Bleeding heart Randians

Once again, Joseph has left it to me to play bad cop on the McArdle beat.

As you can see from the previous post, Megan McArdle has a piece up at the Atlantic complaining about the lack of sympathy for the wealthy when they find themselves in financial trouble.

Likewise, when middle class people take out a mortgage that's perfectly affordable on the income they've been enjoying for years, and then lose the house because they suddenly saw that income cut in half, we don't feel a delicious sense of joy because they finally got what was coming to them.

I keep getting the feeling that McArdle's default approach to complexity is to look at one dimension at a time until she finds a view she likes.

In this case the complexity lies in the way we see financial hardship. We generally react to news of other people's money troubles with a combination of sympathy and disapproval (read Charles Murray for an example of the latter). The level of sympathy is largely determined by where the fall leaves the victim while the level of disapproval depends on how avoidable the crisis seems to be. Both these factors tend to make us react somewhat more harshly to financial problems of the well-to-do.

And in the cases in question here, the avoidability level is up there. The Bloomberg story that McArdle was talking about concerned highly paid executives who are facing hardships because of smaller-than-expected bonuses. This is a very different situation than a drop in salary. Even for the very well paid a completely unexpected reduction in salary can cause problems. The possibility of a smaller bonus should always be expected.

These were financially literate professionals who failed to take into account the potential variability of their income stream and as a result made reckless decisions then failed to own up. This isn't to say that some of these families aren't facing painful disruptions. Of course we feel sympathy for them, particularly the children, but the adults in these situations got there because of bad decisions and now they have to take responsibility for their actions.

At least that's what McArdle used to believe.

Income stability

This post has been questioned.  But I think some of the mockery is unwarranted as there is a pretty real point buried in this post: namely that lack of financial stability is bad for everyone.  Consider:

Likewise, when middle class people take out a mortgage that's perfectly affordable on the income they've been enjoying for years, and then lose the house because they suddenly saw that income cut in half, we don't feel a delicious sense of joy because they finally got what was coming to them. We recognize that this it is really terrible to be forced out of a home where you've built loads of happy memories and dreams--and not incidentally, to possibly be forced to yank your kids out of the aforementioned schools.

These disasters can hit people at any point on the income spectrum.  A lot of landlord policies are designed to minimize tenant flexibility, and houses can be difficult to sell on short notice.  I applaud the idea of trying to live well below one's means (an option that should be more realistic for the well off) but the real issue is the disconnect between the time frame of obligations (tuition, housing, transportation) and that of income streams.

The long run impact of this lack of basic security isn't pleasant.  It's true that the well off should be able to plan better and be more careful about things.  But it would also be reasonable to be able to make medium term plans with some assurance that the carpet will not be yanked out from under you.

EDIT: Mark makes the excellent point that I am talking about salary and the original article was talking about executives who committed to fixed expenses that could only be met with a bonus.  Clearly, it is possible to fail to get a bonus at a bank and counting on it to cover basic expenses (as opposed to saving it and using it for one time costs like a car or house downpayment) is begging for disaster.

Jones sings Nilsson

It's easy to get distracted by the bad pop culture associations and forget that Davy Jones was a very talented man. (He'd earned a Tony nomination while still in his teens for playing the Artful Dodger in Oliver.)

As for the role he's best known for, some of his best moments came performing the songs of Lennon and McCartney's favorite songwriter, Harry Nilsson. The contrast between Jones' boyish innocence and Nilsson's dark and troubled lyrics gave the performances an extra resonance.

Pay particular attention to Cuddly Toy. If you listen to the lyrics you'll notice a certain creepiness. When you learn what inspired it, you'll realise you didn't know the half of it.





Also posted at MippyvilleTV

To understand the health care debate...

You have to understand the beliefs and assumptions held by various segments of the population. This is what one politically influential segment believes.

