearinghouse needs to be able to accurately price the instruments it clears. Clearinghouses manage counterparty exposure by requiring counterparties to post initial margin at the beginning of the trade, and — crucially — daily variation margin. As explained by Robert Bliss and Robert Steigerwald in a Chicago Fed paper:
Margining systems are designed to ensure that in the event that a clearing member fails to meet a margin call, sufficient funds remain readily available to close out the member's positions without loss to the CCP in most market conditions. As a complementary risk-management mechanism, the gains and losses from open positions are posted to a clearing member's margin account on a regular (usually daily) basis and result in calls for variation settlement (or variation margin). The variation settlement reflects periodic mark-to-market fluctuations and is an important mechanism for assuring the collateral held by the CCP is likely to be sufficient to meet the needs of the CCP in the event of a default.
Given the extent to which clearinghouses rely on market prices to mitigate counterparty risk (which is, after all, the main reason we're pushing central clearing in the OTC derivatives space), it's absolutely crucial that the mark-to-market prices be reasonably accurate. Reliable mark-to-market pricing, of course, requires a liquid market."
The article goes on to point out that AIG Financial Products acted as a pseudo-exchange for illiquid securities, and got wrecked.

Sunday, March 28, 2010

My Models of Thinking, v. 1.3

I've been thinking about some speeches Charlie Munger gave in which he outlines one source of his excellence as being from the ability to apply all sorts of mental models. He notes that "man with a hammer syndrome" - to a man with a hammer, the whole world looks like a nail - can make people torture reality into the shape that fits their framework of thinking, instead of the other way around. He notes that cultivating a variety of mental models - different structures to use when attacking a problem - is extremely useful, and even more so in list form, so that you can look at the list and apply the relevant ones.
I am going to cultivate a list of models here. It's not perfect, but it's a reference list for how to think of solving problems. They're roughly categorized but in no particular order.

IF YOU CAN THINK OF GOOD ONES FOR ME TO LEARN ABOUT OR ADD, PLEASE LET ME KNOW!!!! I'm always looking to learn new things.

1. Arithmetic/Algebra. Addition, subtraction, multiplication, division, exponents and powers, logarithms.
2. Arithmetic with orders of magnitude - addition, subtraction, division, multiplication, powers.
3. Matrix Algebra
4. Expected value
5. Combinatorics - Mental math of combinations and permutations with and without replacement
6. Conditional and Bayesian statistics
7. Basic calculus (Integration, differentiation, limits, sequences and series)
8. Differential equations and multiple equilibria
9. Decision trees and probability-weighted outcomes
10. Distributions: Mean, Standard Deviation, Skew, Kurtosis (fat tails), median/trimmed mean, IQR, etc.
11. Compounding, and how small effects become huge over time.
12. Law of Large Numbers
13. Inversion... if it's not clear going forwards, start with the result you seek and get to the start.
14. Statistical sampling
15. Data-mining as a method of model construction as opposed to model construction and testing - using inputs and results to build a model instead of inputs and a model to see if they match results
16. The more leeway or bias in the construction of a study, the more likely it is to reflect funding incentives or a prevailing bias and the less likely it is to be true.
17. Sources of bias: survivorship bias, omitted variable bias, self-selection bias, other sampling bias, recency bias, endogeneity bias, etc.

1. Costly current investment for greater future gain
2. Market as an ecosystem of independent moving parts that affect each other
3. Diminishing returns to scale
4. Zero-sum games
5. Nash equilibria, the prisoner's dilemma and game theory
6. Economies and diseconomies of scale, and when they happen.
7. Specialization - Adam Smith's pinmaker, or Henry Ford's factory.
8. Capital intensity and scalability
9. The tiptoe advantage. A new technology is, for a business, like standing on tiptoe at a football game. It works great when you're the only one doing it, but sooner or later everyone is standing on tiptoe, and you've lost the advantage. If it was costly to stand on tiptoe, you shouldn't have done it (think Buffett's closing of the Berkshire Hathaway mills)
10. INCENTIVES. Possibly the most powerful on this entire list.
11. Time value of money.
12. Tragedy of the Commons
13. Ricardian equivalence and comparative advantage- trade can make everyone better off.
14. Rational people think at the margin
15. All decisions require tradeoffs
16. Opportunity costs and actual costs - the cost of something is what you give up to get it.
17. Fixed vs variable costs.
18. The use of markets to organize intellectual or economic activity.
19. Supply and Demand, and elasticity of supply and demand.
20. Income and substitution effects.
21. Externalities - positive, negative and positional.
22. Monopoly and monopsony, and oligopoly and oligopsony
23. Local monopoly and transport costs.
24. Second- and third-order effects
25. The process of theoretical modeling and then regression testing to verify
26. Barriers to entry - patents, brands, physical resources, scale, entrenched distribution, network effects, predatory undercutting pricing ability from financial resources.
27. Hyperbolic discounting and discipline.
28. Mutually assured destruction as a deterrent.

1. Diversification as a measure of reducing risk
2. Familiarity with operations as a measure of reducing risk (often counter to diversification).
3. Volatility vs value as a measure of assessing risk
4. Accounting as a language of business, and the fact that its an attempt to standardize representation of reality instead of being reality. 
5. The 80/20 rule.
6. Time-horizon arbitrage
7. Tax-avoidance.
8. Schumpeter's competitive/creative destruction, and how either you do it or someone else does.
9. Circle of competence - do what you know how to do well, and don't stray. If this means taking a lot of pitches, take them, don't swing.
10. Elevator pitch - if you can't boil a complex situation down to three key points, you don't understand it (contrary to irreducible complexity in physics)
11. Premortems and postmortems ("If something is going to go wrong, what will it be?" or "What went wrong?")
12. Instead of going for a 7 foot hurdle, find 7 one foot hurdles. Doing something really hard or doing things perfectly shouldn't always be necessary.
13. Parimutuel betting, and the importance of the ante.
14. Mean reversion
15. Secular vs cyclical trends.
16. Whole is greater than/less than the sum of its parts.
17. You need to put in 10,000 hours of practice before it's time for you to be judged if you want to excel. Gladwell.
18. Self-fulfilling prophecy (like autocatalysis in chemistry)- if your price goes up irrationally, you can raise more capital and justify it.
19. People buy fluent products, where the decision-making is easy - easy to use, features described clearly (and in a clear font). Ease of use makes things popular, because ease of use gives us pleasure
20. Better to initiate a price war than respond to one unless you're already a hard discounter by reputation- Initiating a price war makes customers more price sensitive, but the initiator gains a better price image while responders don't. (Still better not to have one)

