Is consistency too much to ask?

Paul Krugman points out a nasty trick:

In legal terms, the program is funded not just by today’s payroll taxes, but by accumulated past surpluses — the trust fund. If there’s a year when payroll receipts fall short of benefits, but there are still trillions of dollars in the trust fund, what happens is, precisely, nothing — the program has the funds it needs to operate, without need for any Congressional action.

Alternatively, you can think about Social Security as just part of the federal budget. But in that case, it’s just part of the federal budget; it doesn’t have either surpluses or deficits, no more than the defense budget.

Both views are valid, depending on what questions you’re trying to answer.

What you can’t do is insist that the trust fund is meaningless, because SS is just part of the budget, then claim that some crisis arises when receipts fall short of payments, because SS is a standalone program. Yet that’s exactly what the WaPo claims.

I wonder if the people who want to privatize social security have thought through exactly how bonds held in a 401(k) are different than the trust fund? Perhaps they are more awkward to default (in terms of not paying the bonds) on but governments have raided retirement accounts before. Add in the strange equivocation between "social security" and "social security/medicare" in terms of projecting cost growth (with the second) and targeting the first for reduction.

In general terms, I do not understand why there are such strong objections to income support for people in old age. The program isn't cheap but it widely benefits the majority of Americans (a lot). Why is it such a popular target for debate? Why not debate how high defense spending is relative to the rest of the planet? Or the amazing cost increases in medical care? Why are these not more pressing issues?

I really do not understand because this debate is eating up precious intellectual effort that really needs to be going into comparative effectiveness discussions for medicine.

Pre-blogging David Carr

I'm working on a couple of journalism posts (one about victimology and the other a reply to this post from Andrew Gelman). David Carr figures in both so I thought this would be a good time to provide some background with this clip.



I got this from Chait so I'll give him the last word:

That's actually repugnant. I don't actually think the sentiment reflects the general view of the Times, but I do think the Times deserves to be held accountable. If the newspaper lets reporter pop off on a talk show, then his opinions are going to represent the Times.

California Pension Reform

I have always had a fascination with California politics and we've talked a lot about personal finance. So I read this reform proposed by Jerry Brown with interest:

To deal with what have been widely seen as abuses of the retirement system, Mr. Brown said the pensions of all new employees should be based solely on their regular salaries, not taking into account any overtime or bonuses. For existing employees, he said the retirement benefits should be based on an average of the last three years’ salary.

I was always surprised that it was any other way. After all, employee base salary is a reasonably predictable variable for actuaries. Furthermore, base salary is likely to be more representative of the income that actually needs to be replaced in retirement and inflating that number can lead to very high liabilities. Finally, it creates the potential for unfairness as the ability to get overtime in one's final three years may depend on the discretion of the supervisor.

I am completely against the current assault on pensions but that doesn't mean that we shouldn't look for places where intelligent reforms can happen.

All in all, it seems like a much saner approach. We'll see if it manages to gain any traction!

Another cautionary tale of corruption by metrics

This American Life has a great piece of radio up on their site. (You can get a free download if you hurry.) It's the account of a patrol man who started collecting evidence of rule-breaking in the department. The story itself is remarkable but what makes this piece extraordinary are the audio segments that the policeman covertly recorded, including the incredibly suspenseful confrontation near the end.

There are any number of interesting angles to this story but the one that caught my ear (at least with respect to the discussions we've been having here) is the role that metrics played.

Ira Glass

The New York Police Department declined our request to come onto the radio or to have the officers who supervised Adrian Schoolcraft, and who are heard on his recordings, to be interviewed about their side of all this. But the pressure on police commanders to get better numbers really goes back to 1994, when New York started tracking crimes with a system called CompStat. CompStat, for the first time, gave commanders timely, accurate data once a week on what crimes are happening, so they could send more cops to deal with it. Chances are you've heard of all this. It became one of the best known successes in modern policing. Serious crime has dropped an astonishing 77% in New York City since CompStat began in 1994. Other cities very quickly started imitating it-- DC, Philly, LA. Baltimore's version of CompStat ended up in a recurring plot line on the TV show The Wire, where street cops are told by the bosses to do anything to pump up their numbers. And the problem with CompStat, says Professor Eli Silverman, who studies the way police forces use numbers, is that the early success of CompStat created the expectation that numbers must get better every single year, no matter what.

Eli Silverman
In the beginning it was like an orange. You could squeeze juice from an orange in the beginning much more readily than you can as you extract juice from that orange. And now, it gets harder and harder to drive crime down, because you're compared to not how you were in '94, but how you were last year the same week. And when something's pushed to the excess that it is now, and numbers dominate the system, that's when you have negative consequences.

Specifically consequences like this:

Ira Glass
Then when the officer tried to file it that way, because he didn't have a name for the unauthorized driver, he couldn't file it at all. So the robbery went unreported. Rules go into effect in the 81st precinct that make it harder to report serious crimes. Officers are told that if there's a robbery, one of their supervisors has to come out to the scene themselves. And robbery victims are told that if they don't come into the police station, no crime report will be filed at all. After Graham Rayman started publishing these stories about Adrian Schoolcraft, retired cops and some on-duty cops started contacting him with their own anecdotes about crimes being downgraded from serious to much less serious-- the most shocking of these from a high ranking detective name Harold Hernandez.

