Friday, October 21, 2011

CETUSA, Hershey and J-1 Visas

A friend sent this to me:

Subject: Hershey's exploiting poor foreign student labour.

Mr. Torres echoed many students when he said his lowest moment came with his first paycheck. After deductions by Cetusa for rent, utilities, bus fare and other items, he took home $85 for 35 hours of work. "You wanted a cultural exchange," Mr. Torres was told by the group representative, he said. "This is America and this is the way we do things here."

New York Times article here (also linked above); c/o Tiger Beatdown

My response was totally different to the subject line. It's funny, you see what you look for, I guess. Hershey exploiting foreign workers was not what I got out of this - what I got out of this was that Cetusa, the ostensible non-profit who brought them over, misled them and stole from them. I have a hard time reading this as "corporation exploits people" as much as it is "Holy lord, we have terrible oversight of our nonprofits and government programs" (mixed with "thank you Mom for giving me an education so I don't need to do that type of work"). If they'd received their entire salary and knew what they were getting into, I'm not sure this would have been quite the scandal it is (they would have made about 700 dollars instead of 35). Confirmation bias at work, for both of us, probably.

 And by the way, Hershey didn't even run the plant, and while I'm sympathetic to the idea that multinationals should care what happens at their subcontractors, it's not a given that they knew about it - subcontractors usually hide as much as they can from their multinational counterparts because they don't want to give the multinational negotiating leverage about their cost structure (or, for that matter, reason to investigate about labor or FDA compliance). So there's a principal-agent problem there, as well, if you wanna pin this on Hershey instead of its subcontractor. When you're Apple negotiating with Foxconn, that's one thing (huge subcontractor for a principal plant), but this is one small piece of a very, very large network of Hershey suppliers.

Friday, October 7, 2011


I wish I could get fired up about anything as much as most high schoolers get fired up about everything, especially websense, an internet monitoring tool used by companies:


"There is nothing worse than Websense. NOTHING! I don't care if it's f***ing your mom, f***ing a cockroach, or eating the s*** of the monkey you just f***ed! NOTHING!".


Source: Urban Dictionary. That's one way to put it...


And this was an email sent at work:


Do you guys realize we have “quota time” to watch viral videos, via websense? As in, for some reason a youtube video on my music playlist got categorized as “viral video”, and I have 60 minutes of viral video quota time (I don’t know how often it replenishes), that can be used in 10 minute increments.


a)      What viral videos last 10 minutes?

b)      Why the hell are they quota-ing viral videos?

c)       Why is my random demi lovato song considered a viral video?


Seriously somebody at websense should be fired.



In all fairness, Websense does suck. Websense has been used by tyrannical governments to suppress internet access by its citizens.





Which leads me to one very logical conclusion:




Monday, September 19, 2011

Recovery Planning: The Limitations of Academic Economists

One of the things I find somewhat frustrating in academic economic debate about the recession and lack of recovery is the hyperspecialization of most of the people making points. In a system as complex as the US economy, a narrow focus on pieces of the system without understanding second order effects means you're likely to make mistakes.

I'd like to posit a few things:

1) It's impossible to understand fiscal policy without understanding finance - not banking finance, but capital markets finance.
2) It's very difficult to understand fiscal policy without understanding industrial organization
3) It's impossible to understand fiscal policy without understanding monetary policy
4) It's impossible to understand monetary policy without understanding trade
5) It's impossible to understand trade without understanding industrial organization and finance

Walking through each of these will hopefully be revealing.

1) The link between fiscal policy and finance:
I've written pieces here:

Summarized and generalized: A government should spend on something or regulate something if the economic impact (call them the economic returns) of that spending or regulation will eventually exceed the cost borne by the society. This cost is a blend of interest rates (government rates in the case of spending, private rates in the case of regulation) at infinite term, economic activity displaced by spending (crowding out), economic activity displaced by current and future taxation and regulation to pay off cost of the initial government spending and regulation.

To think about sensible stimulus, then, you need to think about what the stimulus means.

Interest rates on the short and intermediate end are low, but these rates are short-term rates. They'll need to be rolled over, and given how "sticky" tax rates are, you need to consider short rates in the distant future. Thus, while low interest rates mean the rate of spending can go up, it shouldn't be by very much. Having an understanding of applied finance and having spent time with discount rates on different securities is really important - it's easy for an academic economist to select an interest rate empirically, but until you've worked with discount rates and understand them intuitively as well as academically, you're not going to make a good choice.

I use a projected interest rate of about 7% - 8% moving forward. This was 10% when rates were higher. I do work in finance, but I'm young. I don't claim to know the answer - just that a 4% discount rate (as I see often) is ludicrously low, given that stimulus projects are higher risk projects to not "pay off" than most corporate bonds, given poor quality of project assessment in government.

This means that EVEN IN RECESSION, ignoring crowding out, your spending needs to "return" 7% - 8% to GDP without even looking at crowding out and tax impacts, just based on interest rates.

As a risk control metric, you also need to understand what happens when people lose faith in your ability to repay. As investors in sovereign debt in the PIIGS are finding out, this can make interest rates go up very, very rapidly, and very uncontrollably. So from a risk control perspective, you probably should incorporate that into your assessment, as well.

Of course, at some point, you can ignore interest rates... but that's cuz you've paid off the debt, and you've done that with taxes. So if you ever have any intention of paying down your debt, you need to look at deadweight loss of taxes, as well.

2) Note that I've ignored crowding out - this is because it falls into the "fiscal policy - industrial organization" category.

Many people argue that crowding out isn't of consequence in recessions, because there's so much extra capacity.

The issue with this blanket statement is that there are plenty of frictions based on training. This is widely recognized when talking about unemployment (from people in favor of job retraining programs, etc) but a lot of people seem to forget it when  it comes time to talk stimulus. This is a danger of fiscal policy - Spending lots of money on electronic health records can cause a great deal of crowding out, because one job where we really are very capacity-constrained is computer programmers. I've heard a number of issues with a lot of the ARRA infrastructure projects, because laid-off residential construction workers can't do a lot of the jobs required by infrastructure building, so the generally low-quality ARRA projects ("shovel ready" tends to mean "considered and previously rejected as not being worth it") end up taking qualified people off of better projects. Crowding out still happens, so when you're designing fiscal policy, you need to look at the very specific places you have excess labor supply, which requires understanding competitive substitutability, market power, and a number of other factors.

3) As Scott Sumner likes to point out, if a central bank has an inflation target (or, as he'd point out, even better an NGDP target), then fiscal policy is endogenous anyway - as you do more fiscal policy, you do less monetary policy, so all fiscal policy ends up doing is redistributing from the most efficient potential projects on the margin (who benefit most from a small drop in interest rates and increase in inflation expectations, because they can get started) towards projects linked to congressional campaign donors. Even if a central bank isn't perfect at targeting, they're still moving directionally - hence, as Sumner has pointed out, the fiscal multiplier has been like 0.3 or 0.4 since the late 70s, when the central bank started targeting. Even at zero interest rates, there are plenty of monetary options remaining - QE, IOR reductions, NGDP commitments, level targeting - there are plenty of options, and while some of them would need to get through Congress, none of them would be hugely controversial as long as the dual mandate stays in place. Understanding the mechanics and empirics of liquidity traps is also essential to understanding the limits of monetary stimulus and when fiscal becomes more important (and no, I don't believe we're at that point, or have been yet during this crisis). Without understanding how monetary policy works, you'll have a significantly inflated view of the power of fiscal stimulus.