1. Flowcharting for decisionmaking
2. Style vs substance for decisionmaking
3. Quality vs Quantity
4. Reciprocity tendency
5. Social proof, and the danger of groupthink
6. Commitment and consistency
7. Liking and familiarity as a compliance tactic
8. The power of authority, or its appearance
9. Scarcity and reactions to scarcity
10. Loss aversion
11. Irreducible complexity. People oversimplify because it's comfortable, but there are often unavoidably lots of things out of your control
12. Over- or under-emphasis on extreme values. Goes for both probability scenarios (in which case it's a black swan) or also choosing a level of service to buy or provide (we tend towards getting either "the nicest" or "the cheapest").
13. Paralysis by analysis. Stick to fundamentals ("First-best" vs "second-best" economists, for example).
14. The importance of communicating "why" in addition to "who, what, where, when and how"
15. Pavlovian conditioning, and the importance of imagery, consistency and caution about association. Classic conditioning (stimulus elicits emotional response - coke ads), Instrumental conditioning (positive or negative reinforcement of a behavior -  why increasing prices can increase sales because its a quality measure), operant conditioning (associative learning and teaching).
16. Denial
17. Lollapalooza effect - when multiple models combine in the same direction to push themselves farther than they could individually
18. The power of questioning: people are more likely to believe an answer they give than they are to believe one that you give
19. Cognitive dissonance and taking shortcuts to resolve it
20. emotional persistence - if you do something in an emotional state in a certain way, you're more likely to do it in that way again, long after the emotional state has gone
21. don't make emotional decisions
22. Sleeping on decisions helps your brain work it out while you're asleep in a less emotional way
23. Trust your gut after ruminating, but not your first instinct.
24. Everything takes longer than you think it does, to get an accurate estimate, ask someone else who has done it. Your situation is not different.
25. Anchoring and perceptual contrast.
26. People always perceive bias against them, irrelevant of whether there's actually bias against them.
27. Conformity plateaus in groups of 3-5 people large - after that, additional people don't increase conformity. A single consistent dissenter can crush conformity, but they must be consistent.
28. People conform more in a good mood. Compliance technicians use "danger-then-relief" mechanisms to increase conformity (make everyone feel endangered and then give them relief so they don't question).
29. Different individuals have different levels of conformity and preference for structure.
30. Foreigners or members of an "other" group are difficult to think about and assess.
31. Fluency and ease of use/thought makes us make faster, more emotional and less thoughtful decisions.
32. However, thinking abstractly instead of concretely (or even just being in an abstract state of mind, instead of a concrete one) makes us exercise more self-control, because we're not thinking of the tempting option right in front of us. Self-affirmation also increases self-control, because we think of ourselves as strong in our values. (Glucose also increases self-control).
33. Synthesizing fluency with scarcity... hard to get works best if it looks like it's hard to get for everyone ELSE, but for right now this second, it's not hard to get for you.
34. Surprise is a compliance tactic, because people don't have a chance to mount an emotional or intellectual defense or rationalization of their own stance.
35. People come to believe their own lies if they are repeated often enough.
36. Choice is demotivating. The more choices you have, the less you want to choose. The more alternate options you have on something, the less you work on the option you select.
37. Psychological Priming
38. Mentally separating from something - psychological distance in either a geographic or chronological sense - may make you better at insight problems.
39. Absurdist stimulation or forceful combination of opposites can spark creativity, so go off topic and ponder the impossible. Similarly, the path of most resistance sparks creativity, while least resistance stifles it.
40. Reconceptualizing problems in different forms or structures can lead to very different solutions.

1. Critical Mass - you need a certain amount of something to get it moving, but once gathered together, it explodes.
2. Break points - in any complex system, there are going to be certain points which are more vulnerable than others, and the system is as strong as its break points
3. Foundational construction - you can only build as high as the foundation will support.
4. Positive and negative feedback loops - self-correcting systems and self-destroying systems.
5. Backup systems
6. Theory of equilibria, and static vs dynamic equilibria.

Computer Science
 1. Orthogonal operations - an instruction set where each command does one thing, and no other command does what any other one does. (as opposed to multiple ways to do something)
2. Refresh rate - the rate of updated information affects what you can do with that information

1. Evolution and survival of the fittest (natural selection)
2. Vertical and horizontal gene transfer
3. Catalysis.
4. Autocatalysis - something produces its own catalyst.
5. Survival by differentiation and niche filling.
6. The Scientific Method and Experimentation

1. Differential diagnosis

1. "You can only get rich once."
2. In a repeated game, those who truly exert effort and discipline will keep going until they find a way to succeed. 
3. The idea of giving people a second chance
4. The idea of prolonging the inevitable
5. People don't change, but the way they manifest who they are changes and matures.
6. People who consider themselves moral, or perceive what they do is moral, are more likely to be immoral, because complacency means they don't seek to be better. Alternately, if people feel like they "deserve" reward for doing something right, they'll go do something wrong to reward themselves. Backed by studies on "halo of green consumerism".
7. Validity vs Soundness

Sociology, Anthropology and Culture
1. The idea of a social network - if your friends are fat, you become fat. If your friends have fat friends, you're more likely to be fat also (first and also SECOND order associations). See Christakis.
2. Some cultures are inherently more conformist (typically East Asian) and some are more individualistic. (Verified in experiment, Kim & Markus 1999, Smith & Bond 1993)
3. Overconfidence serves as a signal to others about one's own skill - either a bias in judgment or strategic lying. It doesn't necessarily indicate that people with higher belief are less likely to search for further information about their skill.
4. Women smile to indicate trust and warmth, while men smile to indicate confidence and lack of self-doubt.
5. People are tuned to be more honest, more conformist and more carefree when happy or in sunshine and light, and more dishonest, more creative and more analytical when depressed or in bad weather or in the dark.
6. People who are selfless and support others with time, money or emotions end up supporting themselves more than if they received equivalent support from someone else - backed up by mortality studies and satisfaction studies.
7. People unconsciously mimic those they like or are interested in, and mimicking somebody makes you like them more and be more attuned to them and others, and them feel the same way back towards you.
8. People think left and down correlates with smallness and up and right with bigness. Eye movements betray what number you're thinking of.
9. People are programmed to be happier when they think fast, because it's an indication of lack of hardship, even when there's no difference in hardship.
10. People grossly underestimate the trustworthiness of other people because when people trust others and are wrong, they get feedback, but when people don't trust others and are wrong, they usually don't.
11. The best predictors for somebody cheating on their partner are previous number of partners, level of impulsivity, happiness with current relationship and viability of other options. Predilection, impulsivity, context and alternatives matter in all relationships - business and personal.

1. Counterpoint - something different happening in the background of the major direction
2. Harmony vs Melody - something big with lots of smaller supporting efforts

1. You can say twice as much using half of the words/content. Being clear and concise helps your point.
2. Similarly, complex writing makes you look stupid. Keeping it simple makes you look smart.
3. Difficult names are associated with danger. The simpler the name, the safer it sounds.
4. The more fluent your speech, the more knowledgeable and intelligent you're considered, but when a speaker hesitates before a word, the word that comes out of his/her mouth is better remembered.
5. Don't stop the storyline for flash - let the flash advance your storyline. For example, car chases shouldn't interrupt an action movie, they should further it. Similarly, flashbacks and backstory shouldn't be a detour, they should carry the story forward.
6. Never write something where all there is is the flashiness, even if it is advancing the story in the end - there should be something going on at the same time. For example, a sex scene is boring, but following a sex scene while wondering when the woman's husband is going to discover them because you know he just arrived home is suspenseful. And it then it allows the "flash" sex scene to advance the story (see 5).

1. Communication and synchronization keeps you alive.
2. Mobility matters to your survival in the case of the unexpected.
3. Concentration in one area does more damage than spreading yourself out.
4. Attack the flank.
5. Sometimes, it's not the quality of the attack, it's the length and strength of the supply chain (think Rommel vs Patten in North Africa).

Political Theory, Law and Government
1. Man of System - people who want to control systems like chess pieces, not treating them like independent objects. Adam Smith has a wonderful quote about this.
2. Decentralization vs centralization
3. Bureaucracy, inefficiencies in responsibility designation and accountability
4. Property rights and legal protections
5. Equality of opportunity, and striving for justice
6. How does one relate equality of outcome with equality of opportunity, given unperceived differences in ability and effort and their distributions?

More Healthcare R+D Concerns

"The board will propose packages of reforms that bring Medicare in line with certain spending targets. Those reforms won't increase cost sharing or taxes and they won't change eligibility or benefits. Instead, they're reforms of what Medicare pays for and how it pays for it."

This is a straight up rationing commission. Their only job is to reduce costs by reducing benefits on a blanket basis. The Tea Party fears of "death panels", which I made fun of as ridiculous, actually have a degree of legitimacy - not on an individual basis, but on a nationwide one.

Why is it so pivotal that rationing be done top down, instead of bottom-up, with a competitive insurance market and some variation of Wyden-Bennett? As in, ration me out of acupuncture and chiropractice and psychiatric counseling because those are benefits I'm willing to risk. Ration someone else out of other treatments based on what they're willing to pay for health insurance beyond a basic voucher, or what their own biology/family history indicates will be a problem.