Graham Rayman
He's a very distinguished detective. He was working in the 33rd precinct in Washington Heights. And one morning he comes into work and there's a guy who's accused of first degree rape sitting in his interview room. So he sits down and he looks at the guy. And he has a little twinge, and he says, have you ever done this before? And the guy said, yeah. And Hernandez says, how many times? And he says, oh, I don't know, seven or eight. And Hernandez says, where? And he goes, in this neighborhood. And Hernandez is now dumbstruck because there's been no report of a serial rapist-- sexual predator-- working the neighborhood.

Ira Glass
Like, no crimes have shown up. People haven't shown up saying they've been raped or assaulted.

Graham Rayman
He hasn't been notified. And he would be notified as a senior detective in the unit. It would be a very big deal. And so he says, can you give me the dates and locations? And the guy says, well, I can try, but you're going to have to take me around and I'll show. I'll show you. So he and a fellow detective get in the car and they drive around. And they look, and the suspect-- whose name is Darryl Thomas-- points out the locations. And then Hernandez takes his notebook and he writes down the locations. And then he goes back and he looks through stacks of crime complaints. And he finds them. And he realizes that they've been classified-- they've been downgraded. They've been classified either as criminal trespassing or criminal possession of a weapon-- both relatively minor crimes, given that the actual conduct in the narrative that the victims are describing is either first degree burglary, robbery, or sexual abuse, sexual assault. And he confronts his bosses about it. He confronts the precinct commander. And he confronts his detective squad commander. And everyone just shrugs. Meanwhile everyone's terrified that it's going to come out-- that these women are going to go to the press, and it's going to be a huge embarrassment, a huge scandal for the department. And if it had come out, it would have been a huge scandal for the department. But the department was able to keep it quiet. The District Attorney's office prosecuted Thomas and he went away for 50 years. But here's the interesting part-- they never publicized the case. There was never a press release issued about it. There was never a news article written about the case.

One of the reasons that metric-centric systems can become so bad is that they almost always start out as something good. Compstat, like standardized testing, was a good thing and still is, if used properly. At some point though, people start to focus more on the metric, not because increased focus is helpful but because a metric-based approach is so seductively simple. When that happens the metric becomes an end rather than means (the map becomes the thing for all you Korzybski fans in the audience).

That's generally when things go to hell.

Felix Salmon on the implosion of Netflix

Felix Salmon has a great post up on Netflix. You should definitely read the whole thing but this passage in particular caught my eye:

In hindsight, it’s pretty clear that Netflix CEO Reed Hastings let the bubblicious stock price — it briefly topped $300/share at the beginning of the quarter — go to his head. The company was swimming in money! And so, in September, Hastings signed a deal to pay $30 million per movie for everything that DreamWorks creates, in return for the right to stream those movies a few months after they’re released on DVD. It’s known as the “pay-TV window”, and in order to wrest those rights from HBO, Netflix had to outbid HBO, which was reportedly paying something in the neighborhood of $20 million per movie.

There is a huge hype machine out there, powered by a symbiotic PR/press relationship and focused on selling tales of visionary CEOs. These stories are almost always incredibly distorted. In all but a handful of cases, these superstar CEOs are simply competent executives who had two or three good ideas and a great deal of luck.

When you're at the center of all that myth-making (as Hastings was), it can be difficult not to start believing it. When that happens, bad decisions inevitably follow. We've all heard about Hastings' disastrous attempts to wreck a perfectly good business model but I think this example (again from Salmon) might just be more telling:

Maybe the company shouldn’t have spent $40 million, over the course of the third quarter, buying back 182,000 shares at an average price of $218 apiece. (In the wake of today’s results, they’re trading in the $80s.)

While you're there, check out Salmon's tremendously informative discussion of the dynamics of Netflix's stock swings.

Is this an expression you want to see on the face of a woman holding a giant axe?

Just in time for Halloween (via TPM):

A Luddite Portfolio

Radio was supposed to kill newspapers, as were newsreels, slick magazines, television, and the internet. There was even a short-lived attempt to replace newspapers with fax machines. If we start from the Fessenden broadcast, the industry has been dying for ninety-five years and in that time any number of fortunes have been made publishing the damned things.

One of the memes we've heard ad nauseam in coverage of the Netflix story is that in order to survive, a company has to rush forward and grasp the future and divest itself of any vestiges of the out-of-date. This concept of CEO as bold futurist has great appeal, both for businessmen and business writers, but does always jumping on the latest technological bandwagon really work as an investment strategy?

Certainly, investing in cutting edge technologies can yield great returns (so can a winning lottery ticket), but it is by no means a sure bet. There are plenty of examples of innovative technologies that never went that far (the Teletouch transmission and the 8-track come to mind). There are also cases of old technologies that seem destined for obsolescence only to reinvent themselves (how many people in 1950 thought radio would remain viable a half century into the television age?) or that manage to survive as a niche product (did you know that you can still buy vinyl records at Target?).

A very good argument could be made that business writers get overly excited about the next big thing and since buzz can certainly pump up stock prices, there could very well be an undeserved premium on stocks associated with up and coming technologies. That would mean that the Luddite, by avoiding those overpriced stocks, could well have an advantage.

At the very least he would probably have unloaded Netflix when the CEO started talking about moving past DVDs, rather than waiting for the company to start to implode.

Tragic alignment

This NPR report about how the foster care system in South Dakota treats Native American families is an exceptionally powerful piece of journalism. It illustrates how bad things can get when the wrong forces align: poorly designed incentives, the corrupting power of money (in a fairly mild form), racism and class bigotry (also, I suspect, fairly mild), and the obliviousness of most journalists and other watchdogs to what goes in most of the country. This is not a story of bad people; that's what make it so tragic.