4) Of course, if you don't understand currency and international interest rates, you'll have an inflated view of monetary stimulus. Many of our trading partners - China, Japan, even Switzerland now - peg their exchange rates, which means that monetary policy gets partially sterilized. The US imported about 10 trillion dollars in goods and services in 2008, and we're close to that as an annual run-rate now. Exports run about 8 trillion dollars, off the top of my head, I believe. Monetary policy gets sterilized proportional to some combination of the trade deficit and the overall import number (for a fixed trade deficit it would always be proportional to the trade deficit, but price sensitivity and price stickiness should mean that it's fuzzier than that). That means that you're taking at least a 15-20% haircut on the effectiveness of monetary stimulus, bringing down THAT multiplier.

5) Of course, you could fix the monetary policy sterilization issue of number 4 with tariffs, but those create huge deadweight losses. An import certificates strategy would create smaller deadweight losses (you'd only get the deadweight losses on the products on which we were creating the least producer surplus to begin with, so it'd be way smaller for an equivalent currency move)... but you'd also throw China into a colossal recession because their investment-intensive model, driven by exceptionally cheap capital (driven down by government mandate) would explode (in this opinion, it's going to explode anyway, it's just a matter of when and how badly - how badly being a product of how long they wait before readjusting and how decisively they can move to improve consumption... but anyway), and that would cause problems here in the short run, as well. So moving slowly on trade has benefits, which means you need to size and time your monetary policy accordingly. Additionally, while a readjustment would slow down the rate of job transfer from the US to China, China has a number of structural advantages - their uneducated labor is much lower cost, their land is largely cheaper and their regulatory structure, while still vast, is smaller and less restrictive than the US, which means that to really normalize trade, you have to fix a number of regulatory issues in the US and watch the Chinese banking system to avoid the overly rapid collapse of their investment/property bubble (yes, it's a bubble). You also need to look at all of China's trading partners, many of whom rely on natural resources and will be thrown into major recessions when China pops, because that would offset a lot of the US currency benefits you'd get from a Yuan revaluation.

Thus, it's important to understand input costs, bank lending dynamics, natural and regulatory competitive advantages, resource dependence and behavioral, public choice and financial effects of price swings, etc, when looking at trade.

Note how complicated and convoluted this post has been. It's supposed to be that way. This stuff is not simple, and the argument shouldn't be simple. There are a lot of pieces to understanding economic policy, and when people address these in part without a full acknowledgment, they're doing a disservice.

I hope this somewhat explains my positions on issues as a marginal libertarian - simpler regulation (not even necessarily less regulation, just faster, clearer, shorter, more understandable regulation that's more flexible in the face of innovation and a changing world), lower taxes, much lower government spending and bureaucracy, more aggressive monetary policy (but transparent and indexed to either price level of NGDP level), free trade but with a semi-managed currency to offset foreign currency management, and significant and stable international capital investment by the US to diversify economies. I'm all for job retraining and short term bridge unemployment benefits, but against anything that saps those incentives (like 99 week UI). I'm pro- universal healthcare, but think the route to that is significant deregulation of health insurance coupled with a fixed voucher, not single payer. Etc.

Incentives matter, but it's important to work through the logic. Very few economists I read anywhere actually think about all these areas when putting forward opinions.

Thursday, August 18, 2011

One of these is a politician...

Two amazing clips from CNN this morning:

Anne Hathaway is my new favorite actress:  

and Christine O'Donnell is a complete moron:

Couldn't they please trade places? Based on those videos, wouldn't Anne Hathaway be a politician with three times the courage and intelligence of Christine O'Donnell?

For your interest, pieces of the transcript of the O'Donnell CNN video. Full credit to CNN here:
 (I won't ruin the Hathaway video by posting the transcript. click the video).

MORGAN: Christine O'Donnell ran for the Senate from Delaware. She's a Tea Party darling and yes, she infamously dabbled in witchcraft when she was in high school. She's also the author of a new book with the intriguing title, "Troublemaker."

And Christine O'Donnell joins me.

Christine O'Donnell, how are you?

O'DONNELL: I'm doing well. Good to see you, Piers.

MORGAN: I can't help but notice you did the sign of the cross as you sat down there. Was it -- is it because you're nervous about the interview? Or --

O'DONNELL: No, I did it off camera. I didn't realize you were watching. I do that just because ever since my very first TV interview, I just pray. You know, and ask for God's blessing on what I'm about to say.

MORGAN: Well, I got relieved. I was expecting some kind of devil worshipping sign.


MORGAN: Look, here's your book, "Troublemaker." And what I was struck by is a little description on the back where -- it's a quote from you. "They call us wacky. They call us wing nuts. We call us the people."

I mean, I have met lots of people who are wacky and wing nuts. You can be both, can't you?





MORGAN: I'm sure you'll be thrilled about this. We're going to remind you of one of the self-inflicted wounds. So, have a little look at this.


O'DONNELL: I dabbled into witchcraft -- I never joined a coven. But I did, I did.

UNIDENTIFIED MALE: Wait a minute, you are a witch? UNIDENTIFIED MALE: Yes, she was a witch.

UNIDENTIFIED MALE: Wait a minute. If you were a witch, you are going to --

O'DONNELL: I was a witch. That's exactly why.

UNIDENTIFIED MALE: How can you be a witch?

O'DONNELL: Because I dabbled into witchcraft. I hung around people who were doing these things. I'm not making this stuff up. I know what they told me they do. I mean, one of my dates -- my first date --


UNIDENTIFIED MALE: Wait. I want to hear about this.

O'DONNELL: One of my first dates with a witch was on a satanic altar and I didn't know it. I mean, there's little blood there and stuff like that.

UNIDENTIFIED MALE: Your first date was in the satanic altar?

O'DONNELL: Yes. We went to a movie and like had a midnight picnic on a satanic altar.


MORGAN: My first date was in a satanic altar with blood there. What were you thinking?

O'DONNELL: Did Bill Maher pay you to rerun his show?

You know, well, at the time -- at the time as I, again, painstakingly detail in the book, it was a different time in my life and perhaps I was a little too candid for television. But my goal wasn't to go on the show just for the sake of going on national television. I went on the show to try to reach a younger audience with a message that, you know, when I was 16, by the way, this was 25 years ago, you know, I too was trying to find my way in the world and ultimately I did.

And, you know, people have said -- do you regret making those comments?

And I go into detail about what my thinking was. But the more self-inflicted wound was how we chose to respond and the ad was a big mistake.

