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.