If you have a few minutes, follow the link and listen to the account. And while you're there, why don't you send a few bucks to NPR, journalists who actually do care about what happens to people the rest of the media overlook.

Interesting Trading Idea

The reformed broker has a great post on ten things not to do as an individual investor. Here is one that I think is worth keeping in mind in a more general sense:

"The market is all betting one way so of course I'm betting the other way." This works very well at major turning points, which are very rare. In truth, the herd usually outsmarts the remnant and you're much better off being an ordinary zebra in the middle of the pack than straying off on your own into a deep ravine where predators lurk. If there is a turning point you see coming and you want to exploit it, fine - just don't bet your life on it and deploy all your capital at once. Also, keep in mind that not everything mean-reverts, some things simply trend - some investments will simply never come back to where you wish to buy or sell them regardless of historic price points that might make sense to you. And being contrarian just for the sake of being different is not the same as being contrarian because you see something that others don't.

You see this tendency in a lot of fields. It is psychologically fulfilling to see oneself as the loner, who can see the truth that the rest of the herd so blindly overlooks. Unfortunately, there can be a very good reason that the herd is stampeding away from the vicious lion!

I've personally watched people lose money with the notion of mean-reversion (do we still think that AOL will revert back to its tech bubble peak?). I think we see the same phenomenon in academic research programs. It seems so cool to find this interesting and counter-intuitive finding that nobody else has seen. Because they are idiots. Or, perhaps (just perhaps), because I've managed to overlook something crucial to the whole process.

So if the finding seems to explain a complex phenomenon in a simple way . . . beware. There might be a reason that the herd is off chasing the complex solution and ignoring the counter-intuitive position.

A tweet from Matt Yglesias

Seriously amazing how much better digital over the air looks than "HD" cable with compression.

Isn't this the same argument Mark has been trying to make about Broadcast Cable?

UPDATE: See more here

The secret of (unintentional) comedy is timing

I don't know much about academic publishing so I'm probably missing some of the subtleties here but this certainly seems to be a situation I would have played differently. It's late 2008 and you're putting the finishing touches on a paper asking how so many American economists could have failed to see what a great idea the Euro was. Given the events outside your window, don't you think you would have dragged your feet a bit on the submission, or at least hedged your wording a bit?



Apparently these guys didn't. (via Krugman)

I could not disagree more

One of the things that makes cities tolerable is public land (as private parties cannot possibly own enough land for this effect) where there is green space to visit. Even if it is not always in use, the availability is of great psychological value. But this line of thinking could result in many fewer parks:

That’s not to say we should pave all the parks. But we should be thinking of something to actually do with them. Cities are full of people, and most of the country doesn’t have Southern California weather. There’s limited practical demand for just sitting around outside.

The reason we have to provide public parks is that developers can maximize profits by not including them. But if every developer omits including a park, you end up with no place for children to ever play. I worry that this is looking at a very small problem and risking creating a large one by trying to solve it.

Great catch from Jared Bernstein -- four years of your life for a lousy, stinking 0.1% a year

Bernstein has been doing exceptional work lately. Here he points out a genuinely shocking statistic:

Second point: again, Steve’s not at all alone in advocating for a more highly educated workforce, but he blows by an amazingly sobering statistic:

Achieving higher wages also requires a greater commitment to education; wages for those with college degrees rose 1.4 percent between 2000 and 2010, after inflation.

That’s not 1.4% per year—it’s 1.4% over 10 years! 0.1% per year…OMG—that’s the big freakin’ payoff!!

Now, there’s no question that college grads did better than high school grads, whose real wages fell by 2% over these years (see the data table below). And no question that we’re better off with a more skilled workforce. But a 1.4% median wage gain over 10 years for college grads is not part of the solution…it’s part of the problem.

I'd actually take this further. That 3.4% difference came with four years of lost wages and job advancement and, in many (most?) cases, serious debt. There seems to be a consensus that the country needs educated, tech-literate workers, but if we are serious about this, we need to do something about a system where getting a degree may actually be a losing proposition.

I'd start by scrapping the idea that we should make education accessible through subsidized and (God help us) nondischargeable loans. The current system of easy credit distorts the market in any number of truly ugly ways and takes undue advantage of the vulnerable and inexperienced. If we really want to we can find a better way to make college affordable.

Occasionally I feel a little down...

Some mornings I don't feel like getting out of bed.

There are times when I don't feel like being around people.

Sometimes I feel sad.

For years I simply thought I was displaying a normal range of emotions. I certainly never thought that this required medication. Until recently I assumed anti-depressants were for the moderately to severely depressed, people who suffered from conditions that profoundly affected the quality of their lives and their ability to function, conditions that could even be life threatening.

But I've been watching some short educational programming from the drug companies (it's amazing how much information they can pack into thirty seconds) and apparently feeling down is real warning sign, serious enough to consider taking powerful and expensive psycho-active drugs with some potentially nasty side-effects including loss of sex drive and (this is the one that always makes me chuckle) thoughts of suicide. I've even seen short educational programs that recommend supplementing your antidepressant with yet another pill.

If you scroll way down, you'll see that Joseph has questioned whether one out of ten Americans really need to be taking these drugs, but you know those epidemiologists -- just a bunch of professional worriers.

Possibly the best graph of the year

I think Jared Bernstein is trying to tell us something.


In terms of column inches, this can really help a blogger's productivity.

