Pick a number, any number -- American Public Media edition

Marketplace host Kai Ryssdal closed with the following important point yesterday:

A very touchy way to look at the oil leak in the Gulf courtesy of a research report out of JPMorgan Chase.

Their analysis shows that for all the damage along the Gulf coast, the leak won't really hurt gross domestic product much. Might even increase it slightly in the short term.

Here's another take on what that report really tells you: That for all the attention paid to it by the economic press -- present company included -- GDP's a really blunt and unsubtle way to look at something as complicated as the American economy.

Journalists (particularly financial journalists) are by necessity in the oversimplification business. The good ones (and the people at American Public Radio and NPR are very good) frequently remind themselves of this and that awareness brings an essential caution and humility to their work.

The bad ones get shows on CNBC.

Thoughts on defined contribution retirement plans

Via Felix Salmon comes this interesting tidbit on hidden fees in 401(k) plans. As long time readers know, I have passing interest in the idea of retirement plans and the differences between defined benefit and defined contribution plans. However, this sort of penalty really makes the plan less attractive.

From moneychimp we have an estimate of the real rate of return of the stock market:

Over the very long run, the stock market has had an inflation-adjusted annualized return rate of between six and seven percent.

So if the 401(k) has administrative costs in the 1-2% range and forces you to invest in mutual funds (a realistic option) which also have a 1-2% range before administrative costs then it is perfectly plausible that 50% of the returns are eaten up in administration costs. Now if the plan allowed a client to invest directly inin TIPS then real rates of return are in the 4.25% range (call it 4% after Vanguard levels of administrative costs).

But TIPS are debts owed by the US Treasury. Do you know what else has been lending money to the US government and has extremely low administrative costs (at least compared to these)? Social Security. Sure, the government could default on it but they could also default on treasury bonds, too.

The worst part of all of this is that, insofar as administrative costs are invisible and borne by employees, companies have no clear incentive to bargain for low plan administrative costs. Since employees are locked into the plan (as it is attached to employment), you have lack of liquidity (you need to change your job to change your 401(k) plan) and asymmetry of information. I was always under the impression that these were not ideal free market conditions.

None of this is to say that these plans are necessarily bad nor that any particular company has a questionable plan in place. But it is a call to think carefully about what the incentive and information structure look like. After all, if we get this wrong it has a fairly major impact on the future.

Minefields

Janet Stemwedel has a very well balanced post on the minefield that is work-life balance. It is an issue that I have grappled with as well and I have decided that there really is no optimal solution. I've had maid service before and would like to have it again. But I'd never thought through to the next step of who is liekly to be a amid and what the implications of that are.

But I suspect that the biggest insight that she has is how quick we are to judge the decisions of others.

My experience paying for skilled and loving childcare while I worked was that philosophers and career advisers do not lurk when it comes to such choices. They butt right in and tell you all the ways you are doing it wrong.

The whole article is a very good read and quite thought provoking. Definitely a blog worth checking out!

What I wish I knew before

I was reading a post from Andrew Gelman. Every now and again he gives statistical advice to reader who write in with questions. Today he had a question about a rare drug exposure in a large population.

This reminds me of one idea that I wish I'd known when I was first doing statistical in the financial world (before deciding to get a PhD). It was the idea of "off support inference" or of trying to extend inference beyond the bounds of the data given. This can happen when the few exposed participants are in a portion of the data where there are few controls and there is effect measure modification. Some fairly severe errors can result.

Which makes me think about to all of my risk modeling and makes me wonder if I worried enough about these issues at the time?

"Better a Krabby Patty than a damn"

OK, the jump from SpongeBob to Brave, New World may be a bit much, but the good people at Worthwhile Canadian Initiative certainly know their way around Bikini Bottom.

p.s. You can find an excellent radio adaptation narrated by Huxley himself here.

More on compensation -- compensation and pyramid schemes

As Joseph mentioned before, Ph.D.s don't take post-docs because they like being overworked and underpaid; they take the positions because they believe that the post-doc will lead to better things. This kind of implicit compensation isn't uncommon nor is it necessarily a bad thing. (I'm trying to think of how you would go about making future opportunities part of an explicit compensation package even if you wanted to).

Implicit compensation is, however, particularly prone to problems with asymmetry of information and fraud. Let's say you're recruiting garbage collectors and you start your pitch with a story about collector who found a fifty dollar bill in a trash can by the side of the road. You don't mention that in the past twenty years, this was the only case of cash in trash that you knew of. This would be asymmetry of information. Now let's say you changed the story and made the fifty into a thousand dollar bill. This would be fraud.

