Stories worth catching (Public Radio Edition)

From All Things Considered:

"One of the amazing things about the Denisovans is we still don't know what kinds of artifacts they left behind, what kinds of archaeology. We really only know them from their DNA," he says. "So it's really a genome in search of an archaeology."

From Marketplace:

Well, Cornell University professor David Just tried a little experiment on a few hundred preschoolers. He put cookies and apples in front of them at lunch time, and then got the number of kids who put an apple on their lunch tray to increase by 70 percent.

And this excellent piece of financial journalism from This American Life. (only complaint -- a "Measuring Life" would have been a much better title).

More on the challenges of modern media

More media issues by Jon Chait:

In the campaign press corps, Romney’s brazen decision to not merely indulge in puffery or invective or half-truths — as all campaigns, Obama’s included, have done — but to base his entire message on straight-up lies has prompted some journalistic soul-searching about the role of the campaign press. Reporters have come to outsource the role of evaluating the truth of candidates’ claims to “fact-checkers.” This allows the reporters to avoid directly calling a candidate a liar, but instead to point out that some third party, the fact-checkers, have called them liars. The utility of this arrangement has brushed up against its natural limit, a fact that was brutally exposed when Romney pollster Neil Newhouse asserted, “We’re not going to let our campaign be dictated by fact checkers.”
 

This really does make the traditional "the truth is in the middle" approach to reporting difficult.  At some point one presumes that a healthy press simply needs to start calling out actual mis-truths if they want to avoid being unpaid PR flacks.  At some point the role of reporting has to involve at least a nod to truthful discourse. 

Dealing with homeowners' associations has got to be hell for libertarians

I'm serious. Is there any other institution so focused on making and enforcing trivial and often idiotic rules?

From Marketplace:

If you have trouble keeping your lawn green in the summer time, here's an incentive: a $200 dollar ticket. That's what some homeowners in one Denver development are facing for brown patches in their yards. Yes, in the same state that just experienced a rash of massive wildfires.

You need to listen to this story on the threat of a global food crisis

No, I really mean you have to listen to it if you want to follow the story -- the text version is incredibly skimpy.



 

More stories on infrastructure

At some point one assumes that this system must be terribly broken:

Littlefield also argues that judges in New York routinely side with contractors in disputes with the Metropolitan Transportation Authority. “In the private sector, if you rob your customer, you will suffer a hit to your reputation and possible losses in the courts,” he said in an interview. “Not so if you rob an agency like the MTA. Then it’s all rights and no responsibilities.”

The MTA must continue to award contracts to the lowest- price bidder, and without the ability to hold bad contractors accountable, Littlefield said, the agency turns to “writing longer and longer and longer contracts, expressly prohibiting every way it has been ripped off in the past.” The byzantine contracts that come out of this process drive entrants away, limiting competition and pushing up costs.

The inability to reward contracts based on reputation is a huge problem.  It means that there is a huge amount of  benefit to thinking of a way to rip off the local government and no real consequences to doing so.  Market forces don't work because the need to give the award to the lowest bidder, regardless of reputation, makes it impossible to stop doing business with a bad vendor so long as they have the lowest price. 

Imagine if you had to buy a hamburger this way.  In the real world we know that there is a quality difference between hamburgers as well as a substantial price difference.  But if you always had to buy the lowest cost hamburger unless you could rule out a feature of the burger in advance, you can imagine how hard it would be to get the hamburger that you wanted and how easy it would be for the vendor to play games.

It's not a good system and I can see no reason why we should not look to reform it. 

Seeing things differently

This recent bit of advice for Mitt Romney from Peggy Noonan (by way of Brad DeLong) brought home how perceptions can differ from party to party:

[Romney] must use humor, for three reasons. One is that wit breaks through and sharpens all points. Another is that it is natural to him. Before the voting in Iowa, he wryly told a friend that the caucuses were like the LaBrea Tar Pits: “No one comes out the way they went in.” On a conference call recently, he asked a question of his staff. No one answered. Mr. Romney waited. “Bueller? Bueller?” he said, in a perfect imitation of Ben Stein.

Third, President Obama can’t stand to be made fun of. His pride won’t allow it, his amour propre cannot countenance a joke at his own expense. If Mr. Romney lands a few very funny lines about the president’s leadership, Mr. Obama will freak out. That would be fun, wouldn’t it?

If I were asked to rank recent Republican nominees on being naturally funny (thus leaving the partisan question out, since perception of humor is likely to be influenced how much we agree with someone), I'd put Reagan and McCain in the first class, Dole and George W. in the next, H.W. in the third. Romney would rank the lowest.