MORGAN: Well, that brings me -- that brings me neatly to --

O'DONNELL: Oh, don't tell me you're going to play that ad.

MORGAN: I'm afraid we are. Yes. So, let's have a look at how you made a small problem 10 times worse. (LAUGHTER)


O'DONNELL: I'm not a witch. I'm nothing you've heard. I'm you.

None of us are perfect but none of us can be happy with what we see all around us. Politicians who think spending, trading favors and backroom deals are the way to stay in office. I'll go to Washington and do what you would do.

I'm Christine O'Donnell, and I approve this message. I'm you.


MORGAN: You see, the weird thing to me watching those two clips is on the first clip, you seem like a fairly naive -- you don't me mind saying -- slightly silly young woman who is having a bit of fun about witchcraft.


MORGAN: In the second one, you look like a witch. You look really creepy.







O'DONNELL: We need to address sexuality with young people. And masturbation is part of sexuality, but it is important to discuss this from a moral point of view.

The Bible says that lust in your heart is committing adultery, so you can't masturbate without lust.

The reason you don't tell them masturbation is the answer to AIDS and all these other problems that come with sex outside of marriage is because, again, it is not addressing the issue.


MORGAN: That was from the MTV special "Sex in the '90s."

I'm about to ask you a question I don't ask most of my guests, I have to be honest with you. Do you still think masturbation is wrong?

O'DONNELL: Let's not even go there.

MORGAN: Why? You went there.

O'DONNELL: Well, again, like I said, I address it in the book. At that time in my life, my goal was to reach out to young people and there was a show "Sex in the '90s" on MTV where it pretty touted the philosophy that anything goes. And, you know, there's no doubt I don't think anyone would disagree that there's a little bit of a crisis when it comes to whether it's AIDS or sexually transmitted disease or teenage pregnancies.

So, my goal at the time was to reach out to young people and try to present a view of sexuality that they weren't getting. And again I go into detail about where I was at that time in my life and why I chose to go on that show and do that interview.

MORGAN: I get all that. I mean, your views on sex and stuff are relevant if you're going to be a politician.

O'DONNELL: Well, they're not because there aren't laws outlawing sex. And if there are, they should be on the local level, as I make the case for local control as opposed to federal control.

MORGAN: So, am I right in assuming your views have evolved over the years?

O'DONNELL: Well, I am a practicing Catholic and I support what the Catholic Church teaches. But, you know, would I as a -- I was about to say my age, but as an older woman, go on that show again, no. I wouldn't go on that show again and nor would I choose to do an interview about that subject again.

Again, it was a different time in my life. I was -- I was excited and passionate about this new belief that I had, this new faith that I found. I was eager to share it with my peers.

MORGAN: Are you still a supporter of total abstinence even if you are on your own?

O'DONNELL: Are you the pro-masturbation talk show host?


MORGAN: Yes. Why not? Yes.

O'DONNELL: Good for you for taking that stand. You know, right now --

MORGAN: If the option is to be the anti, I think I'd be in the pro department, yes.


O'DONNELL: OK. MORGAN: And I'm not afraid to say so. So, over to you, Ms. O'Donnell.

O'DONNELL: Well, what I'm going to do and what my goal is now is to fight for the freedom of speech in America that allows to you say that. I mean, that's what's my focus right now is to fight for the constitutional principles that made our country great because we do have a movement in Washington that is completely abandoning it.

MORGAN: Can I ask you, have you -- have you committed lust in your heart and therefore adultery?

O'DONNELL: Let's not even go there. Let's get the conversation back to the book. That's why I'm here.

MORGAN: Yes. But this is -- to me, it's a natural extension to ask you, for example, a very relevant question of any politician. For example --

O'DONNELL: I address it all in the book.

MORGAN: -- what is your view of gay marriage, for example?

O'DONNELL: I address that stuff in the book.

MORGAN: You can't -- you're on here to promote the damn book. So, you can't keep saying it's all in the book. You got to repeat some of it.

O'DONNELL: I'm here to talk about the book.

MORGAN: Yes. I'm talking about the book. You keep saying it's all in the book. So, tell me what's in the book.

O'DONNELL: Well, why don't you ask me questions about what I say in the chapter called "Our Follower in Chief" where I criticize Barack Obama? You know, why don't we talk about --

MORGAN: Because right now, I'm curious -- right now, I'm curious about whether you support gay marriage.

O'DONNELL: You're borderline being a little bit rude. You know, I obviously --

MORGAN: Really?

O'DONNELL: -- I obviously want to talk about the issues that I choose to talk about in the book.

MORGAN: Do you answer that question in the book?

O'DONNELL: I talk about my religious beliefs, yes. I absolutely do.

MORGAN: I mean, do you talk -- do you talk about gay marriage in the book? O'DONNELL: What relevance is that right now? Is there a piece of legislation? I mean, I shouldn't be voting on anything.

MORGAN: It's obviously one of the most -- it's obviously, as you know, because Michele Bachmann's views and others, it's obviously a highly contentious political issue. I'm just curious what your view is.

You keep saying it's in a book. So, I'm bemused as to why you wouldn't just say it in an interview if it's in the book?

O'DONNELL: Because I don't think it's relevant. It's not a topic that I choose to embrace. I'm not championing it right now. I've been there, done that, gone down that road.

Right now, what I'm trying to do is to promote a book that I hope to be a very inspirational story to people who are part of the Tea Party movement so that they can continue, you know, in this movement to bring America back to the second American Revolution. That's my goal. That's my focus right now.

MORGAN: So, would you agree with Michele Bachmann that we should maybe repeal "don't ask, don't tell"? You should restore that?

O'DONNELL: I'm not talking policies. I'm not running for office. Ask Michele Bachmann what she thinks. Ask the candidates who are running for office what they think.

MORGAN: Why are you being so weird about this?

O'DONNELL: I'm not being weird about this, Piers. I'm not running for office. I'm not promoting a legislative agenda. I'm promoting the policies that I lay out in the book that are mostly fiscal, that are mostly constitutional.

That's why I agreed to come on your show. That's what I want to talk about.

I'm not being weird. You're being a little rude.

MORGAN: I'm baffled as to why you think I'm being rude. I think I'm being rather charming and respectful. I'm just asking questions based on your own public statements and now what you've written in your own book. It's hardly rude to ask you that surely.

O'DONNELL: Well, don't you think as a host, if I say this is what I want to talk about, that's what we should address?

MORGAN: Not really, no. You're a politician.

O'DONNELL: Yes. OK. I'm being pulled away. You know, we turned down another interview for this.

MORGAN: Where are you going? You're leaving?

O'DONNELL: Well, I was supposed to be speaking at the Republican women's club at 6:00, and I chose to be a little late for that not to be -- you know, yes, not to endure rude talk show hosts, but to talk to you about my book and to talk about the issues that I address in my book. Have you read the book?

MORGAN: Yes, but these issues are in your book. That's my point. You do talk about them.

O'DONNELL: OK. All right. Are we off? Are we done?

UNIDENTIFIED MALE: He's still there.