Antidepressants

It seems like this drug class is getting more popular, with 10% of Americans taking these medications. So I go to Pub Med and notice:

I take a look at the number needed to harm (see: Arroll B, Elley CR, Fishman T, Goodyear-Smith FA, Kenealy T, Blashki G, Kerse N, Macgillivray S. Antidepressants versus placebo for depression in primary care. Cochrane Database Syst Rev. 2009 Jul 8;(3):CD007954.) and quickly conclude that either 10% of Americans are depressed (which is a silent and important epidemic) or else there are a lot people having unexpected adverse drug effects due to overtreatment.

I do know that my work in population cohorts suggests that 10% of people having clinically significant levels of depressive symptoms is a very high estimate.

Ms Goldstein on Tenure

I think that Dana Goldstein has a really good view on tenure:

Indeed, the Green Dot model calls for teams of teachers to be actively involved in hiring their peers; this is a highly-vetted workforce operating in an environment that emphasizes collegiality and professionalism. Without such healthy school envirnments, unions and teachers will have a hard time giving up the tenure protections they've won because of a very real history of adminstrative overreach.

I see this issue as being very similar to online education. My department has a very strong online graduate program. Contrary to all predictions, moving education to an online environment takes a lot of work and isn't as effective at improving productivity as one might imagine. It's possible to do a high quality online program, but it sure isn't inexpensive or easy.

In the same sense, the idea of removing tenure and leaving effective (albeit different) schools has a lot of the same properties. By increasing teacher empowerment, involving teachers in decisions, and increasing compensation you can develop a workable model. After all, tenure is a job perk and it can be replaced by other job perks like employee autonomy and empowerment.

But what the removal of tenure isn't is a cheap way to reduce teacher salaries while holding quality constant. I am agnostic as to the existence of tenure in a workplace. It is a nice perk but it brings downsides as well. What I find more alarming is the effort to remove tenure and replace it with . . . nothing. Or, even worse, replacing nuanced teacher review with test scores (and then removing tenure).

I admit to being very sympathetic to empowered workplaces. My natural work environment is likely the Left Coast and reading about the corporate culture of Silicon Valley convinced me that I'd do better there than in Boston. But these environments are not a cheap and easy substitution for conventional models. They are hard to develop and really require that the employees be either mobile or empowered.

Is that a goal reformers really want to work towards?

"Don't like my tax plan? Dial 1-800-EAT-USED-FOOD"

It was an unfortunate juxtaposition but one the Cain campaign really should have seen coming. In case you haven't heard, Herman Cain's tax plan includes a sales tax on everything but used goods. During a report I heard today, an economist pointed out how regressive the plan was, in part, he said, because poor people spend a disproportionate part of their income on food (which is taxed under the plan). The report then had Cain challenging the complaints about his plan hitting the poor the hardest by saying they could change their behavior and buy more used things.

Insert Godfather's Pizza joke here.

Some more thoughts on MeTV

This time posted at MippyvilleTV and focused on the venerable Svengoolie.

Unemployment

Mark Thoma is strident:

The use of the term "slackers" is telling. You see, there's plenty of work for the industrious, our unemployment problem is due to laziness. There are plenty of jobs -- pay no attention to the fact that the number of unemployed is far, far greater than the number of jobs -- people don't really want to work. It has nothing to do with the crash of Wall Street destroying the economy, and the bounce back and present good fortune on Wall Street has nothing to do with the government bailing them out -- it was their hard work that fixed the problems.

I think that it is worth keeping in mind how dynamic the world is. There was a time, during the Clinton administration, where the willingness to work was enough to ensure employment in much of America. But the current unemployment rate suggests that many people who would like to work can't.

I really don't understand the disconnect here. Large enterprises need to be helped out by the government? Isn't that industrial policy?

From a health care point of view, unemployment is associated with all sorts of medical ills in the United States. Medical services are so expensive that unemployed people may neglect basic preventative care and end up in the (much more expensive) emergency room. Plus, it is likely that unemployment itself (a source of chronic stress and deprivation) may also have negative health impacts.

I really wonder when we will face up to this as a joint problem!

More banking thoughts

Reading Mark's last post brought to mind this New York Times article on how sticky bank accounts have become:

What they haven’t mentioned are marketing studies like the one commissioned by Fiserv, which develops online bill paying systems, showing that using the Internet to pay bills, do automatic deductions and send electronic checks reduced customer turnover for banks by up to 95 percent in some cases.

With 44 million households having used the Internet to pay a bill in the past 30 days — up from 32 million five years ago and projected to reach 55 million by 2016 — it’s a shift that has major ramifications for competition.

There’s even evidence that fewer consumers are switching banks, with 7 percent of them estimated to be moving their primary account to a different institution in 2011, down from 12 percent last year, according to surveys by Javelin Strategy and Research.

Emmett Higdon, a consultant who managed Citibank’s online bill payment product from 2004 to 2007, said that “for the consumer, it’s a double-edged sword.” While customers value the convenience, inside the industry “it was known that it would be a powerful retention tool. That’s why online bill paying went free in the first place. Inertia is powerful in the banking industry.”

Ironically, I actually see that these services are a point in favor of the banking industry. If these services are entered into voluntarily and make banking much more pleasant (which I can definitely confirm) then it is not a surprise that it is hard to move banks. Heck, I think it might have been harder back in the old days when you had to show up at a teller during banking hours.

Instead, we are seeing the banks seek out the point at which cost and convenience meet. Honestly, given the costs of handling cash, I think that they are nuts not to try and encourage electronic payments. After all, one option that Bank of America customers have is to start using cash for purchases and stop using debit cards.