The Democrats really sh&t the bed on this one.

Friday, March 26, 2010

Interesting phrases on "natural ability" distributions

Unsupported assertions about non-controversial topics

Consider my assertion: "The Wikipedia featured article today is on Uriel Sebree". Even if you haven't checked Wikipedia today and have no evidence on this topic, you're likely to believe me. Why would I be lying?

This can be nicely modeled in Bayesian terms - you start with a prior evenly distributed across Wikipedia topics, the probability of me saying this conditional on it being false is pretty low, and the probability of me saying it conditional on it being true is pretty high. So noting that I said it nicely concentrates probability mass in the worlds where it's true. You're totally justified in believing it. The key here is that you have no reason to believe there's a large group of people who go around talking about Uriel Sebree being on Wikipedia regardless of whether or not he really is.

Unsupported assertions about controversial topics

The example given in Morendil's post is that some races are biologically less intelligent than others. Let's say you have no knowledge of this whatsoever. You're so naive you don't even realize it might be controversial. In this case, someone who asserts "some races are biologically less intelligent than others" is no less believable than someone who asserts "some races have slightly different frequencies of pancreatic cancer than others." You'd accept the second as the sort of boring but reliable biological fact that no one is particularly prone to lie about, and you'd do the same with the first.

Now let's say you're familiar with controversies in sociology and genetics, you already know that some people believe some races are biologically more intelligent, and other people don't. Let's say you gauge the people around you and find that about 25% of people agree with the statement and 75% disagree.

This survey could be useful. You have to ask yourself - is this statement about race and genetics more likely to have the support of a majority of people in a world where it's true than in a world where it's false? "No" is a perfectly valid answer here - you might think people are so interested in signalling that they're not racist that they'll completely suspend their rational faculties. But "yes" is also a valid answer here if you think that the people around you have reasonably intelligent opinions on the issue.

Why Canada's banks did better (it's not a good model)

"It is true that during 2008 four of all Canada's major banks managed to earn a profit, all five were profitable in 2009, and none required an explicit taxpayer bailout.  In fact, there were no bank collapses in Canada even during the Great Depression, and in recent years there have only been two small bank failures in the entire country. 

Advocates for a Canadian-type banking system argue this success is the outcome of industry structure and strong regulation.  The CEOs of Canada's five banks work literally within a few hundred meters of each other in downtown Toronto.  This makes it easy to monitor banks.  They also have smart-sounding requirements imposed by the government:  if you take out a loan over 80% of a home's value, then you must take out mortgage insurance.  The banks were required to keep at least 7% tier one capital, and they had a leverage restriction so that total assets relative to equity (and capital) was limited.

But is it really true that such constraints necessarily make banks safer, even in Canada? 

Despite supposedly tougher regulation and similar leverage limits on paper, Canadian banks were actually significantly more leveraged – and therefore more risky – than well-run American commercial banks.  For example JP Morgan was 13 times leveraged at the end of 2008, and Wells Fargo was 11 times leveraged.  Canada's five largest banks averaged 19 times leveraged, with the largest bank, Royal Bank of Canada, 23 times leveraged.   It is a similar story for tier one capital (with a higher number being safer):  JP Morgan had 10.9% percent at end 2008 while Royal Bank of Canada had just 9% percent.  JP Morgan and other US banks also typically had more tangible common equity – another measure of the buffer against losses – than did Canadian Banks. 

If Canadian banks were more leveraged and less capitalized, did something else make their assets safer?  The answer is yes – guarantees provided by the government of Canada.  Today over half of Canadian mortgages are effectively guaranteed by the government, with banks paying a low price to insure the mortgages.  Virtually all mortgages where the loan to value ratio is greater than 80% are guaranteed indirectly or directly by the Canadian Mortgage and Housing Corporation (i.e., the government takes the risk of the riskiest assets – nice deal if you can get it).  The system works well for banks; they originate mortgages, then pass on the risk to government agencies.  The US, of course, had Fannie Mae and Freddie Mac, but lending standards slipped and those agencies could not resist a plunge into assets more risky than prime mortgages.  Let's see how long Canada resists that temptation.

The other systemic strength of the Canadian system is camaraderie between the regulators, the Bank of Canada, and the individual banks.  This oligopoly means banks can make profits in rough times – they can charge higher prices to customers and can raise funds more cheaply, in part due to the knowledge that no politician would dare bankrupt them.  During the height of the crisis in February 2009, the CEO of Toronto Dominion Bank brazenly pitched investors: "Maybe not explicitly, but what are the chances that TD Bank is not going to be bailed out if it did something stupid?"  In other words:  don't bother looking at how dumb or smart we are, the Canadian government is there to make sure creditors never lose a cent. With such ready access to taxpayer bailouts, Canadian banks need little capital, they naturally make large profit margins, and they can raise money even if they act badly."

The impending healthcare budget and abortion disaster

Under ObamaCare, it is SIGNIFICANTLY better for the majority of individuals to not receive healthcare at work, because the tax subsidies from being on the healthcare exchange vastly outweigh the tax-benefits from receiving healthcare at work.

In other words, for like 90-something percent of the US population, it's better to go to their employer, tell them they'll exchange their healthcare benefits for a raise equal to the cost of their benefits minus the employer penalty, and then turn around and buy insurance on the government healthcare exchange with massive subsidies for the government.

I've praised Doug Elmendorf (the CBO director) in the past for attempting to stay unbiased in the face of massive political and personal pressure from the White House and Congress (invites to dine w the President and other social things, as well as more traditional political pressure). My praise for Elmendorf is hereby retracted. The CBO's estimate of the costs of this plan were awful. I'm not even considering the budget shenanigans (6 years of payouts funded by 10 years of costs, a 25% cut in medicare reimbursements to doctors), because the CBO isn't allowed to consider those - those are squarely in the realm of the Senate and the House.

However, to assume that the "Medicare task force will find cuts that nobody has considered yet", to assume that "GDP growth isn't altered" and to assume that "employer-based insured won't significantly switch to the exchanges" is absolutely idiotic.

We're gonna need another healthcare bill to fix this one, but I sincerely doubt it'll be able to restore the R+D destruction, and we'll be in a much worse fiscal situation when we do it. This isn't a good thing.

On another note, the fact that abortion is not permitted to be covered on insurance exchanges, and the strong financial incentives towards going onto the exchanges, combined with the fact that very few people are going to expect to need abortions for themselves (or, worse, their children), means that abortion is now going to be out of reach of the vast majority of people for whom its most important - the young, the low-income, etc.

 Take a medium-sized firm that employs a hundred people earning $40,000 each—a private security firm based in Atlanta, say—and currently offers them health-care insurance worth $10,000 a year, of which the employees pay $2,500. This employer’s annual health-care costs are $750,000 (a hundred times $7,500). In the reformed system, the firm’s workers, if they didn’t have insurance, would be eligible for generous subsidies to buy private insurance. For example, a married forty-year-old security guard whose wife stayed home to raise two kids could enroll in a non-group plan for less than $1,400 a year, according to the Kaiser Health Reform Subsidy Calculator. (The subsidy from the government would be $8,058.)

In a situation like this, the firm has a strong financial incentive to junk its group coverage and dump its workers onto the taxpayer-subsidized plan. Under the new law, firms with more than fifty workers that don’t offer coverage would have to pay an annual fine of $2,000 for every worker they employ, excepting the first thirty. In this case, the security firm would incur a fine of $140,000 (seventy times two), but it would save $610,000 a year on health-care costs. If you owned this firm, what would you do? Unless you are unusually public spirited, you would take advantage of the free money that the government is giving out. Since your employees would see their own health-care contributions fall by more than $1,100 a year, or almost half, they would be unlikely to complain. And even if they did, you would be saving so much money you afford to buy their agreement with a pay raise of, say, $2,000 a year, and still come out well ahead.

and here:
The penalty is assessed through the Code and accounted for as an additional amount of Federal tax owed. However, it is not subject to the enforcement provisions of subtitle F of the Code. The use of liens and seizures otherwise authorized for collection of taxes does not apply to the collection of this penalty. Non-compliance with the personal responsibility requirement to have health coverage is not subject to criminal or civil penalties under the Code and interest does not accrue for failure to pay such assessments in a timely manner.