As for Obama's tendency to "freak out," I tend to see just the opposite, someone who keeps his cool and is exceptionally difficult to fluster.

These are, of course, subjective qualities, but it seems like the gap between the way different sides see these qualities has gotten almost inexplicably large.

(Illustrations courtesy of Gustave Verbeek.

Robert H. Frank comes out strong for the carbon tax

While we're on the subject, check out this op-ed in the New York Times:

Mitt Romney, for his part, has been equivocal about whether rising temperatures are caused by human action. But he has been adamant that uncertainty about climate change rules out policy intervention. “What I’m not willing to do,” he told an audience in New Hampshire last summer, “is spend trillions of dollars on something I don’t know the answer to.”

...  

The good news is that we could insulate ourselves from catastrophic risk at relatively modest cost by enacting a steep carbon tax. Early studies by the Intergovernmental Panel on Climate Change estimated that a carbon tax of up to $80 per metric ton of emissions — a tax that might raise gasoline prices by 70 cents a gallon — would eventually result in climate stability. But because recent estimates about global warming have become more pessimistic, stabilization may require a much higher tax. How hard would it be to live with a tax of, say, $300 a ton?

If such a tax were phased in, the prices of goods would rise gradually in proportion to the amount of carbon dioxide their production or use entailed. The price of gasoline, for example, would slowly rise by somewhat less than $3 a gallon. Motorists in many countries already pay that much more than Americans do, and they seem to have adapted by driving substantially more efficient vehicles.

A carbon tax would also serve two other goals. First, it would help balance future budgets. Tens of millions of Americans are set to retire in the next decades, and, as a result, many budget experts agree that federal budgets simply can’t be balanced with spending cuts alone. We’ll also need substantial additional revenue, most of which could be generated by a carbon tax.

If new taxes are unavoidable, why not adopt ones that not only help balance the budget but also help make the economy more efficient? By reducing harmful emissions, a carbon tax fits that description.

A second benefit would occur if a carbon tax were approved today but phased in gradually, only after the economy had returned to full employment. High unemployment persists in part because businesses, sitting on mountains of cash, aren’t investing it because their current capacity already lets them produce more than people want to buy. News that a carbon tax was coming would create a stampede to develop energy-saving technologies. Hundreds of billions of dollars of private investment might be unleashed without adding a cent to the budget deficit.

SOME people argue that a carbon tax would do little good unless it were also adopted by China and other big polluters. It’s a fair point. But access to the American market is a potent bargaining chip. The United States could seek approval to tax imported goods in proportion to their carbon dioxide emissions if exporting countries failed to enact carbon taxes at home.

As mentioned before, many of the steps we can take are cheap and/or already necessary to maintain a competitive economy. Some even pay for themselves without taking climate change into account:

The railroad has long been reluctant to accept government investment in its infrastructure out of fear of public meddling, such as being compelled to run money-losing passenger trains. But now, like most of the industry, it has changed its mind, and it happily accepted Virginia’s offer last year to fund a small portion—$40 million—of the investment needed to get more freight traffic off I-81 and onto the Crescent Corridor. The railroad estimates that with an additional $2 billion in infrastructure investment, it could divert a million trucks off the road, which is currently carrying just under five million. State officials are thinking even bigger: a study sponsored by the Virginia DOT finds that a cumulative investment over ten to twelve years of less than $8 billion would divert 30 percent of the growing truck traffic on I-81 to rail. That would be far more bang for the state’s buck than the $11 billion it would take to add more lanes to the highway, especially since it would bring many other public benefits, from reduced highway accidents and lower repair costs to enormous improvements in fuel efficiency and pollution reduction. Today, a single train can move as many containers as 280 trucks while using one-third as much energy—and that’s before any improvements to rail infrastructure.

When someone like Mitt Romney talks about spending trillions, the phrase is only meaningful if we're talking about a difference of trillions between two courses of action. In the case of rail upgrades, spending a trillion might well mean hundreds of millions in savings compared to achieving similar capacity through other means.

Megafires, incentives and the inactivity bias

One of the recurring themes of my conversations with Joseph is this country's growing disinterest, bordering on antipathy, in getting things done. (If you think I'm bad, you ought to get him started.) From building a badly needed piece of infrastructure to addressing global warming, we seem to focus most of our energy on finding reasons for inactivity.