My major barrier to the use of cash is the silly idea that we have to add sales tax to the posted price, making it impossible to calculate the amount due at the register (as the sales tax may vary by product, especially in a grocery store). If posted prices were the actual amount spent, I would be the master of exact change!

Bad banks and (you guessed it) free TV

I was listening to NPR a few days ago and I heard a financial reporter say that other banks would probably follow BoA's lead and start charging a fee for debit cards because "that's how markets work." That is, in fact, pretty much the exact opposite of how markets are supposed to work.

Even with the new regulation, merchants' fees are still many times what the transactions cost the banks. When markets are doing their job, businesses shouldn't be able to use a competitor's price increase as cover to raise their own. Competition is supposed to prevent this kind of de facto price fixing. In a well-functioning market, BoA's move should provide an ideal opportunity for a smaller bank to come in and grab a bigger slice of what is still a multibillion dollar market.

Of course, we don't have anything like a well-functioning market in banking. The considerable inconvenience of changing banks (particularly in an age of direct deposit) means that price increases and cuts in service will only cause minimal loss in market share. Poor transparency means that even if you get fed up enough to change banks, you probably won't be able to get the information you need to make an informed choice (at least not in a form that even a financial advisor can understand). Finally, and most importantly, the market is dominated by a handful of huge players, implicitly backed by the federal government thanks to their too-big-to-fail status.

Which brings me to my main point, and yes, the connection to free TV. We seem, as a society, to have become indifferent, if not openly hostile, to the idea of competition. I'm not talking about intrusive government anti-trust policies (those we can debate at another time); I'm talking about intrusive government policies that actively discourage competition. Implicitly guaranteeing the biggest banks, mangling patent and copyright laws to favor major established players, and, in the case of over-the-air television, proposing to shut down the only part of the television industry that's diversified and not dominated by large corporations (you could look at this as roughly analogous to proposing that we shut down credit unions).

The go-to guy on this story is, of course, Joe Nocera, but both Salmon and Baseline Scenario are also doing some great work here.

Financial security and the decision to start a family

I mentioned earlier that there was reason to suspect that being financially secure might influence the decision to adopt. This interview with demographer Carl Haub explores the similar relationship between economic downturns and birthrate (via the good people at NPR).

Best economic metric based on a Seinfeld routine

The joke about men keeping underwear until it broke down into individual underwear molecules came to mind while I was listening to an entertaining piece on alternative economic indicators (via the good people at Marketplce). The list included Marine retention and abandoned pets and, of course, this:

Ryssdal: I'm just looking at the list of things we were going to talk about and I see next -- and I hesitate to mention this -- the men's underwear index.

Brancaccio: The theory is during bad times we're less likely to replace our boxers and our briefs. I wouldn't have brought the tone of this conversation down this far if the source had not been so exalted.

Ryssdal: Give it up. Who is it?

Brancaccio: Well, back in the '70s before he was Fed Chairman, Alan Greenspan ran his consulting firm. One way he kept track of the economy was by looking at offbeat economic indicators like the men's underwear indicator -- MUI for those of you in the know. Here's the theory: When you're feeling strapped for cash, your less likely to replace your undergarments even though most people see under see underwear as a necessity not a luxury.

Ryssdal: So one is obliged to ask David, how are sales now?

Brancaccio: Well, we did check. And according to an analyst who tracks these things -- underwear sales for the NPD Group -- sales, currently, are up 5.2 percent.

Testing Theory

Matt Yglesias:

Last week I was outside my office and I saw a $5 bill on the ground. Famously, economists say you never see a $5 bill on the ground because someone would pick it up. But instead of picking it up, I stood around watching to see if anyone else would. A bunch of people walked by not noticing it. Then one guy saw it, saw me, and asked if it was mine. I said no it wasn’t, I was just curious what would happen. He laughed and made a joke about economists. Then a second guy came by, picked it up, and said I’d dropped five dollars. I said no, actually it was there before me. He looked around, noticed a homeless guy across the street, said “I think he needs it more than me,” walked over and gave it to him.

While a single test is not proof of anything (expect the strongest of the possible theories), I have certainly had people tell me that I have dropped money. That seems to go against the assumption that rational people will always act to increase their wealth (after all, they could just pick up the bill).

I think that it is worth keeping in mind that the assumptions of economic models are just that. Models can be useful but are rarely ever completely correct.

And Matt's stuff in the same post on the Night Watchman state is simply not to be missed.

Update on BoA severance

In a recent post, I referenced the decision of Bank of America to give a very large settlement package to two departing executives. Given how tone deaf the settlement seemed, many people assumed that it was part of an employment contract. Mark, my co-blogger, has many times talked about the importance of upholding contracts (see comments on this post).

It turns out that the decision to pay $11 million dollars in severance was voluntary and not required at all by any contract.

Social Justice

Tyler Cowen points out a great interview with the head of a major Slovakian political party on why Slovakia isn't necessarily thrilled about the plans in Europe:

SPIEGEL ONLINE: Nevertheless, banks could run into significant problems should they be forced to write down billions in sovereign bond holdings.

Sulik: So what? They took on too much risk. That one might go broke as a consequence of bad decisions is just part of the market economy. Of course, states have to protect the savings of their populations. But that's much cheaper than bailing banks out. And that, in turn, is much cheaper than bailing entire states out.

SPIEGEL ONLINE: Does one of your reasons for not wanting to help Greece have to do with the fact that Slovakia itself is one of the poorest countries in the EU?