Does anti-bribery legislation hurt countries, perpetuating bribery?

Anti-bribery legislation in the US, like the FCPA, may serve to deter foreign investment in desperately poor countries.
This actually was something a lot of economists (Cowen, for one, who also gets the hat tip on this article) talked about with Haiti. Companies weren't willing to go into Haiti to provide necessities because they knew they'd never be able to get in without bribing officials, given how much of the infrastructure has collapsed.
I'm not saying we should outright support bribery, but in a strange way, not supporting it may perpetuate it, by keeping them poor. At the very least, it may be worth suspending in the case of temporary crisis (a la Haiti).

And so it begins... (the interest rate climb)

"Selling the "less poor" investment hardly makes the U.S. Treasury's job any easier. A sign that buyers may be turning wary came Wednesday, in a weak auction of 5-year Treasury notes. Indirect bidders, considered a gauge of foreign demand, took 39.7% of the notes, the lowest portion since July, according to Miller Tabak. Treasury bonds have already had a rough week, with the benchmark 10-year yield climbing from 3.68% to 3.82% since Monday. "
Post health-bill passage, plus real-world signs that profligate spending actually can systemically crater an economy (in addition to Dubai and Greece, Portugal has now been downgraded and is teetering on the brink), 10-year yields skyrocketed this week.
I'm not a big believer in short term fluctuations, but the big difference here is that if Coca-Cola plummets today, I look at it and think "Nothing's going to happen to Coca-Cola, this just makes it a better value", and eventually the price gets pushed back up again. If the US debt outlook plummets (which the passage of the healthcare bill absolutely pushed us towards, and Portugal is another indicator of how much trouble we're going to be in), then interest rates rise... but that should only spur more investment if people DON'T use price as an indicator of quality. If people see treasury bond yields rising, and take it to mean that the US is a riskier investment and get out, then bond yields will rise even higher, stifling the economy further and making the US less creditworthy, leading to higher rates - in effect, an interest rate spiral. This type of momentum absolutely happens in currency and sovereign bond investing (George Soros made billions on it), and in the case of treasuries, they can be self-fulfilling (unlike Coke, which doesn't need to raise capital beyond operational cashflow, so any bubble or trench is by definition temporary).
This means that for a country like the US with structural deficits, a point-in-time perception of weakness can lead to actual weakness; there's plenty of evidence for that. If Moody's, Fitch and S&P decided to downgrade US debt, the downgrade would likely make the US debt less creditworthy. They seem to understand that, which is one reason among many, I think, that they haven't pulled the trigger (another is that they would receive SUBSTANTIAL media, social and political pressure from all sides by "proud Americans" who want to stifle their warnings).
Thus, short-term movements actually do matter. And in this case, they're justified and have a readily determinable cause - government spending - verified by the low percentage of indirect bidders. This should be a warning, but of course nobody will take it as one.

Wednesday, March 24, 2010

Bakadesuyo on Self-Improvement

Bakadesuyo, one of my favorite blogs, regularly posts the results of studies dedicated to assessing self-improvement. A sampling:
How to trick yourself into eating less food and spending less money: (hint - partition into smaller units!)
How to improve your math skills (speak out loud, and draw it!):
How to improve your vision (play video games...):
How to make accurate predictions of how long something will take (ask someone how long similar projects have taken in the past, and ignore your response):
How to praise your child in a way that makes you a good parent (praise their efforts, not their innate attributes):
How to learn (take a very challenging test - you remember more than just studying or taking easier tests)

A case for nominal GDP growth targeting

This is wonkish, but a case for nominal GDP growth targeting instead of inflation targeting (which the US does not do explicitly but does do implicitly):
"inflation targeting at any rate is merely responding to the symptom not the underlying causes--shocks to aggregate demand (AD) and shocks to aggregate supply (AS)--of macroeconomic volatility. This is problematic because monetary policy can only meaningfully counter AD shocks and therefore, it must be able to discern which shock is driving inflation. Inflation, however, can be hard to interpret. For example, if there is a sudden burst of inflation is it due to a positive aggregate demand shock (e.g. sudden, unsustainable increase in household spending) or a negative aggregate supply shock (e.g. temporary spike in oil prices)? In the former case inflation targeting would act appropriately by reigning in excess spending while in the latter case inflation targeting would only make matters worse by further restricting economic activity. Rather than targeting inflation, then, monetary policy should directly target the underlying  source of macroeconomic volatility over which it has real influence, AD.  Doing so would have gone a long way in making  the U.S. economy during the 2000s more stable...
inflation targeting is only effective when  AD shocks are the main source of macroeconomic volatility.  If AS shocks are also important,then inflation targeting can be destabilizing.  Second, a far more effective approach to  minimizing macroeconomic volatility is to stabilize AD.   In the above scenarios, stabilizing AD growth  around a 5% target was all that was needed."

Another study states that females are more risk-averse

This time, it's chess players.
This has remarkable implications for female wage equality. If women aren't receiving equal wages for what looks like the same job, it very well could have something to do with women having taken less risk in their careers, which wouldn't show up in statistics easily but would be reflected in standing within the company.
Of course, there are other reasons for the gender gap in earnings for identical job titles. Assuming that men and women in a position have the same level of experience - not necessarily true, given things like childbirth - it's also possible that companies assign projects differentially to women or pay women differentially because of the risk of possible absence from work due to childbirth or motherhood.
Sexism is a possible explanation, as well, that needs little exposition from me.

What's next in healthcare, part 2

So the question now is how the government will respond to the various problems ObamaCare will create.
Hopefully the government will realize the adverse selection mess they're causing in short order, and raise penalties for not getting insurance. The cadillac tax will probably be raised to a higher threshold as insurance costs go up significantly.
There are two directions in which the government can respond to a shortage of doctors (I don't believe that the government will notice or care about a reduction in medical R+D, though in my opinion, that's the most tragic part of this whole mess):
The first option is that it can follow the time-tested path of deregulation. It'll slowly unwind a lot of the bureaucracy put into place by Obamacare and replace it with a more constructive, better thought-out bipartisan plan (the unfortunate part of ObamaCare is that it's happening at a time when the public has a significant distrust in free markets, but the alternative has always proved worse - something that is not in the collective public consciousness. If this happened 3 years ago, we may have seen a much better bill. China's fraudulent "miracle" isn't helping matters.)
I agree that vouchering for catastrophic care may be an option; if the Republicans have enough power to overwhelm the Democratic fostering of their union constituents, we may actually see something like Wyden-Bennett (a bipartisan healthcare bill better than what was passed - by every (educated) account on both the left and right - but crushed by unions) with a version of vouchering for catastrophic care. This still falls under the deregulation banner; instead of the government functionally dictating the way your plan works for you, individuals have the chance to choose the plan that's right for them. You'd need some sort of disclosure agency to ensure consumers are given the information they need to make the decision and avoid extraneous information, but that's a far less top-down program than Obamacare.
The other option is the "Pelosi Pipedream" of government-provided healthcare and a government-run medical system. Doctors would probably have to undergo less training in order to have an equilibrium with sufficient doctors receiving (functionally) federally determined pay. The quality of people entering the industry lowers, meaning the quality of care for specialized or rare diseases decreases. As with most bureaucracy, inefficiency reigns and R+D stops entirely.
I'd like to think that by then, America will have gotten over the financial crisis-induced fear of deregulation, and the US will repeat the deregulation of the early 80s. We finally snap out of a period of reduced growth, and hopefully big government fiscal progressivism dies for good (though it's not entirely clear how much more, fiscally, there even is for the government to do, unless it intends taking over provision of housing or food in the name of equality - and the USSR is still fresh enough in people's memories that it's hard to see that happening any time soon).
I would hope that at some point, as the quality of care degrades and price goes up, that people would look at better methods of reimbursement. Hard to know.
Moral hazard becomes somewhat more of an issue, as well - you have fewer reasons to not be fat if you know you have insurance. It's probably a smaller effect than the far right makes it out to be, and definitely a bigger one than the "it's not a problem" left. If so, you'll probably see some degree of pigouvian taxation, or perhaps the government would let insurance companies be a little bit more actuarially fair.
R+D may slow down for good. The US fiscal situation is another post for another day. And it's possible that the US could try and "reclaim" some of the assets of people who leave - a thoroughly socialist thing to do, but we just half-socialized healthcare, and that's a lot less unpopular.
You may see greater protectionism as companies increasingly offshore labor, or politicized tax breaks for businesses to hire here in industries housed in states with key politicians.
We probably have another massive healthcare bill debate in 15 years to try and clean up the mess caused by this one (and hopefully that one will happen with Republicans in Congress, so we can actually get some useful features like tort reform that were left out of the bill at Democratic constituents' request).