MORGAN: I'm not. I'm still here.

UNIDENTIFIED MALE: He says he still wants to talk to you.

MORGAN: It would appear that the interview has just been ended.

Saturday, August 13, 2011

S&P Downgrade Nuances

Credit to someone else for this argument - I don't remember who, sorry!

Many people have been flipping about the S&P downgrade. This is understandable. It's a big deal. Many people have been arguing about whether it's justified, and from that perspective, it's far more complicated.

S&Ps ratings, to my knowledge, measure only the probability of a default event. Unlike some other ratings agencies, they do not consider severity, duration, recoverability, or anything else - only probability of a default event. From that perspective, given the drama that just went on (which is attributable to both sides, this was bipartisan stupidity), how can we be considered AAA when we were days away from default and it could happen again?

We probably don't deserve AAA anyway if inflation risk is accounted for along with severity, etc, but that's more debatable

Friday, August 12, 2011

Last Night’s Debate

Steven Landsburg ranks the eloquence of Republicans in the debate.

Does anybody notice that the best speakers tend to be the least ideologically complex and intellectually nuanced? Huntsman and Pawlenty have real opinions, whereas Santorum and Cain are close to ideological standins. The simpler the message, the easier to communicate... but is simplicity of message really a quality to look for in a politician?

As a disclaimer, I'm a big Huntsman fan, personally, and I'm not a big Palin or Santorum fan. I like candidates both near the top and at the bottom of that list. But I'm not sure this is a good thing to be voting based on.

Monday, August 1, 2011

Initial Reaction to the Debt Ceiling Bill

I've been reading details about the debt ceiling bill that's been agreed to by most of the moderate congresspeople and is expected to pass.

Basic details as I understand them, cutting the politically symbolic stuff (balanced budget amendment, etc)  -

Stage 1: Functionally, a 900 billion debt ceiling increase. 917 billion in cuts over the next 10 years, mostly backloaded. This is 50% defense cuts, and the rest is mostly discretionary spending cuts, but it does not cut a number of programs popular with progressives. Medicare providers will take a hit, as well.

Stage 2: Another 1.2 trillion debt ceiling increase. Could go higher, up to 1.5 trillion based on a) a balanced budget amendment that won't happen or b) if the reduction in the next part exceeds 1.2 trillion, but for now, likely 1.2 trillion. A bipartisan, bicameral Congressional panel must identify 1.2 trillion in deficit reduction (from taxes or cuts) and submit it for passage. If it's not passed, it comes out evenly from defense, discretionary programs excluding stuff popular with progressives, and payments to Medicare providers, up to a 2% cut in Medicare payments.


1) all future deficit recommendations are relative to "current law", so the Bush tax cuts expiring is considered baseline. It will make extending the Bush tax cuts a tax "cut" by definition of the committee, and makes them less likely. This strikes me as a victory of proponents of letting them expire - it's a way to raise taxes without having to say you raised taxes.

2) The real compromise here is that the Republicans didn't have to raise taxes and set the size of spending cuts, but Democrats functionally got to entirely design the composition of spending cuts, conditional on their size. The cuts are backloaded into out-years, exclude a bunch of welfare state programs (including social security, medicaid and actual welfare), and 50% of all cuts come from defense while barely touching entitlements.

3) It's going to be difficult to get the committee's recommendations passed, realistically. The committee will almost certainly look at tax reform - eliminating deductions in exchange for lower marginal rates, ultimately creating something revenue neutral. The committee will also probably look at entitlements - Social Security, Medicare, Medicaid, etc. Most Democrats won't vote for this, when the alternative is to have 50% of further cuts come from defense, and mostly spare entitlements.

So in my opinion, the best way to look at this deal is:

1) Bush tax cuts probably expire.

2) Defense spending slashed about 30%.

3) Medicare spending is slashed 2%

4) Discretionary spending on non-progressive departments is cut 30% - this is places like agriculture, energy, epa, etc.

5) No tax reform, no entitlement reform (social security, medicaid, medicare)

A lot of people are trying to call this a "huge Republican win". I disagree. This was a real compromise - numbers 1, 2 and 5 strongly favor Democrats.

I do hope that tax reform can get done, but I'm not optimistic.

I'm happy the debt ceiling was raised and I'm happy about a number of the spending cuts (both defense and discretionary), but excluding entitlements is a big deal, and tax reform remains an important piece for me. I'm neutral to slightly positive on this.

Tuesday, July 26, 2011

The Debt Ceiling and Oil Prices: An Explanation

A friend wrote:

"can you please explain this to me?

There are a few different factors here, but to keep things simple I'll explain the primary one; if you'd like to know about others, just ask.

The main point here is that US debt is considered the least risky security in the world (it's frequently called a "risk-free" security, though that's a technical term for default risk, not a general term for actually having no risk. And, as we're seeing now, it's still possible for us to default).

Because US debt is the least risky security in the world, it's held by a LOT of people and organizations - banks and insurance companies use it to back their liabilities, corporations use it to store their extra cash, individuals who want something low risk use it for investment, China uses it to manipulate their currency prices to make Chinese investment/manufacturing grow, etc. In fact, there is so much US debt and US debt is so useful that there's actually a lot of demand for dollars from other currencies so that foreigners can buy US debt - Japan, Britain, China and other places hold vast quantities of debt, and that ignores all the foreign banks and insurance companies that use it.

If the US defaults or faces a downgrade in its credit rating (a measure of its risk) because the long term projected path of the deficit is too high, then a lot of the holders of that debt will either not want to hold US debt anymore, or will be contractually prohibited from holding it. The demand for US dollars to buy US debt would drop a lot, and less demand for US dollars means a weaker currency. A weak currency means our exports look cheaper to the rest of the world, so the rest of the world consumes more of our stuff, and imports get more expensive in dollars - it takes more dollars to buy them. We import a lot of oil, so a weaker dollar means that oil prices in dollars go up (it takes more dollars per unit of oil because the dollar is weaker). So betting on the prices of commodities that we import is a way of betting on a weaker dollar in the short term. (In the longer term, a lot more affects commodities prices than just the strength or weakness of the dollar).

Thursday, June 30, 2011

Why the Regressivity of Smoking Taxes shouldn't bother us

I’m surprised I’m writing about this, because smoking taxes seem uncontroversial. But I’ve had 2 people argue against cigarette taxes to me in the last month on the basis of their regressivity, so I figured I’d address them.


Smoking taxes are indeed regressive – they hit poor people at higher rates than rich people because more poor people smoke than rich people. Largely, we aim for progressive taxes, where rich people pay more because they can afford to.


I’m not convinced that this analysis matters when it comes to cigarette taxes. A high regressive tax rate only results in negative effects if:

1)      The activity being taxed is implicitly or explicitly a good and productive (or at the very least, necessary) activity (ie, work, consumption, savings, estate generation, etc). This is true for all taxes. The types of activities for whom regressive taxes are even worse than normal taxes are those where, holding the amount of an activity constant, we want everybody to do a little of it – like savings – and regressive taxes are more ok when, holding the amount of an activity constant, we’d prefer a few people to do a lot of it – like, arguably, smoking.