NPR's excellent series on wildfires has a good example. If you weigh the costs and risks of prescribed burns against the costs and risks of letting current trends continue, the case for action is overwhelming, but we continued to let the situation get worse.

Add climate change to the mix (another situation we've shown lots of interest in discussing and little in solving), and we may have reached the point where there are no good solutions, only less terrible ones.

I remark just how lush his forest is, how the Ponderosa pines almost reach out and touch one another. He doesn't take it as a compliment. "They're a plague," he says. "On this forest, it's averaging about 900 trees per acre. Historically it was probably about 40. Here in the national forest, what we're facing is a tree epidemic."
Armstrong has rubbed some people the wrong way with talk like that. But he says forest this dense is dangerous. "We're standing here on the edge of what is known as the Santa Fe Municipal Watershed," he explains. "Imagine a huge bathtub" — a natural bathtub sitting in the mountains around Santa Fe. When it rains, the water flows down into reservoirs. That's where the state capital gets most of its water.

Trees help slow down the flow, but big wildfires take out the trees. They even burn the soils. "They convert from something that's like a sponge to Saran Wrap," Armstrong says. "In the aftermath of a wildfire within this watershed, that would flood like the Rio Grande, for heaven's sakes; that would come down a wall of water, and debris and ash and tree trunks, and create devastation in downtown Santa Fe. Suddenly, they find that the entire mountain is in their backyard."

Armstrong supports trimming smaller trees with machines and chain saws. But that costs hundreds of dollars per acre. The service now lets some natural fires — ones started by lightning, for example — burn within prescribed limits. Or they start "prescribed" burns when conditions are safe. These clear out smaller trees and undergrowth to keep them from fueling megafires. Armstrong has done that here.

But people didn't like the smoke, and when an intentional fire gets out of control, people sue. And there's been widespread drought in recent years. These are some of the reasons the Forest Service has reduced the use of prescribed fires.

Let's say there's no global warming...

Here's a short list of a few of the things, some big, some small, that we could look to to address climate change:

Smart Grid/Smart Meters

Rail Choke Points

Reflectivity

Public transportation

Power plant upgrade

Increased gas tax

Plug-in hybrids and electrics

Ground source heat pumps

weatherizing

This isn't a complete list by any means. I could have put nuclear, wind, centralized solar, passive solar, biofuel (with some strong caveats) and any number of other technologies. I picked these because they were well established and easy to argue from a cost-benefit standpoint (and because, frankly, I didn't have time to read up on the cutting edge stuff).

There's nothing speculative here and, with the possible exception of the tax (which is just too freaking obvious to leave out), there's nothing controversial either. These are proven approaches with well understood behavior, the kind of approaches that lend themselves to quick, back-of-the-envelope cost-benefit analyses.

Let's say for sake of argument that there's no global warming and, while we're at it, no acidification of the oceans. Even if we take all the controversial stuff off the table and just look at things like balance of trade, protecting the economy from supply shocks, improving quality of life (and therefore property values), reducing recognized, non-climate related health threats, (in the case of choke points) improving highway safety and just saving money, most if not all of these proposals have benefits that outweigh their costs.

Setting a smart grid and upgrading our rail system would be the most expensive but given the pay-offs and the fact that it's almost impossible to be modern industrial power with outdated and unreliable energy and transportation infrastructure make it hard to argue against these improvements, particularly if we limited ourselves to high priority rail projects like choke points.

For the rest of the list, the cost is lower and the payoffs, though smaller, are more immediate. Ground source heat pumps are arguably at the break even point even ignoring externalities and might be held back more by a lack of public awareness than anything else. Still, a few moderate steps (tax breaks, targeted government backed loans, building codes, retrofitting public buildings) can go a long way to reducing our national heating and cooling bill. On top of that, ground source based cooling cuts back on energy consumption at the very time that the system tends to be be overloaded, thus having an added infrastructure benefit.

Even reflectivity and shade initiatives can be justified in a non-warming globe. The economic benefits to Phoenix of absorbing less heat still apply regardless of the temperature of the rest of the planet.

I won't list the benefits of the rest (you probably know them better than I do). Each is sensible and based on proven technology and associated with substantial positive externalities that probably outweigh the cost of implementation even when you leave out climate and oceans completely out of the analysis.

We are often told that it would be nice to do something about global warming but the cost is just too great. Someone explain this to me. We have to fix our energy and transportation infrastructure anyway. It's cheap to paint roofs and hang awnings. Ground source heat pumps actually pay for themselves. Where exactly is the threat to the republic?