Sulík: A few years back, we survived an economic crisis. With great effort and tough reforms, we put it behind us. Today, Slovakia has the lowest average salaries in the euro zone. How am I supposed to explain to people that they are going to have to pay a higher value-added tax (VAT) so that Greeks can get pensions three times as high as the ones in Slovakia

I think that this is becoming one of the real flashpoints in our economic discourse. I am a huge supporter of pensions. But I can see the potential moral hazard in the Eurozone where making reckless promises can result in being bailed out (and working through your problems can result in being billed for others failure to do so). That sort of "tragedy of the commons" is a much bigger threat to economic stability than I had previously suspected.

We will have some of the same issues between generation here in the United States. There have been proposals to limit Medicare to people who are currently 55 plus. That will mean my generation (which began their careers with a terrible job market) will be playing taxes so that the generation ahead of it (which did comparatively well) can retire at a higher standard of living. These sorts of approaches can be toxic to any social contract.

But I can see Slovakia's position now, even if I am not necessarily in favor of it.

Epidemiology is about communication

This article highlights the critical importance of continuing to try and communicate evidence-based medical information:

Most pancreatic cancers are aggressive and always terminal, but Steve was lucky (if you can call it that) and had a rare form called an islet cell neuroendocrine tumor, which is actually quite treatable with excellent survival rates — if caught soon enough. The median survival is about a decade, but it depends on how soon it’s removed surgically. Steve caught his very early, and should have expected to survive much longer than a decade. Unfortunately Steve relied on a diet instead of early surgery. There is no evidence that diet has any effect on islet cell carcinoma. As he dieted for nine months, the tumor progressed, and took him from the high end to the low end of the survival rate.

Why did he do this? Well, outsiders like us can’t know; but many who avoid medical treatment in favor of unproven alternatives do so because they’ve been given bad information, without the tools or expertise to discriminate good from bad.

Everyone would prefer to avoid surgery -- especially painful, high-risk surgery with an uncertain prognosis. But this seems to be a clear case where better advice could have made a real difference. Unfortunately, the literature is full of spurious findings and it can be hard for even experts to sort these issues out.

The ultimate goal of Epidemiology is to give patients the best (high-quality) evidence available in order to assist them in making optimal decisions. We'll never know if the advice given to Steve Jobs was good or bad, but stories like this highlight how important it is to keep focusing on communication.

Testing teachers

It has been a while since we talked about education reform but Arnold Kling has a great perspective:

Simple formulas can be “gamed.” That is, employees learn to achieve the objectives in the formula while failing to work toward the longer-term goals of the firm. On Wall Street, we have seen how bonus formulas proved dysfunctional. The older partnership form of organization appears to have provided better incentives.

A government-run system of teacher compensation, based on test scores, would in some ways be the worst of all worlds. It would create incentives for teachers to “game” the system. It would give too much weight to a noisy indicator of performance. As a result, it would do little or nothing to improve accountability or to reward better teachers.

This classic insight is shown in this dilbert comic.

Are we sure that test score based measures are the way to go? Most information technology jobs have the same sort of issues, often solved by comparative rankings and broad evaluations. Even worse, a bad metric drives out the good (meaning it could actually be counter-productive).

The whole post is worth reading.

More on Executive Compensation

I do not agree with the amount of vitriol in the linked post, but Joshua Brown has a very strong set of feeling on the decision to pay two low level executives at Bank of America an $11 million dollar severance package:

You pay fired executives more in severance than the average American worker will earn in a lifetime. For most people on the outside looking in, this seems like it's from outer space, another world entirely. These numbers just do not exist to regular human beings, they cannot be fathomed.

He also points out the bad timing:

It's not that this isn't your prerogative as a private company - it is. But seriously, numbers like these at a time when you're instituting added fees on customer accounts just sound farcical, almost like you're making these payments to get a reaction out people.

I have been interested in this dynamic for a while. Mostly because I am beginning to see executive compensation as an intriguing form of market failure. After all, let us consider the example of these two executives. What are they being compensated for?

Do executives at banks really add so much value that $5.5 million dollar severance packages are just a way of saying thank you? Is there really no competitive pressure on salaries? Is the supply of potential bankers really this low? Supply side issues seem to be dubious. Are these skills really so rare (and, if they are, how do banks really select for them because the rest of us want to know).

Or is it due to the risk of taking a corporate job instead of being a school teacher? Well, these two executives are not really taking any real risk. Even if this is the last job either one ever holds. they are already well above the typical lifetime earnings curve based on this severance package alone. Debts required to reach this position (like School debt) are simply dwarfed by the size of the payout.

It is a very interesting problem.

Schlock Mercenary

It is certainly one of the best science fiction themed web comics out there. It is a new addition to the blogroll.

Enjoy!

Free TV blogging -- Why Weigel Broadcasting may be the best business story that no one's covering -- part I

[I should start with the disclaimer that all of the information I have about Weigel comes from two sources: Wikipedia and way too many hours of watching television. It's entirely possible that a competent journalist could discover that the truth here is something entirely different, but if competent journalists were paying attention I wouldn't be writing these posts.]

Though the improvement in picture and sound got most of the attention, another aspect of the transition to terrestrial digital was arguably more important, particularly for broadcasters: under the new technology, each station could broadcast multiple subchannels. The situation was analogous to the TV landscape thirty years earlier when cable and satellite stations were exploding on the scene. It's not surprising that someone would try to create the broadcast equivalent of superstations like TBS. What is surprising is who was able to get a channel up and running before any of the competitors were out of the gate.