At least some of the post-docs in Joseph's post probably took those positions because of asymmetry of information. If they had known the actual odds of getting the careers they were hoping for many of them would have picked other jobs (usually ones with higher explicit compensation).

There's a common private sector version of this that occurs in companies that recently experienced rapid growth in size and or stock price. When you go to work for one of these companies, you will find yourself bombarded by stories of skyrocketing careers. You'll hear about salaries doubling and vice-presidents who started as interns five or six years earlier.

Some of these stories are probably apocryphal but even if every single one were true they would still be tremendously misleading because career advancement at a growth company is basically a pyramid scheme. The first generation of employees experience huge gains (though they also faced a high risk of having a company collapse under them). The second generation experiences large gains. After that things quickly level off, partially because growth inevitably levels off and partly because the company gets better at recruiting and particularly at luring in higher-level people.

But the stories of amazing career paths become part of the corporate mythology and take years to fade. In the case of Wal-Mart, new employees were still hearing about millionaire cashiers more than a decade after the jump in stock prices that created them.

More on compensation -- tenure edition

[for Joseph's earlier posts on compensation see here and here.]

We often hear that the labor market will be fine if we just let market forces fix the problem. The assumption is that workers will consider the available jobs, weigh the requirements of each job against the compensation and rationally choose the optimal position. But the assumption behind that assumption is that employers will honor contracts, particularly regarding compensation.

This compensation can take a number of forms (salary, bonuses, pensions, benefits, stock options, etc.) and can be paid out over a variety of schedules. The only thing that matters is that the agreed-upon compensation is paid if the employee completes the agreed-upon duties.

Guarantees of job security are often part of compensation. Think of football coaches and CEOs. Failing to honor these guarantees is no different in either principle or practice from taking a delivery then failing to pay the agreed-upon price.

With that in mind, check out the latest from Colorado:

While other states have tried to modify tenure, Colorado's law was the boldest education reform in recent memory, according to Kate Walsh, the president of the Washington-based National Council on Teacher Quality, which promotes changing the way teachers are recruited and retained, including holding tenured teachers accountable with annual reviews.

Walsh thinks Colorado is now at the head of the pack in the second round of the Obama administration's Race to the Top competition, a $4.35 billion pot of stimulus money designed to prod just such changes.

"If I was a betting woman, I would absolutely put Colorado in first place," she said.

The new law requires teachers to be evaluated annually, with at least half of their rating based on whether their students progressed during the school year. Beginning teachers will have to show they've boosted student achievement for three straight years to earn tenure.

Teachers could lose tenure if their students don't show progress for two consecutive years. That won't be a possibility until 2015, however, because lawmakers slowed down the process under political pressure from the teachers' union. Teachers can appeal dismissal all the way to the state Supreme Court, and school districts have the burden of proving why they should be terminated.

Just a friendly reminder, if you are going to do business with Colorado, insist on being paid first and make sure to count the money. The state isn't that big on honoring its contracts.

Compensation

This is a huge topic and I am an amateur. But Mark's comment on implied compensation got me thinking that this topic is worth pursuing further. In a lot of the academy, you are investing effort now in the hope of future rewards. As a general strategy, I suspect that this approach is likely more successful than a purely short term strategy.

However, post-doctoral fellowships are an example of a job with a lot of inherent variablity. Now, I was fortunate enough to have had an exceptionally good post-doctoral experience with strong mentors that I highly respect. But I recognize that not all experiences are equal.

In a sense, the strongest anaology to this that I see in general society is that of pensions. it may seem to be an odd link, but bear with me. Pensions also promise a positive improvement in future welfare in future for sacrifices now (in terms of lower compensation, for example). Even the defined contribution form of pension (the 401(k), for example, or the RRSP in Canada) requires that the contributor have trust that these funds will be available in the future. Outside of market risk, you have issues like political risk or people who steal from pension funds (which are often hard to detect as the moeny is supposed to be inaccesible for 40 years and constantly watcing it isn't an ideal strategy insofar as it drives future behavior).

So how do you handle this level of uncertainty about future rewards? Part of it is the social constract that ensures that all parties do their best to keep these sorts of obligations. But it is unclear what you do when the implied compensation is difficult for the employer to fulfill. For example, if the academic job market is rendered flat due to fundign cuts, even the best mentor may have trouble placing a mentee in a good positions. Similiarly, Megan McArdle has opined on the lack of decent choices with under-funded public pensions.