2)      The activity being taxed is potentially more productive than the marginal activity the government would spend it on (or, probably more theoretically accurately in the long term, the least productive activity the government would still spend on if instead of taxing, it rerouted spending away from its least productive activities). Again, how the behavior is distributed matters here.

3)      It cannot be avoided by switching to behavior that is equal or better in cost or desirability. This is rarely the case, but if it is, the impact of the tax doesn’t matter at all.


Disincentivizing smoking is a good thing, not a bad thing, so there is no incentive effect (from 1), and it’s something we’d strictly prefer fewer people to do in higher volume because of declining health returns to scale of smoking (which I admittedly assume). While our government is unbelievably bloated, it’s hard to see very much government spending as actually producing negative returns if you subtract out the tax effects (There are arguments for certain ethanol and energy subsidies, but even then, cheaper goods are usually good things).


Smoking is also voluntary, and switching to not smoking is desirable, not undesirable, so it fails on 3.



You could even make cigarette taxes unregressive by offsetting them with income tax cuts at low income levels, and that still makes them worth pursuing. This implicitly happens already – if there weren’t cigarette tax revenues, those tax revenues would eventually have to be made up somewhere.

Wednesday, June 29, 2011

Going to Mars - Couldn't agree more


America's human spaceflight program is now adrift. On July 8, the space shuttle is scheduled to make its final flight, and the Obama administration has no coherent plan for what to do next. Instead, as matters stand, the United States will waste the next decade spending $100 billion to support an aimless constituency-driven human spaceflight effort that goes nowhere and accomplishes nothing [TF Note: It accomplishes something if it makes human spaceflight significantly cheaper so that more people can do it more regularly – maybe even for commercial purposes. But that doesn’t detract from the rest of this article]. For NASA's human exploration effort to make any progress, it needs a concrete goal, and one that's really worth pursuing. That goal should be sending humans to Mars.


Uniquely among the extraterrestrial bodies of the inner solar system, Mars is endowed with all the resources needed to support not only life but the development of a technological civilization. For our generation and those that will follow, Mars is the New World. We should not shun its challenge.

And we are ready. As I show in detail in my just updated book, "The Case for Mars," we are much better prepared today to send humans to Mars, despite its greater distance, than we were to send men to the moon in 1961, when President John F. Kennedy started the Apollo program. We got to the moon eight years later.

There is nothing required by [his] plan that is beyond our technology.

The issue is not money. The issue is leadership. NASA's average Apollo-era (1961-73) budget, adjusted for inflation, was about $19 billion a year in today's dollars, only 5% more than the agency's current budget.


Yet, the NASA of the '60s accomplished 100 times more because it had a mission with a deadline and was forced to develop an efficient plan to achieve that mission and then had to build a coherent set of hardware elements to achieve that plan. If President Barack Obama were willing to provide that kind of direction, we could have humans on Mars within a decade…”


Monday, June 27, 2011

Not from the Onion

A dating site that only accepts beautiful people has had to remove 30,000 people who were admitted because of a computer virus...  This literally sounds like The Onion. I decline to give the site publicity, so I won't mention its name here. In other news, I may have to move to Sweden.


my favorite quotes:

"We have to stick to our founding principles of only accepting beautiful people – that's what our members have paid for," said Greg Hodge, managing director of [the site]. "We can't just sweep 30,000 ugly people under the carpet."


"We got suspicious when tens of thousands of new members were accepted over a six-week period, many of whom were no oil painting," Hodge told the Guardian.

The brutal axing of the 30,000 hopefuls is not the site's first brush with controversy. Last year, about 5,000 members were removed from the site after they had appeared to put on weight during the Christmas period.

This month, the website triggered anger in Ireland when it said that Irish men were among the ugliest in the world. This was based on the reasoning that only 9% of male Irish applicants to the site were accepted. Only 20% of Irish women are accepted, compared with nearly 70% of Swedish women who sign up.

Conceding that the latest set back was a "very embarrassing day", Hodge said he felt "very sorry" for the "unfortunate people who were wrongly admitted to the site and believed, albeit for a short time, that they were beautiful".



Wednesday, June 15, 2011

How is this even remotely anti-trust compliant?


In less than three weeks, Apple plans to begin enforcing new iTunes App Store rules prohibiting apps that include "external mechanisms for purchases ... such as a 'buy' button that goes to a web site to purchase a digital book… Its goal is to steer more of the revenue stream for content purchases through Apple's own in-app payment system, which typically nets Apple a 30% cut of the sales.”

Now read this:


Regardless of legal interpretation… by intent, this type of behavior should not be condoned under Antitrust…






Tuesday, June 14, 2011

Questions that confused me today

It is legal in the United States to pay for gametes - sperm and eggs - with the purpose of allowing infertile people to procreate. Adoption is also legal. But it's illegal to sell a baby. This makes no sense. I don't mean selling a child in terms of "ownership" of the child, I mean selling a baby to allow the baby to be raised as a child by the buyers. Why is this logical? Gametes have no purpose other than making babies, so materials solely for making babies can be sold, but babies can't? Is there any other example of this anywhere in the US? Certainly some drugs can't be sold, but materials for making drugs have other potential legitimate uses, and those that don't are generally illegal. Even the stuff sold in  drug paraphernalia shops can be used for smoking tobacco.

Refuting obvious argument number 1: you could quite easily ensure that the baby has to be sold before birth or within a short time after birth, so that the baby doesn't connect to the biological parents and is raised entirely by the new parents. This avoids the cruelty of selling a 10 year old with connections to his/her family.

Wednesday, May 25, 2011

Political Hiring

Does anyone else have an issue with the fact that the IMF is on the verge of putting a lawyer in the top seat just because a large European contingent wants a European there, a large feminist contingent want a woman there, and Lagarde is the only European woman even remotely close to the IMF?


The scope of the problems that the IMF is going to have to solve over the next ten years are HUGE. DSK may have been a misogynist douche, and he may have been a borderline socialist (center right of the left party in France), but he was, at the very least, an economist, and understood a lot of the issues faced by economies among a world filled with asset bubbles fueled by an overextension of the Asian growth model. He'd apparently been very, very effective in his leadership.


Christine Lagarde is an antitrust and labor lawyer, which is the exact OPPOSITE of the perspective needed at the IMF right now – they need to promote business investment and growth in the developed world, and consumption growth in emerging economies – both of which are undermined by the aims of most labor and antitrust lawyers.


This is a classic political hire – reminds me of the Drew Faust and Jane Mendillo hires at Harvard, post-Larry Summers. Summers was controversial, and then said something perceived as sexist, so the university made a conscious effort to hire people who were a) women and b) would not be even remotely controversial, either in terms of their appointment or in how they would run things.