I can imagine various objections, starting with the inevitable "it doesn't solve the whole problem" (otherwise known as Zeno's paradox of public policy), but these steps would go a long way to solving our part of the problem and, more importantly, this is nowhere near a complete list.

Just so we're clear, this is a largely unresearched blog post written by someone who knows nothing about the subject so weight this accordingly, but if the climate models turn out to be true, events like we've seen recently are going to become more common. Add up all of the primary and secondary costs of just this summer's weather (wildfires, crops devastated, ranchers forced to sell off breeding stock, cities dealing with record-breaking heat) and you find yourself talking in terms of some stunningly large numbers.

Loads of caveats here (and if there's an expert in the house, please join in), but to the untrained eye, if you assign a better than even chance that the scientists who studied this sare right (and that's generally a pretty good bet), the cost of inaction looks far greater than the costs of doing something.

Particularly when it's something we should be doing anyway.

Megafires

A truly scary story from All Things Considered. This is what happens when bad management meets climate change.

The perils of 401(k) accounts: a continuing series

Megan McArdle is back with this observation:

The 401(k) I started in the late 1990s, before I went to business school, is worth less than the money I put into it. And even when I look at the last decade, I don’t see 8 percent growth; after inflation, it’s more like 2 to 3 percent. Most of the money in my retirement accounts is the money I put in. Nor am I alone.
 

Potentially snarky comments about investment strategies aside, this is a lot like what I have been seeing lately as well.  Yield is extremely low these days.  While it is always possible it will spike up again, the wave of retirements suggests that there will continue to be some exit from the market (as retired adults dip into saving to finance their retirement) which should put some downward pressure on prices. 

Private market retirement is a tricky beast indeed. 

Government Health Care

Aaron Caroll:

There are plenty of things that government does poorly. Or, at least you can make that argument, and find some support for it out there. For instance, many people believe that government does a terrible job at sparking innovation. I could imagine a debate there. Some think that government does a bad job at providing choice. That’s entirely defensible. Government run systems also allow less room for profit, which can drive out entrepreneurs. Also arguable.

But what government systems do well is hold down costs. They use central planning. They use their large market power to negotiate for reduced reimbursement (see Part 2). They buy drugs cheaper. They eliminate profit and overhead.
 

 In a lot of ways this still understates the role of government in health care.  The regulatory rules about health care are aslo responsible for increasing prices as well and have some definite effects on innovation.  Now I happen to think that some of the rules are good (e.g. the FDA) and some of these rules are bonkers (e.g. limits on number of new physicians via residency slots).  But there is a point where you have to decide how you want a market to be run.  Designing it so that it regulates things that help interest groups (i.e. keeping physician numbers down) but not other things (i.e. reducing costs by using market power) is very much the definition of regulatory capture.

I am quite willing to have a discussion about free market health care.  The first barrier to a real free market system is how we deal with public health.  After all, it took government intervention to get sewers and outhouses to come into common use in Europe.  Just look at the complexity of the modern sanitation system in France.  There is a conflict between the freedom to dump waste on the streets and the need to protect the public from fecal borne disease.  Similar arguments can be made with the need to try and keep antibiotics effective. 

A system that keeps all of the regulatory barriers to entry but shifts costs to the consumer is a very partial form of opening an industry to the free market. 

Hearst and Hitler

In one of those synchronicity moments, shortly after writing this post about how the movie Citizen Kane plays with the persona of William Randolph Hearst, an unrelated news story got me to thinking about editors and publishers give platforms to people whom they would normally refuse to associate with. That got me thinking about how Hearst caught hell for some of those associations (and why this shot had such added significance for audiences back in 1941).

From a Newshour interview with Hearst biographer David Nasaw:

TERENCE SMITH: He had an odd relationship and view of both Adolf Hitler and Mussolini. Tell us about that.  

DAVID NASAW: Well, he had at one point working for him... because he had 20 million readers, he had a large number of politicians in the United States and world statesmen who wanted to write for him, who wanted to reach his audience. At one point or another in the 20s and the 30s, Winston Churchill, David Lloyd George, Benito Mussolini and Adolf Hitler all wrote for him. Hitler wrote for him from the time that his Nazi Party became the second-largest party in Germany until Hitler became the leader of the German state, at which point he demanded of Hearst that he be paid as much as Mussolini because he, too, was now a chief of state. Hearst denied him that request. Hearst said to the editor who was corresponding with Hitler, "Hitler doesn't write well enough, he doesn't meet his deadlines, he promises us exclusives he doesn't give us-- we don't need him." And they instead used Goering.