Via Brad DeLong:

Dutch Puzzled by Santorum's False Claim of Forced Euthanasia: The Dutch Embassy in Washington declined to comment on Wednesday on recent remarks by Rick Santorum, the Republican presidential candidate, in which he claimed, falsely, that forced euthanasia accounts for 5 percent of all deaths in the Netherlands. An embassy spokeswoman, Carla Bundy, explained that the Dutch government preferred not to intervene in an American political campaign. But Ms. Bundy did provide The Lede with documents and official statistics showing that there are no provisions of Dutch law that permit forced euthanasia. Voluntary euthanasia, which has been legal since 2002, accounted for about 2 percent of deaths in the Netherlands in 2010.

As Jonathan Turley, a legal blogger, explained on Monday, the Dutch law permitting euthanasia is unambiguous about the requirement that it be voluntary, and lawmakers mandated that each case be carefully reviewed by an expert panel…. As the Web site Buzzfeed reported, Mr. Santorum’s erroneous comments, made at a public forum hosted by the conservative leader James Dobson on Feb. 3, failed to attract much notice until they were fact-checked, and mocked, in the Dutch press last weekend…. [A] video showed Mr. Santorum claiming that elderly Dutch people wear a bracelet reading “Do not euthanize me.” Over audible gasps from the audience, he continued:

Because they have voluntary euthanasia in the Netherlands, but half the people who are euthanized every year — and it’s 10 percent of all deaths for the Netherlands — half of those people are euthanized involuntarily, at hospitals, because they are older and sick. And so elderly people in the Netherlands don’t go to the hospital, they go to another country, because they’re afraid because of budget purposes that they will not come out of that hospital if they go into it with sickness.

As Buzzfeed noted, Dutch journalists found it easy to refute Mr. Santorum’s statistics, and made fun of his “fact-free” claim that euthanasia was forced on anyone, but they had no idea where he got the idea that the nation’s elderly wear “Do not euthanize me” bracelets…. Mr. Santorum’s campaign did not respond to a request to explain who or what the candidate’s sources were.

I think we are a long way from this scenario

This seems a little extreme:

The government has men with guns and dungeons. The armed men will throw you in the dungeon unless you pay taxes. So if the government chooses to accept random pieces of paper as payment, the pieces of paper become valuable. The point of collecting taxes isn't that the government needs money (it can print money) it's that if the quantity of taxes is too low relative to the stock of money, then the money loses its value and the price level rises.

But, at it's heart it points out something that is often forgotten about government.  We have lived under a benign and strong government for so long that we (as a culture) seem to have forgotten that somebody is likely to have people with guns.  When the people with guns are members of a republic with an obligation to protect the citizenry, things are rather good.  But if you make the government "small enough to be drowned in the bathtub", there will still be people with guns but they might have a different view of what constitutes a code of conduct.

This is not to say government cannot be improved (in a thousand ways), but it is worth keeping in mind that there are no scenarios where the "people with guns" issue goes away completely (even if we got rid of all guns, feel free to substitute "people with clubs").

Travel Update

I am about to do another multi-city work trip. So blogging might be extremely light for the next week or so from my end, at least. Apologies for the light posting this month . . .

MedicAid

MedicAid is extremely cost-effective (at least by the standards of US medicine) and protects some of the most vulnerable citizens of the republic. Aaron Caroll goes into just how difficult it would be to make further cuts in MedicAid. But I wonder if the real direction of the debate shouldn't be about expanding coverage for more citizens. After all, the low rate of reimbursements mean that getting treatment under the program will be difficult. This means that people will seek better forms of coverage if they have any options at all. Would it really be terrible to have a public/private hybrid system? Needless to say, I find the idea of MedicAid cuts to be pushing the discussion in the wrong direction.

Odd Criterion

Via Diane Ravitch:

But one sentence in the agreement shows what matters most: “Teachers rated ineffective on student performance based on objective assessments must be rated ineffective overall.” What this means is that a teacher who does not raise test scores will be found ineffective overall, no matter how well he or she does with the remaining sixty percent. In other words, the 40 percent allocated to student performance actually counts for 100 percent. Two years of ineffective ratings and the teacher is fired.

So why not be transparent and make the student performance count for 100%? Unless the goal is to allow teachers who are effective at improving standardized test scores be removed for other reasons. I love the idea of trying to ensure that education is of high quality. But high stakes evaluations of complex behavior based on a simple metric seems . . . unwise. I am sure Mark will have a lot more to say about this newest entry in the Education Reform debate.