The results have been objectively awful. Harvard has had a massive operating budget deficit that would have never happened under Summers (who wouldn't have allowed the idiotic tripling of bureaucratic positions that can't be eliminated and the overextension of financial aid), and a drop in endowment value of 35% with simultaneous major timing errors in investment (that were OBVIOUS and easy to avoid), and significant Asset-Liability mismatch (contributing to the operating budget deficit… seriously, do you know how badly you have to botch AL matching to have a 250 million deficit when you had a 34 billion dollar endowment and a 1.1billion operating budget? Even if the endowment was restricted and only a fifth of it was general use… remotely intelligent budgeting on Faust's part and standard risk control by Mendillo would have avoided any sort of budget crisis).


The difference between Harvard and the IMF is that Harvard can survive mismanagement much more than the world can survive a mismanaged IMF.


It's as I keep saying to the people who want to beat on Bill Belichick for not taking a pass rusher – if the ideal candidate doesn't exist, you can't manufacture them. Take the people you have available and pick the most talented.  Based on her background, I have trouble believing that Christine Lagarde is that candidate. Seriously, pick an economist, or at least an industry practitioner!


Yes, I know I've been a little unspecific about her particular views, but I have read a lot of interviews with her, and I don't agree with a lot of what she says – I disagree with her on her financial regulatory approach, she's trying to impose a financial transaction tax that makes absolutely no sense, she thinks that volatility caused by speculators is a major factor undermining the euro, she has a MAJOR chip on her shoulder about what she sees as "testosterone fueled" economic developments (keep your identity small!), she underestimates labor mobility in financial markets – as you'd expect from a French labor lawyer, she plays politics with irrelevant notional values of derivatives, she wants to replace the dollar as the world's reserve currency (which would be good for the US, in my opinion, but holy crap, a stupid idea right now, especially given the Euro crisis!)… etc.


(I understand that some of these views may be controversial. They're entirely mine and don't represent that of my firm, my family/friends, or anybody else)



Sunday, May 15, 2011

Optimism vs overoptimism

My friend Madison posted this. I felt the desire to respond.

The issue I have with studies and articles like this is that while people overestimate the positivity of their own outcome, they probably underestimate their own ability to DEAL with bad things or less-than-optimal things that happen to them - this is largely driven by personality. For example:

Even if you are pessimistic (or realistic) about your chances of extreme success (either professionally, in marriage, or whatever else), you can still have an optimistic bias if you believe you'll be able to handle that outcome alright. This may not be 100% true with health, but with most other things it probably is true.

I've been sporadic blogging recently, I know. I have a few ideas for future posts but life is EXTREMELY busy with the album and other stuff... but I'll be back ( :

Thursday, May 12, 2011

Showing Support for Adam Foster


Does anybody have any opinions on the best way to show support for Adam Foster in his situation?

Tuesday, May 10, 2011

And that's why you don't listen to the media for stock advice

One of the things I was taught early on was to note what stocks the media thinks have bright futures, because they're very likely to underperform moving forward. This article, originally written in May, 2006, is a particularly extreme (and morbidly entertaining) example of this principle.

Thursday, April 7, 2011

What the heck is wrong with these parents?


Seriously… who PICKETS an ELEMENTARY SCHOOL STUDENT for the student’s HEALTH PROBLEM? Those parents should be absolutely ashamed of themselves. The kid didn’t choose to be allergic to peanuts…

Re: Lawyer oversupply

A friend sent this article to me asking for my comment:

I apologize if the format's a bit screwy-  I wrote this last night and then edited it on the train this morning, and I don't blog from work, so I may not have got all the formatting right.

The overwhelming likelihood is that producing more lawyers isn't driving costs down because lawyers are choosing to do things other than law.

Legal fees aren't really "fixed costs". Court fees are, but lawyer's rates (per page or per hour) are not. Maybe the HOURS are fixed, but the cost per hour is not fixed. It's probably a little bit "sticky", as in once you're paying someone a certain wage per hour it's hard to cut their pay, but we're talking about young lawyers entering the industry, and they can be offered lower wages from the outset. This should result in a reduction of rates for the use of junior lawyers, which should save people money.

If legal fees aren't dropping, law firms do actually compete with each other on the basis of profits, and barriers to entry for law firms aren't that high, then that means that you don't have a flood of lawyers entering the marketplace. Which means they're not doing law – maybe they prefer to remain unemployed than take a lower salary because they think the salaries will come back up, maybe they are taking jobs in consulting or finance or management, whatever… but structurally, the argument you lay out isn't economically consistent with competition among law firms

Tuesday, April 5, 2011

Debt Ceiling

I've been away from blogging for a long time. This will almost certainly continue. Some projects have been consuming my free time - work, CFA, taxes, investments, my album, some other stuff TBA - so I apologize. But last night, someone asked this, so I figured I'd post my response:

"Hey Trevor, I have a question:
They don't really say what the 'negative consequences' will be of hitting the debt ceiling (in the next month ish).
Higher interest rates = bad. Collapse of the US government and stock markets? What impacts will we see in daily life?"

Firstly, I should point out that the debt ceiling will be raised, almost guaranteed. I'll come back to this. Let's pretend it isn't. Projecting the consequences of this is like projecting what happens if a natural disaster happens or a WMD goes off - you can do your best, but there's enough chaos going on that there are bound to be unanticipated issues. That said, here's a stab at it:

It means the US will not be able to borrow more money. Think about what the US funds - Social Security, Medicare, the Military, implicit funding of states (which gets spent on infrastructure, medicaid, education, prisons, police/firefighters, etc) and cut all of it in half overnight. There's a decent chance we'd default on the debt because not paying China is politically easier than not paying Grandma's social security (though the consequences of not paying China would probably be way more damaging to Grandma in the long run anyway), though interest payments are only 10% of the budget so you'd still need to make massive cuts. A debt default would impair the economy for a long time because of the impact on interest rates. You'd probably also see a lot of states increase taxes significantly as the Federal government cuts back on aid to states.

I wonder if, in that scenario, the Fed would step in and start printing money to pay off debt - basically, causing massive inflation to solve the problem because it's the only thing that doesn't require congressional approval.

Thus, a lot of people would suffer, taxes would go up, you'd probably see inflation and the economy would not take it well. You know I think the government spends too much and want to see massive spending cuts, but this is because of a long term unsustainable budget structure, not an acute emergency in government repayment credibility (which would spike interest rates - we're not seeing that). These adjustments can't happen in large unexpected shocks - people need time to prepare and to understand what the policy changes mean so that they can be ready, and also so Congress can fix its screwups before they happen (as has been happening with a number of the provisions in Obamacare - the 1099 shuffle, the doc fix, etc - and Dodd-Frank - interchange, mortgage writing requirements, etc - to name two recent examples).

Anyway, all of that said, the debt ceiling will be raised because everyone understands we don't have a choice. It's political theater. It really is unbelievable, though, that in a government with a 1.4 trillion dollar deficit and a budget that's 3.5 trillion, Republicans (the so-called "spending cutters") are only targeting a 61 billion dollar spending cut while using the spending cuts opportunity to target completely unrelated social issues... and the Democrats (The "one marshmallow eater party") are crying foul and claiming we can only afford to cut 30 billion. The tone of debate among both parties is really discouraging.