Levitt and publishing bias in medical journals

Via Andrew Gelman here is a quote from Steven Levitt

When I told my father that I was sending my work saying car seats are not that effective to medical journals, he laughed and said they would never publish it because of the result, no matter how well done the analysis was. (As is so often the case, he was right, and I eventually published it in an economics journal.)

Now compare his article to this one (published a year later):

OBJECTIVE: The objective of this study was to provide an updated estimate of the effectiveness of belt-positioning booster (BPB) seats compared with seat belts alone in reducing the risk for injury for children aged 4 to 8 years. METHODS: Data were collected from a longitudinal study of children who were involved in crashes in 16 states and the District of Columbia from December 1, 1998, to November 30, 2007, with data collected via insurance claims records and a validated telephone survey. The study sample included children who were aged 4 to 8 years, seated in the rear rows of the vehicle, and restrained by either a seat belt or a BPB seat. Multivariable logistic regression was used to determine the odds of injury for those in BPB seats versus those in seat belts. Effects of crash direction and booster seat type were also explored. RESULTS: Complete interview data were obtained on 7151 children in 6591 crashes representing an estimated 120646 children in 116503 crashes in the study population. The adjusted relative risk for injury to children in BPB seats compared with those in seat belts was 0.55. CONCLUSIONS: This study reconfirms previous reports that BPB seats reduce the risk for injury in children aged 4 through 8 years. On the basis of these analyses, parents, pediatricians, and health educators should continue to recommend as best practice the use of BPB seats once a child outgrows a harness-based child restraint until he or she is at least 8 years of age.

 So what is different?  Well, the complete interview data is a hint as to what could be happening differently.  It is very hard to publish a paper in medical journal using weaker data than that present elsewhere.  Even more interestingly, papers before this one found protective associations (this was 2006) which should also be concerning. 

Then we notice that the Doyle and Levitt has Elliott et al. as a reference, but still claim that they are the first to consider this issue:

This study provides the first analysis of the relative effectiveness of seat belts and child safety seats in preventing injury based on representative samples of police-reported crash data.

So now let us consider reasons that a medical journal may have had issues with this paper.  First, it does not seem to deal with the previous literature well.  Second, it doesn't explain why crash testing results do not seem to translate into actual reduction in events.  It might be due to misuse of the equipment, but it is not clear to me what the conclusion should be then. 

But it seems that jumping to the conclusion that the paper would not be published because of the conclusion seems to assume facts not in evidence.  It is common for people to jump fields and apply the tools that they have learned in their discipline (economics) and not necessarily think about the issues that obsess people in the field (public health).  Some times this can be a good thing and a new perspective can be a breath of fresh air.  But in a mature field it can also be the case that there is a good reason that the current researchers focus on the points that they do.

This reminds me of Emily Oster, another economist who wandered into public health and seemed surprised at the resistance than she encountered.

So is the explanation Levitt's father gave possible?  Yes.  But far more likely was the difficulty of jumping into a field with a high counter-intuitive claim and hoping for an immediate high impact publication.  Medical journals are used to seeing experiments (randomized controlled drug trials, for example) overturn otherwise compelling observational data.  So it isn't a mystery why the paper had trouble with reviewers and it does not require any conspiracy theories about public health researchers not being open to new ideas or to data. 

Cost is tricky in health care

An interesting Yglesias post:

Instead the existing Medicare Advantage program tries to apply a risk-adjustment formula to the patients, and Ryan proposes doing the same in his greatly expanded version of Medicare contracting-out. But this doesn't change the fact that the real profit-making opportunity here is to try to identify and exploit inevitable flaws in the risk-adjustment process. The winning strategy is to craft products that are appealing to customers the formula is willing to overpay for and unappealing to customers the formula would underpay for. Now that could be a small problem or a it could be a giant problem, all depending on how good the government is at setting the rates. Which is to say that for bringing private bidders into the process to work well, you need really effective central planning. And to the extent that you have effective central planning, it seems to me that it makes sense to take advantage of the economies of scale that come from a single-payer system.

I think that this understates just how tremendously difficult epidemiological risk modeling really is.   But I do not think it undermines the central point -- once you put the work into risk adjusting the payouts to private companies you have all of the machinery for a single payer approach.  And it is dead obvious why a naive approach won't work.  But even the modern risk models aren't that great accoridng to Peter Orszag:

In 2006, Medicare Advantage plans were overpaid by more than $3,000 per beneficiary because they were able to select beneficiaries who cost less than their risk-adjusted payments. About $1,000 of that overpayment reflects what the plans were paid, rather than what they bid. So relative to their bids, the plans were overpaid by $2,000 per beneficiary -- or roughly 25 percent of the bid, on average.