What's next in healthcare, part 1

A number of people have been forecasting what must inevitably happen to US healthcare now that the Democrats have passed this bill. I include interesting points, and then a number of my own.

"Many Americans will receive subsidies for insurance, from what I understand roughly in the range of 6k to 12k.  Many other Americans -- namely those who already have health insurance -- will not receive direct subsidies of this nature.  Yet the subsidy-receiving and non-subsidy-receiving Americans will very often belong to the same income classes.
This disparity does not bother me personally (I have other worries about the subsidies), but I believe it will be very unpopular once it is publicly understood.  One way or another, the "firewall" between the exchanges and the employer-supplied system will break down.  Some people will want to spread the subsidies, others will want to limit them.  Yet the former is budgetarily problematic and the latter will be politically difficult.
A second and related issue is that the differences in reimbursement rates -- across private insurance, Medicare and Medicaid (highest to lowest) -- will become a more pressing issue.  For one thing, Medicaid patients will be crowded out by those buying private insurance on the exchanges, plus they will be crowded out by the growing number of Medicaid (and Medicare) patients.  There will be pressure to fix this problem and the difference in rates will lead to growing supplier gaming, queues, quality differentials, and so on.
Over time, reimbursement rates across programs (insurance subsidies, Medicare, Medicaid) will converge to an increasing degree.  Subsidies will be increasingly determined by income class rather than previous insurance history. 
In the limiting case (I'm not suggesting we will get there), everyone will receive means-tested subsidized vouchers for regulated private insurance.  In this strange way, Medicare and Medicaid could end up partially privatized and Ezekiel Emanuel -- a voucher advocate -- will end up being more influential than his brother Rahm.  We will have to live with the problems of means-testing to a higher degree than today, but we will have something closer to a unified system, as do most other countries with universal coverage.  There will be political pressure for compulsory health care savings, as they have in Singapore, to lower costs of finance.
It would be good if such vouchers could evolve in the direction of emphasizing catastrophic care and eventually they will have to.
Massive pressure will be put on such vouchers if either health care consumes 30-40 percent of gdp or income inequality continues to rise.  In the former case, subsidies become increasingly expensive and involve extraordinarily high implicit marginal tax rates (earn more, your subsidy declines in value).  In the latter case, it becomes increasingly difficult to ensure "near-equal" levels of health care access at feasible subsidy levels.  Those pressure points are not unique to the Obama bill, but they become especially critical under the evolutionary scenario I am outlining.  Perhaps we would give up the ideal of near-equal access, but that day is a few decades away.
Addendum: Here is Bryan Caplan's scenario, which means the bill will not work; my above post is assuming that problem is solved by raising the penalty."

1. It provides "immediate access to insurance for uninsured individuals with a pre-existing condition," creating a big adverse selection problem with one swoop.  The provision "ends when Exchanges are operational" in 2014.  But beginning in 2014, "Health plans can no longer exclude coverage for treatments based on pre-existing health conditions."  So apparently consumers will be free to play "Heads I win, tails I break even" from now on.

2. A while back, Krugman loudly insisted that if you ban pre-existing conditions clauses, you also have to mandate insurance.  While the new bill has a mandate, it doesn't begin until 2014, and the penalty clause is absurdly small.  Here's what passes for "promoting individual responsibility":
Requires most individuals to obtain acceptable health insurance coverage or pay a penalty of $95 for 2014, $325 for 2015, $695 for 2016 (or, up to 2.5 percent of income in 2016), up to a cap of the national average bronze plan premium. Families will pay half the amount for children, up to a cap of up to a cap of $2,250 per family. After 2016, dollar amounts are indexed. If affordable coverage is not available to an individual, they will not be penalized.
In practical terms, then, "Heads I win, tails I break even" remains the winning strategy.  And as adverse selection drives up the price of insurance, paying the uninsured penalty until you're seriously ill gets smarter and smarter.

3. While new regs penalize firms that don't offer insurance, the penalty seems to asymptote to $2000/employee:
Requires employers with 50 or more employees who do not offer coverage to their employees to pay $2,000 annually for each full‐time employee over the first 30 as long as one of their employees receives a tax credit. Precludes waiting periods over 90 days. Requires employers who offer coverage but whose employees receive tax credits to pay $3,000 for each worker receiving a tax credit up to an aggregate cap of $2000 per full‐time employee.
I have a feeling that post-recession jobs are going to be a lot less likely to offer health insurance. 

4. The "Cadillac tax" doesn't kick in until 2018.  But given the regulation-induced adverse selection problem, plus many other provisions to hobble discount insurance, I wouldn't be surprised if half of the insured ended up paying it:
Tax is on the cost of coverage in excess of $27,500 (family coverage) and $10,200 (single coverage), increased to $30,950 (family) and $11,850 (single) for retirees and employees in high risk professions. The dollar thresholds are indexed with inflation...
Notice that the thresholds are indexed to inflation, even though medical costs have increased at a much faster rate than inflation for ages."

And now my take:

Adverse selection and cream skimming are two very obvious problems with the current bill. General economic slowdown is another; it has just become much more expensive to employ someone because of the required benefits or penalty, and wages can't easily adjust down. Additionally, the bill increases taxes substantially.

Something people don't mention is "brain drain". Wealthy people tend to flee high-tax areas, and the US just became a much higher-tax area (the investment tax and income taxes work poorly - a cadillac tax would have been better). Additionally, the quality of US healthcare on a per-patient basis will almost certainly go down amidst significant pressure on doctor reimbursements (cutting the number of doctors in the industry) and a substantial number of new patients (most likely in the 20 million range on a net basis). Supply down, demand up, and no ability to independently price more? The only place to cut is cost of servicing a patient, which means seeing more patients (and thus less time with each patient). I also think you'll probably see cost of care go up, as Medicare can only ignore the problems with supply/demand imbalances for so long. Anyway, the US has been the best place in the world to get sick (almost undeniably - mortality rates from each disease in the US are among the lowest in the world, uniformly), which is a reason for rich people to stay. That doesn't exist anymore, so I'd imagine the US begins seeing more wealthy Americans leaving for lower-tax locales.

Furthermore, with doctors leaving the industry, you end up with a de facto uninsured problem, where people have insurance but can't find a primary care doctor (me, for one... I live in MA, with universal healthcare, where primary care doctors have 44 day waiting lists, and 56% of doctors refuse to take new patients...I live in an urban area, which means the problem is worse than the MA average. I suspect I have conjunctivitis today but I have nobody I can go to other than an emergency room, which I refuse to do, meaning that despite my health insurance, I am de facto uninsured for a number of conditions.). You may not have solved much of the problems you were trying to address - you may have been able to achieve the same things at lower cost and better incentives with vouchered catastrophic care.