A friend who worked at the DOE once told me that they have to prepare their budget 3 years in advance - and it's always "use it or lose it". Thus, they all got new computers and office furniture every year. Changing discretionary budgeting procedures to make them nearer term, more flexible and reduce the incentives to constantly ramp up spending would probably eliminate more discretionary spending than anyone currently thinks is possible. Of course, discretionary spending is only like 12% of the budget, but still, a 3% or 4% budget cut is significantly more than anyone's discussed so far.

(reference for the one marshmallow eater party:

Sunday, January 30, 2011

The more things change...

How reliable is the Christian Science Monitor? Because if this is actually a reasonable report...

"German Chancellor Angela Merkel told a gathering of young members of her conservative Christian Democratic Union (CDU) party this weekend that the "multikulti" concept – where people of different backgrounds would live together happily – does not work in Germany.

At "the beginning of the 1960s our country called the foreign workers to come to Germany and now they live in our country," said Ms. Merkel at the event in Potsdam, near Berlin. "We kidded ourselves a while. We said: 'They won't stay, [after some time] they will be gone,' but this isn't reality. And of course, the approach [to build] a multicultural [society] and to live side by side and to enjoy each other ... has failed, utterly failed."

The crowd gathered in Potsdam greeted the above remark, delivered from the podium with fervor by Ms. Merkel, with a standing ovation. And her comments come just days after a study by the Friedrich Ebert Foundation think tank (which is affiliated with the center-left Social Democratic Party) found that more than 30 percent of people believed Germany was "overrun by foreigners" who had come to Germany chiefly for its social benefits.

The study also found that 13 percent of Germans would welcome a "Führer" – a German word for leader that is explicitly associated with Adolf Hitler – to run the country "with a firm hand." Some 60 percent of Germans would "restrict the practice of Islam," and 17 percent think Jews have "too much influence," according to the study."

Thursday, January 20, 2011

Zero Marginal Product Workers

There's been a lot of chatter between Tyler Cowen, Alex Tabarrok, Paul Krugman and Scott Sumner, among others, about the issue of what they call "Zero Marginal Product" workers.

In the latter link, Alex Tabarrok wrote this:

"To see the latter point note that even within the categories of workers with the highest unemployment rates (say males without a high school degree) usually a large majority of these workers are employed. Within the same category are the unemployed so different from the employed? I don't think so. One reason employed workers are still fearful is that they see the unemployed and think, "there but for the grace of God, go I." The employed are right to be fearful, being unemployed today has less to do with personal characteristics than a bad economy and bad luck (including the luck of being in a declining sector, I do not reject structural unemployment)."

It's not hard to imagine a model in which labor demand renders workers as zero marginal product without actually requiring the individual workers laid off to be low quality. If a factory employs a janitorial staff of 20, and all are equally good, but the factory owner shuts down half of the production space (say it was a brick factory, or something else that's been very seriously structurally impaired). Just because none of the workers are themselves identifiably zero marginal product doesn't mean that 10 of them aren't - so you can have a job-positional zero marginal product rather than a worker-specific zero marginal product. The first janitor is very productive, the second is still productive but slightly less so, the 10th is slightly positive, and the 11th has shifted negative because of business needs. So the factory owner pulls 10 names out of a hat. There but for the grace of Heaven go I.

This is a largely more optimistic view than the worker-specific zero marginal product one, because as the economy picks up again, these workers stop being zero-marginal product without requiring significant new investment in human capital. Tyler definitely understands this, because he references this exact point, but I'm not sure Paul or Alex have thought that through. The very fair question of why hiring hasn't ticked up along with economic recovery is a pretty simple one, maybe too simple - hiring lags recovery because, for a while, you can increase the productivity of existing workers through technology and having people work harder, but eventually the recovery will be strong enough that people get rehired. These are things they've mentioned before, and I have too, but are worth reprinting here for relevance.

Wednesday, January 19, 2011

Endogenizing Ideology: on Interfluidity
This post is somewhat of a response to interfluidity's argument about endogenizing ideology.

My problem with interfluidity's argument is that, applied to the current situation in Washington, it boils down to "the Democrats have good policy, the Republicans have strong ideology, and ideology wins so Democrats are losing". This is a gross oversimplification of his theoretical argument about ideology and policy, but it isn't nearly as far off as a description of the evidence he uses to support this argument.

The issue is that if you look at a lot of policy early in the Obama administration, before the Republicans were backed against the wall - call it the healthcare bill, call it the various Obama budgets, or whatever - the starting point was the ideological liberal wish list, and it was compromised only just enough to force it through a growingly unhappy Congress. This is no different to a bunch of the stuff Bush did, as well - the only difference being that the the INTRA-party squabbles for the Democrats were more public, whereas the uneasy alliance between fiscal conservatives, social conservatives and foreign policy hawks did tend to stay quiet - though not during voting season. A bunch of those fiscal conservatives ended up voting for Obama because they voted as independents.

Thus, it's hard to take his theory seriously when the only evidence he gives is, at best, highly Democrat-biased and debatable - if you see the Democratic wish list as a "moderate, good" policy, of course you'll think that ideology is winning when you need to compromise. However, it would be just as easy to use the same argument structure with different assumptions about the evidence to say "good policy shapes ideology" - if I wanted to put MY general slant on it, I could say "Over the last 40 years, we keep implementing policy that is slightly better than neutral - which is the point of having a government at all, one would hope. Because good policy is fiscally conservative and socially liberal, this also means more fiscally conservative than neutral and more socially liberal than neutral, and it has had good effects (look at the US trajectory compared to the rest of the developed world since the 70s!). People see these good effects, and at the median, people respond to these observations by moving ideologically towards fiscal conservatism and social liberalism." This model explains a much longer time frame of American politics than interfluidity does, and while ideology is still endogenous (an important observation that I don't want to discard), it is endogenous in a very different way than interfluidity means.

I'd argue this is exactly what did happen, and over a much longer time frame than interfluidity uses as evidence (he references decades but uses 3 years of political developments). It's easy to think the country has gone drastically Christian conservative or populist, but just because extremists get headlines doesn't mean they represent the majority. Look at attitudes towards gay marriage, marijuana legalization, etc. We haven't moved towards an extremist ideology, we've moved very incrementally towards the "educated ideal" (contrary to media perception of "educated elites", college-educated people are more fiscally conservative and socially liberal than the rest of the country). That also explains why so many people have such negative views of Congress, including me - the number of people who fight for ideologies not espoused in entirety by either the "right" or "left" seems, at least to me, to be going up, based on voting patterns rather than media exposure. Congress' approval rating is the lowest ever, and it's not like this is the only recession we've ever had. Prior recessions had actual inflation, too, not just inflation fears, and people were even more negative about the future (endless stagflation, etc).