I lack good ideas about ways to handle these sorts of problems but would be open to suggestions!

Funding Post-Docs

There was a neat post over at Prof-like Substance's blog about NSF funding. He wonders if the Canadian system is all that it is cracked up to be -- awards of $30,000 per year for 5 years. At these rates, a post-doc needs to come with their own funding or else one isn't possible.

I have two reactions.

One, salary support in Canada tends to be more robust. Putting the grant with the post-doctoral fellow gives them flexibility and more power in the relationship (the supervisor needs to give positive benefits to the post-doc to get them to come to a specific lab).

Two, why does every new lab need a post-doc? If the career of a professor spans 30 years and the average post-doc serves for 5 years then we are either expecing a robust growth in the number of scientific positions or we expect most post-docs not to become professors.

Now there could be good reasons to be a post-doctoral fellow that do not involve a career in academia afterwards. But the most common reason is a desire to be mentored towards a career. If the post-doc is a requirment then they are really poorly paid technicians.

Is this a good thing?

Journal Boycotts

I'm not going to wade in and argue if one side is correct or not but the boycott of Nature Publishing Group by the University of California seems like it will ahve a tough time working as planned. The NIH open access initiative will help but the costs to getting papers by inter-library loan isn't going to be pretty. And, for some fields, NPG has a bunch of key journals. You can't know all of the literature but it won't be a pleasant experience to have trouble tracking down key papers.

Heck, jsut ask me about finding the original paper on pooled logistic regression. It was seriously not fun!

Thank you

Speaking of Andrew Gelman, he had a very nice post about this site in which he pointed out the really thought provoking posts that Mark has been doing.

Thank you for the kind words!

Multiple Languages

Andrew Gelamn has a nice post on the advantages of knowing more than one statistical programming language.

It's a good point and, at the risk of beating a dead horse, one that I increasingly have taken to heart. I am actually thinking about exposihng my students to R this fall. It's not an ideal choice because I am a mediocre programmer (at best) and I know SAS way better than R. But there is a real push to have our students at least understand Bayesian statistics and I am simply not a fan of the Bayesian approaches in SAS (at least the last time that I looked).

The other reason for teaching R is that it is open source. A corporate license for SAS appears to cost $7000/year. While cheap compared the analyst, it can happen that students will end up in environments where access to SAS isn't easy to obtain and it is nice to have a back-up option.

On the other hand, we often forget the very nice log files and complete outputs that SAS produces. There are environments where a paper trail is essential and SAS is an ideal tool for those cases.

So we'll see how I think about it after this fall but wish me luck!

Papers and Industry

In an interesting post, Exponential Book discusses the potential impact of papers on jobs. Now (s)he appears to be in physics, and things vary by field. But I do know that when I interviewed (and worked) as a statistician in financial services we did not consider papers as part of the hiring package. We were much more focused on job skills such as facility with key software packages (at that time it was SAS -- explaining my over-use of the software a decade later) and communication skills.

Now sure, a paper could be used to show that one was a good scientific writer. But it was a very minor consideration (at best).

Far better to show that you liked to assemble data sets. Being good at pulling your own data and developing data sets seemed to be one of the strongest predictors of success at this particular company (not least because you did not have to compete for programmer resources with other parts of the company).

Anti-stimuli

From Off the Charts:

States and localities cut 22,000 jobs in the past month, wiping out half the month’s gain in private-sector jobs (Matthew Yglesias highlights this issue as well). In total, state and local governments have cut 231,000 jobs, including 100,000 local education jobs, since the summer of 2008.

Years ago, I recall hearing an economist say that one of the reasons that we couldn't have another Great Depression was because a higher percentage of workers were in the public sector and, of course, those job wouldn't go away in an economic downturn.

I really wish I could remember that economist's name.

Seyward Darby does not understand economics

There are so many things wrong with Seyward Darby's New Republic piece and I have so much to do this week (finishing off big posts, lining up some more work, getting the bugs out of a text-mining tool), that I'm going to limit myself to just one for now.

The story here is not which teachers get laid off; the story is the utter insanity of mass firings by the government during the worst economic meltdown of the Postwar Era. As previously shown, this negates all of our stimulus efforts and comes disturbingly close to replicating Herbert Hoover's response to the Great Depression.

Even if Darby's arguments were sound (and they're not), the article would still be little more than a distraction. We find ourselves in a burning building; Darby wants to stop and talk about radon levels.