The name of the channel was ThisTV. It was produced by a regional broadcasting called Weigel, best known for operating the last independent station in Chicago and being the home of the cult favorite Svengoolie -- last of old time horror hosts. Weigel had a content deal with MGM which was not nearly as impressive as it sounds -- Turner had bought out the classic MGM library years earlier -- but MGM still had a lot of films including the catalog of American International, the studio responsible for virtually every drive in movie you can think of from the late Fifties through the early Seventies.

Access to all those AIP films probably had a lot to do with the unique ThisTV brand. Here's how I summed it up earlier:

Weigel are the people behind ThisTV and the exceptionally good retro station MeTV (more on that later). ThisTV is basically a poor man's TCM. It can't compete with Turner's movie channel in terms of library and budget -- no one can (if my cable company hadn't bumped TCM to a more expensive tier I never would have dropped the service), but it manages to do a lot with limited resources using imagination and personality. As a movie channel, it consistently beats the hell out of AMC.

ThisTV has caught on to the fact that the most interesting films are often on the far ends of the spectrum and has responded with a wonderful mixture of art house and grind house. Among the former, you can see films like Persona, the Music Lovers and Paths of Glory. Among the latter you'll find American International quickies and action pictures with titles like Pray for Death. You can even find films that fit into both categories like Corman's Poe films or Milius' Dillinger.

If I ran a TV station, I would definitely combine Bergman and ninjas. I would not, however, run Mario Bava's feature length pulp magazine cover, Planet of the Vampires from twelve till two. Some of us have to get up in the morning.

This mix was in place from the very beginning. The station officially debuted on November 1, 2008 with Spike Lee's She's Gotta Have It but many stations started carrying it a day earlier to take advantage of a day of cheesy Halloween horror films. It was a formula that made a virtue out of cheapness (rarely seen auteur films and drive-in movies both have the advantage of not costing much) and it produced a format that's been running smoothly with remarkably few adjustments for almost three years.

For a small player to identify a new market, develop a concept, negotiate the necessary deals with a content provider (MGM), line up affiliates, make the countless other arrangements that accompany a major launch and to be up and running with a quality product when the support technology first comes online is an impressive accomplishment. But it gets better.

So far we have a solid business story -- small yet nimble company with some good ideas beats big, well-established competitors into a new market. Not exactly the most original piece of journalism but certainly good enough for the front page of the business section. However the story doesn't stop there. Weigel didn't just beat its big and well-financed competitors; it lapped them. Before the next entrant, Tribune/WGN, was able to get its station, AntennaTV on the air, Weigel managed to launch a second channel, the ambitious classic television station, METV. If this weren't enough, AntennaTV is the only one of the three to look slapped together despite having taken far longer to make it to the air (of course, we have no way of knowing how long it took Tribune to see the opportunity and how long it took them to act on it but either way Weigel looks good by comparison).

To put this in context, at least half of this story takes place after the collapse of '08, a downturn that hit advertiser-based businesses particularly hard. Furthermore, the story occurs in an industry that a large number of lobbyists and at least a few pundits were literally trying to kill. There had even been a New York Times op-ed calling for the government to eliminate over the air television and sell off the spectrum.

One of the great memes of the Great Recession has been that uncertainty paralyzes businesses. Even the possibility of a tax increase or some additional regulation -- both extremely mild by historical standards -- are enough to bring the economy to a standstill, but here's a market filled with unknowns under a credible threat of annihilation and we can still find a company like Weigel moving aggressively to establish dominance of it.

That's the other side of uncertainty. It allows companies to substitute boldness and decisiveness for money and market position and take advantage of opportunities that would otherwise be out of their reach.

[also posted at MippyvilleTV]

CERN disproves global warming!

I exaggerate but not by much. Jon Chait has a wonderful time disembowelling this piece of bottom-scraping from the WSJ.

(The Churchill analogy alone is worth the price of admission)

Equal time for American Public Media

Having singled out NPR, I should mention that APM's Marketplace has been doing some extraordinary work lately. Today they ran the best piece I've come across yet on the business genius of Steve Jobs but the whole episode merits a link.

It feels strange talking about good journalism.

The unhappiest place on earth?

NPR has an excellent report out on J visas:

“You have 300,000 workers come to the US and they’re just lacking in protections,” Costa said. “Workplace protections, wage protections and we’ve see complaints where employers have been threatening people who complain about their work conditions with deportation.”

In fact, it’s even worse than that. In recent years, J1 workers have reported that their stays in the US were characterized by menial jobs, low wages, filthy living conditions, and a lot of economic exploitation.

J1 workers apply for the program and then pay between $3,000 and $6,000 to a sponsoring organization, accredited by the State Department. The sponsor organization places them with American companies. One of the biggest J1 employers is Disneyland.

“They work on rides, quick service food and beverage, housekeeping, parking attendants, merchandising, lifeguards, dispatch, and most importantly showkeepers- those are the janitors,” said Kit Jonson, a law professor at the University of North Dakota.

Jonson’s been researching the J1 labor force and says it’s become a very clever business strategy for American companies. They save on wages, state and federal taxes, healthcare, housing and pension plans.”

“For Disney those figures end up being really stunning,” Jonson said. “Disney’s saving in wages alone upwards of $18.2 million a year in hiring international workers. So international students are simply a lot cheaper than American labor.”

Both Kit Johnson and Daniel Costa say that especially now, when unemployment is so high, these jobs should be filled by local workers. But J1 workers are more attractive because on top of the cost savings, they’re less likely to put up a fuss. If they do, they’re easy to get rid of. Like a group of J1’s from Russia who came to work as lifeguards in Texas, and ended up begging in the streets when they weren’t paid.