Laffer Curves

Matt Yglesias:

This is a reminder that while the "Laffer Curve" does not characterize taxation in the United States as a whole, it probably does apply to cigarette taxes in the highest tax jurisdictions. The combination of success in pushing people to quit smoking and success in pushing smokers to come up with ways to avoid paying the taxes has pushed revenues below what could be gained. In public health terms, that's all fine, but for a while higher cigarette taxes were a rare form of politically palatable revenue-raiser and that's increasingly difficult to make work.

I think that this is a point that does not get enough attention.  Just because we are on the high tax side of the Laffer curve does not mean that we are not at a socially desirable point.  There is a tendency to demonize tax rates beyond the inflection point on the Laffer curve, but it is quite possible that these tax rates could have socially desirable consequences that make the lower revenue worthwhile.  And these benefits may not be symmetric: lowering cigarette taxes in New York could be made revenue neutral in a way that increases the total amount of smoking. 

Now I have tended to be laissez-faire in terms of people's right to smoke (odd for a public health person).  But I am not at all opposed to making the habit expensive, to make the deicison to stop or start be nudged towards a lower volume of smoking equilibrium.

So I think this suggests that we should think carefully about a particular piece of policy rather than simply disqualify it due to simple tests (like the Laffer curve).  In particular, this sort of reasoning might very well make sense applied to things like the gas tax.  Believing in people's right to use an SUV does not mean we shouldn't discourage the behavior, where possible. 

Unemployment is simply a bad thing

Matt Yglesias nails it:

In the wake of the Great Recession, I think we need another change in regime. We can't continue with an approach that always delivers on price stability but frequent leads to prolonged spells of mass unemployment. But I think to push for that regime change credibly, people need to acknowledge what went wrong in the past and need to explain why it won't happen again. I would say, for example, that one of the great virtues of the more globalized economy of 2012 rather than 1972 is that the freer flow of goods across borders makes inflation much less likely.

There is an old saying that the "heroes of the last war are the villains of the next one". The reason is that wars happen infrequently, are heavily analyzed, and everyone had figured out how to overcome the winning tactics of the previous war (well, at least insofar as the next war involves any sort of parity). There is also a real tendency to overcompensate for the failures of the last approach and, in the process, create an extreme in the other direction. This is especially true if the last approach ended in a crisis.

The current view of fiscal policy is that price stability is really important. As a consequence, people are willing to tolerate a lot of unemployment to ensure it. In some countries that might be okay, but the United States of America runs on the idea that safety nets are disincentives to work. The consequence of a weak safety net is that prolonged periods of high unemployment create an amazing amount of misery. It is past time that we acknowledge this and seek a new approach before a crisis brings another swing that is too extreme.

So much to rant about, so little time

From Marketplace:

The FCC's answer is to clear more space in the wireless spectrum, and sell it to the highest bidder. Open frequencies are in high demand, even as channels set aside for the nation's TV broadcasters go unused. Christian Sandvig is a media professor at the University of Illinois at Urbana-Champaign. He says most of us have cable.

Christian Sandvig: By some estimates, you might say about 9 percent of the population of the United States is watching television over the air, and dropping. On the other hand, the population of people who want to use cell phones, especially smartphones, to do things like browse the Web, keeps increasing.

So Congress has decided to auction off slivers of the spectrum, hoping to raise around $22 billion. TV stations will be given a small share of the proceeds, if they agree to give up the channels they were authorized to use for free.

Sandvig: Here -- if you just get off this spectrum, we'll give you some money.

You could call it making money out of thin air.

As longtime readers have probably already guessed, I'm going to have more to say about this.

Target's targeting

I have something else I need to be working on so I don't have time to comment on this at length but the New York Times has a piece on statistics and marketing that worth look. I can't give a ringing endorsement (despite having written on the subject before, I'm not sure the author, Charles Duhigg has that firm of a grasp of predictive analytics), but it's still informative.