In addition to doctors leaving the industry, I suspect you'll see a substantial reduction in "rare" disease research over the next decade and beyond. When you restrict the prices an insurance company can charge, increase the costs of care (both through supply/demand, the adverse selection problem and the fact that we still have a bunch of nearly-completed research into amazing but expensive technology coming online), restrict deductible adjustment and set a lower bound on reimbursement rates for doctors (as functionally, there must be - we may see private reimbursement rates approach Medicare's), then the only other area for insurance companies to adjust is in what they will cover. I suspect you'll see a lot of treatments not get covered, and the government will be very inconsistent in managing to force insurance companies to cover new procedures. This adds substantial risk to the process of developing something new and rare, because insurance companies may not cover it directly because they don't have to, or someone may come up with something cheaper than what you're doing, leading insurance companies not to cover what you do because they can meet their mandates with cheaper services. R+D will thus very likely crater as private capital dries up, and public capital remains incapable of commercializing research (or even funding it intelligently - see the average age of NSF grant recipients over time - but that's a different set of issues).

This ignores the national debt impact of the bill, which will certainly be substantial, because that'd likely be a problem with ANY healthcare plan, and some sort of healthcare reform would have been a good thing.

Thus, you end up with a Cerberus of reduced doctor incentives, reduced R+D and a weakened economy.

So how will the government respond? See part 2...

Monday, March 22, 2010

USA is a less safe creditor than BRK.A, JNJ, LOW, PG, ABT and RY

As of this morning (post ObamaCare passage),
"Two-year notes sold by [Warren Buffett's] Berkshire Hathaway Inc. in February yield 3.5 basis points less than Treasuries of similar maturity, according to data compiled by Bloomberg. Procter & Gamble Co., Johnson & Johnson, [Abbott Laboratories, Royal Bank of Canada] and Lowe's Cos. debt also traded at lower yields in recent weeks."
Of course, I'll also note that I think the US should have lost AAA under Bush and lost AA+ under Obama, and that I think the reason AAA is being maintained is because it can be a self-fulfilling prophecy. If more people thought about the US credit rating, I think it'd drop.
Anyway... this should be very scary. The last thing the US needs is their interest rates to go up amidst a recession and a healthcare bill that could quite easily raise unemployment (due to the employer-mandate provisions of ObamaCare).

EDIT: One possible explanation I wrote in a comment section on Marginal Revolution:
"Well, note that the securities whose interest rates dropped below treasuries' largely have pricing power in periods of inflation. (JNJ and ABT are pharmaceuticals with patents, PG has brand power, LOW is a low-cost producer, BRK.A is run by a man who made his fortune off of buying companies with inflation-resistance, and RY is Canadian). They're presumably still higher rates than TIPS. Additionally, most (all but LOW, I believe) also have international exposure. So functionally, you're getting extremely strong US corporations with clean balance sheets and good management who are more resistant to inflation than US government bonds. "

EDIT 2: I realized that my response is somewhat stupid - the bonds are fixed rate and don't have inflation protection - but at least they have a very, very low probability of default if inflation happens. However, that probability can't be less than 0, and that situation can only occur if the US approaches default. Thus, US treasuries should still be the lower bound for what a fixed rate bond should yield.

Perhaps it is a longer/shorter term issue, but it doesn't sound like it. I don't know the answer.

EDIT 3: I've thought about it some more. The only thing I can come up with (other than 'irrationality' or 'computer-generated trades') is that the market has a non-zero probability on a US sovereign default that is not inflated away by the central bank. In that circumstance, you could justify this situation. I don't think that's a likely outcome, but it at least explains it...

Friday, March 19, 2010

Anchoring Bias and Confirmation Bias in the Middle East

"So, let's just accept that Israel's handling of the Ramat Shlomo settlements announcement during US vice-president Joe Biden's recent visit was cack handed and self-defeating. Prime Minister Netanyahu has admitted as much by apologising. It was a diplomatic faux pas, and it provoked a torrent of protest from the State Department to the Palestinian Authority. It also received saturation coverage in every major outlet in the western media. ...
Now consider the response [from the rest of the world] to the Palestinian Authority's decision last week to celebrate the worst terrorist atrocity ever perpetrated inside Israel (the 1978 bus massacres which left 38 dead including 13 children) by naming a central square in Ramallah after its perpetrator, Dalal Mughrabi. That was a statement of values and intent, glorifying mass terrorism and signalling to Israel and the world that the Palestinians can never be trusted to abide by civilised norms. It tells you everything you really need to know about Israel's conflict with the Palestinians and why peace with them has proved elusive for more than six decades. What follows is a list of the western news outlets that have covered what, I repeat, is an immensely significant and illustrative story:
1. The New York Times. 2. Nobody… That's right, every other major media outlet in the western world has effectively censored it. ...
By leaving the general population in a state of near total unawareness about the realities that Israel confronts in its dealings with the Palestinians, even neutral and unbiased observers are bound to come away with the impression that Israel is the guilty party in this conflict.
This is real censorship. And it works." 
and more,
"Accordingly, I support a "Middle East Apartheid Education Week" to be held at universities throughout the world. It would be based on the universally accepted human rights principle of "the worst first." In other words, the worst forms of apartheid being practiced by Middle East nations and entities would be studied and exposed first. ...

Under this principle, the first country studied would be Saudi Arabia. That tyrannical kingdom practices gender apartheid to an extreme, relegating women to an extremely low status. Indeed, a prominent Saudi Imam recently issued a fatwa declaring that anyone who advocates women working alongside men or otherwise compromises with absolute gender apartheid is subject to execution. The Saudis also practice apartheid based on sexual orientation, executing and imprisoning gay and lesbian Saudis. Finally, Saudi Arabia openly practices religious apartheid. It has special roads for "Muslims only." It discriminates against Christians, refusing them the right to practice their religion openly. And needless to say, it doesn't allow Jews the right to live in Saudi Arabia, to own property or even (with limited exceptions) to enter the country. Now that's apartheid with a vengeance.

The second entity on any apartheid list would be Hamas, which is the de facto government of the Gaza Strip. Hamas too discriminates openly against women, gays, Christians. It permits no dissent, no free speech, and no freedom of religion.

Every single Middle East country practices these forms of apartheid to one degree or another. Consider the most "liberal" and pro-American nation in the area, namely Jordan. The Kingdom of Jordan, which the King himself admits is not a democracy, has a law on its books forbidding Jews from becoming citizens or owning land. Despite the efforts of its progressive Queen, women are still de facto subordinate in virtually all aspects of Jordanian life.

Iran, of course, practices no discrimination against gays, because its President has assured us that there are no gays in Iran. In Pakistan, Sikhs have been executed for refusing to convert to Islam, and throughout the Middle East, honor killings of women are practiced, often with a wink and a nod from the religious and secular authorities.

Every Muslim country in the Middle East has a single, established religion, namely Islam, and makes no pretense of affording religious equality to members of other faiths. That is a brief review of some, but certainly not all, apartheid practices in the Middle East.

Now let's turn to Israel. The secular Jewish state of Israel recognizes fully the rights of Christians and Muslims and prohibits any discrimination based on religion (except against Conservative and Reform Jews, but that's another story!) Muslim and Christian citizens of Israel (of which there are more than a million) have the right to vote and have elected members of the Knesset, some of whom even oppose Israel's right to exist. There is an Arab member of the Supreme Court, an Arab member of the Cabinet and numerous Israeli Arabs in important positions in businesses, universities and the cultural life of the nation. ...

There is complete freedom of dissent in Israel and it is practiced vigorously by Muslims, Christians and Jews alike. And Israel is a vibrant democracy.