Response to Comments

Comments from Trevor:

I agree that the logic of this argument is very strong, and it seems to me that the same argument applies to the morality of punishment.

and the link posted by Stuart Buck seemed to share a common theme. In the link, the authors argue that:

According to data provided by the California Department of Corrections and Rehabilitation, in 1977, parolees who were returned to prison or convicted of new crimes accounted for just 10% of California’s prison population. The percentage topped 20 only once prior to 1980. In 2009, however, the number was an alarming 77%, having held firm between the high 60s and low 80s since 1986.

I think that there is a real point here: vindictiveness is expensive. The previous focus in California prisons on rehabilitation and returning prisoners to society was based around minimizing losses of social capital. This is not to excuse the crimes (as most criminal activity is either selfish, mean or petty), but to point out that a focus on punishment is expensive and not especially good for the prisoners themselves. Clearly something was going right if only 10% of prisoners were coming back into prison. A return rate of 77% might actually indicate that we are simultaneously less safe and making life worse for the imprisoned.

Now, we can always find single examples of people who should never be released. Serial killers with psychiatric issues come immediately to mind. But we should not let the extreme example determine the policy for the median prisoner. Similarly, we have a 100% chance that at least one person on parole will re-offend. That would be true even if the crime rate in the parolees was less than that in the general population.

This is a hard issue. I have strong and irrational feelings of fear about many convicts. But the focus on punishment over rehabilitation may well have been a mistake.

"100,000 Tablets for School Children in New Delhi"

To be perfectly honest, the original post I had planned for this NPR story was rather critical of Apple, but before I could get around to posting it word came of Steve Jobs passing away and it seemed disrespectful. I'm sure we'll return to this subject later. In the mean time, check out this interesting interview from NPR's the World.

100,000 Tablets for School Children in New Delhi

Market Efficiency

For a long time now I have been hearing about how markets set salaries based on the productivity and value of an employee. The ideal was that increases in executive pay were a function of the greater influence a top executive could have in the information age. It was a nice story. Unfortunately, it also seems to be untrue:

Companies have long hid the way they set executive pay, but in late 2006, the Securities and Exchange Commission began compelling companies to disclose the specifics of how they use peer groups to determine executive pay.

Since then, researchers have found that about 90 percent of major U.S. companies expressly set their executive pay targets at or above the median of their peer group. This creates just the kinds of circumstances that drive pay upward.

Moreover, the jump in pay because of peer benchmarking is significant. A chief executive’s pay is more influenced by what his or her “peers” earn than by the company’s recent performance for shareholders, according to two independent research efforts based on the new disclosures. One was by Michael Faulkender at the University of Maryland and Jun Yang of Indiana University, and another was led by John Bizjak at Texas Christian University.

As Kevin Drum observes:

Adjusted for inflation, cash compensation for line workers has actually decreased over the past few decades, and even when you include healthcare compensation it's grown only about 30% or so. In contrast, executive compensation over the same period has more than quadrupled.

This is clearly a result of market failure. It also suggests that the reasons for increases in executive compensation are entirely due to poorly designed compensation system and not because of market forces. Examples like this one are worth keeping in mind when considering whether a market-based outcome is really utility maximizing or not.

Effect Sizes

I think that this is very insightful:

They mistake small truths for large ones, and use the small truth to obfuscate the big one. So, the truth - that a few of the unemployed don’t want to work - is exaggerated and used to hide the bigger truth, that the vast majority of unemployment has other causes.

Mark and I have often discussed how effect size can be easily overlooked in modern debates. In epidemiology, for example, it can be the case that a drug has a serious side effect that is so rare that it basically cannot change the risk-benefit calculus. So, for example, statins can cause rhabdomyolysis (as an adverse drug side effect) despite have massive benefits on all-cause mortality (in secondary prevention of cardiovascular disease). But the rare side effect is often newsworthy and may discourage patients from seeking a beneficial therapy. Fortunately, we have randomized trials to sort out what the net impact of the benefits and risks of the drugs is like across a whole population.

I think lacking these experiments makes it easy to get focused on the details in macroeconomics. Policies that may increase utility across the whole population (e.g. immigration) may have costs to individual workers. Failing to properly specify the relative effect size of different interventions may lead to a focus on "second or third order effects". Or, even worse, to misjudging the net impact of a policy.

I think that might well be correct in the example above, as well. It is certain that there are people who would hire more if the minimum wage was to drop. But it is unclear that adjusting the minimum wage would have a major impact on the >9% unemployment rate we have in the United States. We may have to look elsewhere for solutions.

Now, implementing this advice is rough. Which is why I am pleased we have experiments over here in epidemiology.

The danger of deserve

Karl Smith:

On Facebook I think Robin framed the question as “how weak do temptations have to be before they make people less deserving of charity”

My clear answer would be that there is no level so low. Human suffering is bad. Reductions in human suffering are good.

Why humans are suffering is of concern to us in knowing when our interventions might be productive but it doesn’t affect whether they are warranted.

This is, in my view, precisely correct. The decision to impose a moral worthiness component to helping others is the source of a great deal of misery. For example, the moral implications of being HIV+ (in the early years of the epidemic) clearly reduced overall public health (due to stigma preventing patients from seeking care).

That isn't to say that some approaches that feel good may be counterproductive. If we are going to be good utilitarians then we really need to consider the global consequences of an action. Making one person better off at the cost of making many others miserable is typically a bad trade-off.

But, insofar as we can make lives better, does it ever make sense to ask if people deserve to have better lives?