I also have a similarly mixed reaction to Felix Salmon's comments on Duhigg's piece. I'm not questioning Salmon's understanding of the principles at work here (when it comes to analysing business problems, he's about the best we've got), but in this one case, I don't think he's supported his conclusion.

Check it out and judge for yourself.

Are incentives really so hard to set up?

There has been a lot discussion about a recent Yahoo Finance article about the shortage of machinists.  Several solutions have been proposed, including Karl Smith pointing out that raising wages would do miracles in increasing supply.  But it is Matt Yglesias who really has the most common sense reponse to this issue:

So we should expect underinvestment in training of entry level workers absent some special arrangement like the TAP Writing Fellowship conceit. But it seems to me that to the extent that the training is transferrable the employee is gaining something of real value, and the employer now has the ability to reduce cash compensation accordingly. Employers need to choose between paying a premium for already-trained workers, or paying lower wages to less-trained workers but bearing training costs. But either approach is perfectly viable.

So when would an employer not want to pay training wages? When they are convinced that the current demand is very short lived, is about the only thing I can come up with. In this case, the employer in the Yahoo article wants a skilled work force with flexible employment standards (i.e. willing to work in the short term), and not pay premium wages.

After all, it is not worth it for a young person to take a college program as a machinist today in the hopes that they would be employed for a short time at low wages tomorrow. The Karl Smith approach (outbid rivals and triple the wages) would make the positions sufficiently lucrative that some people would take the gamble that the wage bubble was a secular shift (and others, with the skills but employed elsewhere, might come back due to the high wages).

But the best path for the future is to develop a good policy for training. Sure, skilled workers often leave. But is it really that hard to build in retention incentives? Don't we do this for high level managers all of the time?

You might be amazed at what a $20,000 payout at the end of 2 years (or as a severance bonus if you are laid off before that time) would do to make the trainees "sticky".  Even if they were worried about losing their job, the bonus would make them wait out the uncertainty. 

Just move?

Megan McArdle on Urban Development:

People who have chosen to live in a quiet area are probably people who have lower tolerance for that stress. If you're a renter, no problem: just move. But if you own, and the changes make your property harder to sell at the same time as they impair your enjoyment . . . well, it's not shocking that people resist.

I actually mostly liked the piece, which focuses on the pros and cons of development (including some understandable but less than pure motives).  But I want to stomp on the idea that renters can "just move".  It is true that, as a college kid, it was possible for me to move with a van, some friends, and pizza expense.  Of course, I had little furniture and was moving into places that catered to easy moves.

Add a few years and suddenly carrying a hundred boxed up several flights of stairs losses its allure.  With a full household, moving is either expensive or a tremendous amount of work.  It is also annoying to hunt for a new place and difficult to arrange things so that you do not end up paying rent on two places for at least a couple of weeks (the alternative for us middle aged folks is typically professional movers).  It's accelerated by the need to clean a place out and the landlord's preference for no time without occupants.

So "just move" isn't as simple as it sounds . . .

Private Prisons

Talking Points Memo reporter Ryan Reilly reports that:

The Huffington Post reports that the for-profit prisons giant sent letters to 48 states offering to buy up their prisons in exchange for a 20-year management contract and the guarantee that the facilities would be at least 90 percent full.

Am I the only person who sees a potential issue with a 20 year contract that guarantees that prisons will be 90% full??? Seriously???

It is one thing to argue that we can make a decent 5 year projection based on current sentencing rules. But this puts huge barriers in the way of either sentencing reforms or improvements in crime prevention. Would the best case scenario not be a series of policing and social reforms that led to less criminal activity over time?

Furthermore, isn't the reason that we reward private business because they take risk? The idea of capitalism (creative destruction) is that good ideas are rewarded with profits and bad ideas lead to business failure. A state guarantee of customers (i.e. prisoners) over the course of a reasonable mortgage on these facilities is equivalent to removing all risk. So why should there be an expectation of profit?

And none of this addresses the difficulties in regulating a private contracter to insure that prisoner rights are not violated.  After all, we trust the guards to report on violations that could extend a prison sentence; are we sure that there is no conflict of interest here? 

I am not saying that all of these concerns cannot be addressed, but the basic idea seems suspect.