What is true of Israel proper, including Israeli Arab areas, is not true of the occupied territories. ... I have long opposed civilian settlements in the West Bank, as many, perhaps most Israelis, do. But to call an occupation, which continues because of the refusal of the Palestinians to accept the two-state solution, "Apartheid" is to misuse that word. As those of us who fought in the actual struggle of apartheid well understand, there is no comparison between what happened in South Africa and what is now taking place on the West Bank. ...

The current "Israel Apartheid Week" on universities around the world, by focusing only on the imperfections of the Middle East's sole democracy, is carefully designed to cover up far more serious problems of real apartheid in Arab and Muslim nations. The question is why do so many students identify with regimes that denigrate women, gays, non-Muslims, dissenters, environmentalists and human rights advocates, while demonizing a democratic regime that grants equal rights to women (the chief justice and speaker of the Parliament of Israel are women), gays (there are openly gay generals in the Israeli Army), non-Jews (Muslims and Christians serve in high positions in Israel) and dissenters, (virtually all Israelis dissent about something). Israel has the best environmental record in the Middle East, it exports more life saving medical technology than any country in the region and it has sacrificed more for peace than any country in the Middle East. Yet on many college campuses democratic, egalitarian Israel is a pariah, while sexist, homophobic, anti-Semitic, terrorist Hamas is a champion. There is something very wrong with this picture."

from, emphasis added by

My question, of course, is "why does this happen?" Anti-semitism (not equal to anti-zionism, but undeniably co-existing sentiments in way more people than would care to admit it) is certainly part of it.
However, I don't believe every American news outlet is ragingly anti-semitic, and my friends who believe Israel is wrong (largely liberals) are certainly not all anti-Israel or anti-semitic or biased (some probably are, but not all).
Something that I've been wondering lately is whether anchoring bias and confirmation bias are skewing the media presentation of what's actually happening in the Middle East.
We think about the Muslim world, and about Palestinian actions in the past, and we think of a large number of negative things: theocracies, abuse and mistreatment of women, executions for political dissent or non-crimes like "sorcery", suicide bombings, terrorism, etc. Even the not blatantly-negative things have negatives: Dubai and excessive wealth, oil-driven economies, etc. We thus "anchor" on this perception, and thus behavior that "confirms" our stereotype isn't really even news. Who cares if Lebanon is launching rocket attacks into Israel or Gazan suicide bombers or terrorists are attacking innocent civilians? That's the norm; we dont' think of it as anything unusual, so it's not reported on. This is exacerbated because their cultures and systems of government are so different to ours, that we just assume that their behavior stands as normal.
Then look at Israel: high-tech, democratic, diverse, and fairly tolerant of a wide variety of religious viewpoints (excluding the treatment of reform and conservative Jews by orthodox Jews, but that's not what anyone here cares about). We then see that they are building settlements in East Jerusalem, or launch a rocket into a pre-warned and pre-evacuated part of Gaza, and immediately associate with them. They are like us, and we "anchor" to a stereotype of "like us". Thus, any deviation from what we do (never mind that we're not surrounded by enemies) is something newsworthy, and worth criticizing them for. Israel gets trashed, functionally, for engaging its enemies with anything other than open arms, despite engaging the most civilized war in history (seriously, who else text messages all of their enemies with alerts as to where will be bombed and when, far in advance, so that people can evacuate themselves and their legal and illegal property and only buildings get destroyed?) while the Palestinian atrocities against civilians (and yes, they are atrocities) get ignored.
There's also definitely an "underdog bias", as well - Israel has lots of technology and wealth (which it built for itself, through a productive society), while Gaza is still dirt poor (because it has spent more time fighting Israel than building itself). So people root for the underdog without really focusing on how they got there.
" Israel withdrew from Gaza unilaterally, leaving behind a substantial infrastructure that was subsequently trashed by the Gazans.
  • Israel re-invaded Gaza to halt the firing of rockets into Israel.
  • and don't forget that there is a major blockade on the Egyptian side of Gaza. Why aren't Gazans upset about this barrier? At least the Israelis provide electricity to Gaza and allow some exchange.
  • Palestinians, in general, left their homes and land at the behest of Arab leaders in 1947. For the most part they were not driven out by the Jews, but rather they were enticed out by promises that the Jews would be driven into the sea.
  • Palestinians, again for the most part, were not welcomed in Syria, Jordan, Egypt, etc. Instead they have been kept at refugee status for generations. Why are the arab leaders of these countries not hated by Palestinians for having misled them in the first place and then not having welcomed them later? "
  • Incredible claims of a misled public on healthcare

    When I say "incredible", I don't mean "the synonym of amazing", I mean "not credible".
    One of the major factoids Krugman and other liberals in support of the healthcare bill have been pulling out has been the idea that "Republicans have skillfully used message to make people believe that they oppose the healthcare bill when they actually don't". The argument they make is "People oppose the bill, but when they're presented with individual provisions, they support them. Thus, it's a message issue."
    The problem, of course, is that this suffers from extreme, extreme bias based on the questions being asked.
    This bill is undeniably huge, in scope (a cited estimate of 940 billion over ten years, and if you correct for the "doc fix" and the 6 years of payouts vs 10 years of fees issue, about 2.3 or 2.4 trillion over 10 years), and also in number of provisions (the actual bill is over a thousand pages long).
    This bill certainly gets SOME things right - it extends coverage to everybody, it ends preexisting conditions, it mandates that people get insurance and it tries to crack down on the "dropped coverage" abuses that insurers have perpetrated. These are undeniably good things, and despite my opposition to the bill, those are features I support.
    If you were to ask me if I support the bill, I'd say no, but if you asked me if I supported those particular provisions, I'd say yes. I would thus fall into their "tricked by message" category. Of course, the real problem is that the issues I have with the bill, that in my mind outweigh the good provisions of the bill, are never asked about.
    Here is a somewhat concise list:
    1) Putting drug companies in a position of pricing pressure from monopsony power, for example, is one thing I've written about at length and would kill more people in the long run than providing insurance to everyone would save because it would crater the R+D pipeline at colleges and startups.
    2) Driving down health costs by cutting payouts to doctors is another major problem - we have a major, major shortage of doctors, and this bill not only exacerbates demand (an unavoidable feature of extending universal coverage) but also crushes supply, instead of increasing it, by implicitly reducing how much doctors are paid through insurance companies and Medicare. (For reference, 56% of MA primary care doctors don't take new patients,  the average waiting period for an appointment for those who do take new patients is 44 days, approximately 10% of doctors leave the profession every 5 years and need to be replaced by new MDs and a growing number of doctors refuse to take Medicaid or Medicare patients because the payouts are so unbelievably low.)
    3) The bill DOESN'T correct a number of very real problems of how hospitals and doctors are compensated - I think they should be compensated more, but I think they should be compensated differently. Instead of on a "per test" basis, it should be some weighted average of per-test, per-outcome and per-appointment (perhaps with per-condition thrown in). This would make the system cheaper.
    4) The bill does not make the penalties for the insurance mandate high enough, which means people can game the system by only getting insurance when they need care and dropping it when they don't. That skyrockets costs.
    5) The bill doesn't deal with very important issues like portability of healthcare. If I want to keep my plan after I leave my job, I still can't. In fact, my company could decide to drop my healthcare, pay me the minimum subsidy required by law and make me shop on the exchange, which will be more expensive but have worse options than my company-negotiated plan.
    6) The bill includes enough mandates or potential for mandates that health insurance costs will go up for treatments that I don't want or need (chiropractice, for example, or smoking cessation therapy).
    7) The bill doesn't allow insurance companies to be actuarially fair and charge more on the basis of obesity or smoking, which are certainly lifestyle-related, which means that not only are healthy people subsidizing unhealthy people, which is a factor of luck and is defensible, but responsible people are subsidizing irresponsible people, which is a factor of effort and is not.
    8) The bill does NOT correct for foreign countries exercising pricing power on US drug countries, which leads to higher US drug costs and is a massive reason why our healthcare is more expensive than foreign healthcare.
    9) The bill does not allow for things like 'catastrophic coverage' and versions of it curtail wonderful things like FSAs and HSAs, all of which reduce healthcare costs.
    10) The bill crushes R+D by medical companies through taxation as well as pricing pressure, and that is a very, very bad thing for the future health of America.
    11) If the first ten years of the bill were graded by the CBO equalizing the 10yr vs 6yr issue and screening out the doc fix, it would add 1.4 trillion to an already stretched deficit. The "savings" in the second ten years are not true savings, because the assumptions on the increase in healthcare costs that get "curtailed" by the bill are based on fanciful predictions in the growth of Medicare costs, which are driven upwards largely by R+D, which will be hit substantially. We could cut our trade deficit in half by blowing up everyone's gasoline-consuming automobile, but that doesn't mean we are better off.
    12) Further skepticism about the CBO estimates. The first-decade cost of Medicare was 1000% of the CBO-estimated cost of Medicare because so many dynamic equilibria were considered to be static (things like "who gets a pension or employer-subsidized healthcare in retirement, and will that change", and "how much do we have to pay doctors to take those patients"). This bill is bigger than Medicare, with more room for error.
    13) The employer-related healthcare provisions will make it even more costly to hire American workers. We're already suffering from severe offshoring, thanks to an overvalued dollar, the highest corporate tax rates in the world, an exploding minimum wage, a well-intentioned but arcane regulatory framework and a brutal process for constructing any sort of capital assets. Intel recently estimated that building factories in china costs 30% less than building the identical factories in America... and the difference is not made up for anymore by the productivity of American workers, because the cost differential has grown so much and foreign workers are becoming so much better (and American workers aren't improving). We already have 10% unemployment and about 18% total underemployment + unemployment... how many of those underemployed will turn into unemployed because it's just not worth it to have those workers? How many people not reflected in either of those numbers will get fired?
    14) Concern over marginal tax rates - Between 25,000 and 40,000 a year, people already pay near or over 100% marginal tax rates because of the dropoff in government subsidies (If I go from 25,000 a year salary to 35,000 a year salary, the amount of government programs I lose are greater than 10,000, so I'm actually poorer). This is a substantial impedance to work and thus economic and personal improvement. We also have the highest share of government being paid by the rich in the entire world already... do we really want things like "brain drain" to lower tax locales?
    15) Doesn't deal with the easiest low-hanging fruit because those are democratic constituents- tort reform, excessive union benefits ("cadillac tax"), etc.
    16) Because it's opposed to any sort of incrementalism, we actually haven't figured out if there are other ways for insurance companies to scare off high-risk customers. I guarantee you every insurance company will be looking for ways, and they'll be a lot more creative than a government bureaucracy.
    Nobody asks these things about the bill, so it looks like a Republican "message" victory, instead of substantive opposition. If you asked people about these things, they'd perhaps respond differently, and the individual components piece would line up with the overall opposition piece. Let's not forget that Massachusetts - the most educated state in the union, a Democratic stronghold but dominated by independents instead of typical democratic constituents (unions and poor) - just elected a Republican Senator who ran against healthcare. The vast majority of voters in this state knee-jerk agree with Democrats - I guarantee they did not get sucked into a fake Republican message.