So the funny thing is I kind of revise his opinion on ideology - ideological searching is important (that's a third of why I write this blog - the other thirds being policy exploration and stock-related analytical thinking), but if you come up with good policy, you're inevitably supporting an ideology. His argument is almost one of salesmanship - if you sell your ideology, you'll end up with lifetime supporters, while selling your policy is "in the moment". My response would be that strong salesmanship of a crappy policy doesn't convert a majority, it just makes a supportive minority more vocal. It alienates the majority. That was absolutely true for Obamacare, that was true for Bush's push on gay marriage abolition, and in general that goes for a lot of policies that seemed to shift the country's political stance.

If you'll excuse a more personal observation on interfluidity, the pity is that this post was almost Krugmanesque - formidable intellectual aptitude and structural thinking overlaid upon a set of assumptions that's been so politically skewed that the whole argument needs to be regarded skeptically - like the ever more complex models in the late renaissance that held the earth as the center of the universe and could still explain the recorded measurements... until more measurements were recorded and required even more updates. At a certain point, conceding "this was bad policy" has to be more logical than ever-complexifying arguments about Republican ideological salesmanship, even if it's more psychologically taxing.

California (and Federal?) Insolvency

I saw this on Ben Casnocha's blog:

I've heard variations on this argument from a lot of friends I have who generally support higher government spending - fiscal liberals who believe the US and California safety nets need to be expanded, not contracted.

The issue I have with the argument is that it conflates solvency with productivity. Nobody can deny that the US is the most productive country in the world, as of now, and it's by far the most productive per capita of the countries large enough that they can't be dominated by single industries (financial or petro-resource). Similarly, California is almost certainly the most productive state and is one of the top in productivity per capita, beaten only (I believe) by Alaska (oil) and a few states in the Northeast (no poor unskilled immigrants).

However, that doesn't mean that California's bond situation is fine.

You see, tax revenues in California already reflect that incredible productivity - I don't have any numbers in front of me, but I'd bet you tax income per capita in California is also among the highest in the country. But expenditures per capita are even higher than their productivity can support at today's tax rates. You either need to raise taxes or reduce spending.

Given the high cost of living he alludes to, a 10.5% tax rate in California isn't easily comparable to a 10.5% tax rate in a lower cost state, because you're taking a percentage off the top of a much higher burden. Additionally, it's hard to argue that raising taxes (or even keeping them where they are) is even a remotely optimal solution relative to cutting spending, precisely because California's so productive that the money taken for taxes could be put to MUCH better use, while the money spent by the state government is extremely poorly spent, even by state government standards. Ben Casnocha also has a link to an article here ( about how terribly corrupt and self-serving the political system is.

The "fact" (an allusion to the marketwatch article, not an attempt to be snarky) is that California's government is spending far more than it can afford to, and it does need to choose between raising taxes and cutting spending. Its economic productivity already factors into that. California will default eventually if it doesn't sort out its government - this is mathematically inevitable (the old quote that Buffett always cites - "if something cannot go on forever, it must stop"). It is this productivity that most strongly indicates that taxes really shouldn't be raised if at all avoidable, except pigouvian-style taxes on activities that are actively harmful. Thus, spending will consume California if it doesn't stop.

That's why I would not buy California's bonds, and why I do believe it may default at some point - I don't know when, but I don't see special interests backing off until the day the general populace starts paying attention. Unless Arnold's "jungle primaries" work to reduce the power of special interests, even bigger fiscal problems will come down the pipe eventually. And that day, it won't matter how much California is "bailing out the rest of us" - that money is Federal, and the Federal government is not obligated to bail out states. Maybe they will choose to one day (amidst more cries of moral hazard, this time on a state level), but the Federal government is much better off telling the states NOW that they'll never be bailed out and making some credible commitment to that policy in order to force the states to get their house in order. The government seems to be signaling just that, though who knows how credibly. California would be wise to behave as if it's on its own, and cut spending accordingly.

And a final note that irked me-  just because the pension system is an "actuarial" number doesn't mean you can ignore it. Another Buffett quote comes to mind - "Better to be approximately right than precisely wrong". Arends cites a 136 billion shortfall as not being that big a deal. A pension deficit of 1/13 (not the 1/14 he cites) of the state economy is COLOSSAL. For a state with 37 million people and a $1.8 trillion GDP (not the 2 he cites), a 136 billion shortfall means that California will need to take about $3700 from every single man, woman and child in the state just to pay for the overly generous retirement benefits for state employees. That's just retirement benefits... that's ridiculous!

By the way, if you're reading this and thinking "Hm. The arguments about California could be just as easily applied to the United States as a whole", then we're thinking alike.

Friday, January 14, 2011

Prosecutor Overreach


5 years for reading someone's email, when all he did was catch his wife cheating and prevent trauma to his wife's children? I would understand facing 5 years if he had gone into the email and taken personal information and used it – bank numbers or passwords or whatnot. But while email privacy is something we should protect, 5 years in jail is an absolutely ridiculous punishment. I've seen pranks that did worse.

The interesting question is what features of the system you'd want to tweak so that this doesn't happen? Prosecutors have an incentive to get convictions, because that's what gets them promoted (I'd be willing to bet the 5 years is a scare tactic and it will eventually be settled for less, but still - it shouldn't even be on the table). Is that something we really want?

The other question I have is about judicial discretion - isn't this the sort of situation you'd want judicial discretion in? This is clearly not what that law was intended for, so do we really want to prosecute on that basis?

Or maybe we have too many lawyers with nothing to do, and need fewer applicants and admits to law schools. At the individual requests of readers Eric and Mike, that will be the subject of a future set of posts.



Wednesday, January 12, 2011

The Greatest Businesses in the History of Capitalism

Subjectively judging by both the peak, durability, inherent brilliance and execution of their business models:

Phillip Morris
General Electric
Berkshire Hathaway
American Express
Standard Oil / Exxon-Mobil

Honorable mentions:
Goldman Sachs
Proctor & Gamble
Fannie Mae

My goal over time is to do writeups on these and explain what made them such amazing businesses. Think an investor's version of Jim Collins' books. Before I do this, however (because it's going to take me a long, long time)... does anyone have any nominations for additions to or subtractions from this list?

Tuesday, January 4, 2011

Educational Attainment Outcomes...

Obviously a better school assigns more homework and there's a feedback effect but still...
EDIT: definitely wasn't trying to make a statement reading into race or anything, just trying to point out that it's hard to entirely blame "crappy schools" at a reductionist level... that blog actually has a lot of really interesting stats. He claims in one article (with specific data to back him up) that lower US scores are basically a product of simpson's paradox - our non-minority students score better than other countries' non-minority students and our minority students score better than other countries' minority students (whatever the minority for those countries happen to be), but we have a lot more minorities than other countries so our overall average is worse. He backs that up with data comparing the scores of immigrants vs country of origin - Swedes in the US score better than ethnic Swedes in Sweden, Mexicans in the US score better than ethnic Mexicans in Mexico, etc. It's all kind of interesting, actually.

Becker and Posner had a bunch of stuff on PISA also, which was interesting, as well.