    EDIT: One other major problem that cropped up later - Private companies have incentives to drop employers onto the public exchange and just pay the penalty. It's way cheaper for like 90% of American workers for companies to drop coverage, pay the penalty and provide additional salary to cover the public-exchange healthcare premiums than it is for those companies to keep providing private healthcare (the major problem is that healthcare premiums on the exchange are too low. A secondary problem is that the penalty for not providing healthcare coverage is too low). This will a) send us towards even more centralized healthcare, which kills R&D more, and b) cost the taxpayers a TON and makes the deficit reduction projections look like a comic joke.

    Tuesday, March 16, 2010

    Empirical Analysis of the CDO Market Meltdown

    I present "The Story of the CDO Market Meltdown: An Empirical Analysis", an incredible senior thesis written by a friend of mine, AK (full citation in the actual paper itself). It was recently cited in the Wall Street Journal ( and Michael Lewis, author of "Liar's Poker" and "Moneyball", has said it is "more interesting than any single piece of Wall Street research on the subject" and cites it in the acknowledgments of his new book, "The Big Short".
    However you think about the analysis (AK makes very intelligent, simple and defensible points, most of which I agree with and a few of which I'd be interested in learning more about before coming to a conclusion), the detailed empirics of this are unmatched by anything else I've read in the news, editorial pages or blogosphere on this crisis. AK compiled the extensive data by hand, because it didn't exist.
    It's very, very wonkish, so you may have some trouble understanding it if you don't know how investment banks work. It may be worth a read either way, however, because you'll pick up pieces as you go, and it illustrates the incredible complexity that characterized the system (and thus allowed it to swell so far).
    For those who want the "Cliff's Notes", I've posted the table of her conclusions (table 16 in the actual pdf) here:

    Questions I have

    1) Which country does this Charlie Munger quote refer to?:
    "In this vein, I next want to mention a strange Latin American case of a dysfunctional economy that got fixed. In this little subdivision of Latin America, a culture had arisen wherein everybody stole everything. They embezzled from the company, they stole everything that was loose in the community. And of course, the economy came practically to a halt. And this thing got fixed. Now where did I read about this case? I'll give you a hint. It wasn't in the annals of economics. I found this case in the annals of psychology. Clever people went down and used a bunch of psychological tricks. And they fixed it."
    2) What books should I read to learn about the conversion methods of Reverend Moon and the Unification Church?
    Anyone with information would be much appreciated.

    What caused the Credit Crisis, wonk edition

    The above tables are from my friend's aforementioned magnificent thesis. It's available publicly, I'm just waiting for permission to post it because it has personally identifiable information on it (which I can black out, but still).

    The table summarizes significant results. I highly recommend reading closely.

    (Most surprising finding? "No strong evidence that credit ratings were affected by the amount of fees brought by the CDO underwriter, [indicating that] Primary reasons for rating agency problems not associated with fee system." This has been harped on by a lot of pundits, but I've never seen anyone use data, and certainly not data as good as this...)

    Regulation gone awry

    This sentence, from a friend's senior thesis, was terrifying:

    "In the beginning days of CDOs, it was common for underwriters to keep the most junior or equity piece of their CDOs as a way to protect against adverse selection and moral hazard. However, the Basel Accords imposed a 100% capital charge against equity tranches, deterring banks from holding these bonds."

    the thesis, by the way, was featured in the Wall Street Journal, as well as winning just about every award Harvard has to offer its thesis writers. I'm reading it now, and the data collection alone is unlike anything I've ever seen anywhere. It's a fascinating read, and as soon as I have permission, I'll post it.

    (I'd also love to post my own senior thesis for posterity's sake, though perhaps I shouldn't invite the comparison with hers...)

    Anyway, that sentence above is a perfect reason why the answer is rarely more regulation, but instead, better regulation. If banks had been forced to keep the riskier junior/equity piece instead of the senior secured tranches, it's a safe bet this mortgage meltdown wouldn't have happened. Well-intended capital regulation, intended to make bank assets safer, actually worsened the crisis.

    How bout a regulation that states that a bank must retain a junior piece of every deal it originates? This isn't just for mortgage securities, it's for everything - equities and corporate debt, credit and other ABS and project finance, etc.

    EDIT: To clarify, I'm not advocating for banks to be able to lend against junior capital - that would be a house of cards. I am arguing for banks to be forced to retain pieces of their deals and NOT lend against them. This could distort the structure of deals (by putting a high-risk, high-reward option value on the junior capital, you may actually perversely cause some tranches to have INCREASED risk. This would require some very deep thought by a regulator as to how, exactly, to structure that regulation).