That is a huge profit making potential (just think of the return on investment for that statistical model).  So you focus the incentives of the private sector on finding weak spots in the model (because that is incredibly profitable) and not on reducing health care costs (because that is hard and painful). 

I am somewhat sympathetic to the "put lot's of resources in medicine and technological improvements will follow" types of arguments.  But it seems to me that this approach is going to focus the innovation in precisely the wrong spot. 

Ground source heat pumps

Some background for an upcoming post.

From Wikipedia:

The US Environmental Protection Agency (EPA) has called ground source heat pumps the most energy-efficient, environmentally clean, and cost-effective space conditioning systems available. Heat pumps offer significant emission reductions potential, particularly where they are used for both heating and cooling and where the electricity is produced from renewable resources.
...
Ground source heat pumps are characterized by high capital costs and low operational costs compared to other HVAC systems. Their overall economic benefit depends primarily on the relative costs of electricity and fuels, which are highly variable over time and across the world. Based on recent prices, ground-source heat pumps currently have lower operational costs than any other conventional heating source almost everywhere in the world. Natural gas is the only fuel with competitive operational costs, and only in a handful of countries where it is exceptionally cheap, or where electricity is exceptionally expensive. In general, a homeowner may save anywhere from 20% to 60% annually on utilities by switching from an ordinary system to a ground-source system. However, many family size installations are reported to use much more electricity than their owners had expected from advertisements. This is often partly due to bad design or installation: Heat exchange capacity with groundwater is often too small, heating pipes in house floors are often too thin and too few, or heated floors are covered with wooden panels or carpets.
...
Capital costs may be offset by government subsidies, for example, Ontario offered $7000 for residential systems installed in the 2009 fiscal year. Some electric companies offer special rates to customers who install a ground-source heat pump for heating or cooling their building. Where electrical plants have larger loads during summer months and idle capacity in the winter, this increases electrical sales during the winter months. Heat pumps also lower the load peak during the summer due to the increased efficiency of heat pumps, thereby avoiding costly construction of new power plants. For the same reasons, other utility companies have started to pay for the installation of ground-source heat pumps at customer residences. They lease the systems to their customers for a monthly fee, at a net overall savings to the customer.

Medical Costs

A very left wing blogger writes:

Saying that voucherizing Medicare merely wouldn’t “hold down costs” is far too charitable. In fact, the evidence is unambiguous that voucherizing Medicare would increase costs all things being equal, since private insurers are clearly less efficient than actually existing Medicare.

It is worth noting that countries with public medical systems seem to get similar health outcomes at much lower costs.  I am unclear why "privatizing" of medical care is limited to shifting the costs to patients instead of a single payer.  Why does it not tackle licensing issues that result in a medical doctor shortage (which raises wages and thus costs)?  Or open up prescribing powers to more providers (why can Pharmacists not prescribe?)?

It seems to be odd to focus on this one aspect of the health care segment of the economy and not even discuss the other regulatory issues involved.

Some thoughts on cinema overe at MippyvilleTV

Arrested (cinematic) Development

With friends like these.. Peter Bogdanovich and Citizen Kane

More Econ 101

Worth pondering

So, when somebody says that the government should buy paper from a private provider, hey, great. There are lots of buyers and sellers of paper. Go for it. If somebody wants to contract out janitorial work or food service, again, there are lots of buyers and sellers of those services. But I’ve never seen how contracting out more specifically governmental tasks really improves things. You go from having a monopoly provider, with all the disadvantages thereof, to a monopsony buyer, that still has to exert oversight (which is subject to all sorts of information problems and all sorts of good and bad incentives). And if there’s only one buyer, that buyer is, effectively, a monopoly provider for the public.

In all sorts of arenas, information is the real limiting factor.  I like to apply this to fields like health care.  There is no real open market in health care.  We have subsidized insurance or government provided insurance for the majority of customers.  The plans that exist often lock in networks that make it more challenging to comparison shop.  Most customers do not have the ability to shop around on price.  Treatments are legally protected from being sold on the open market (you can't self treat with a statin).  Medical doctors are a protected guild that has a limited number of residencies (and thus a cap on members) leading to increased costs due to shortages. 

None of this looks like a functional market with good information, equal quality goods, freedom of entry/exit, or substitution effects on treatment. 

Worth pondering. 

One hundred degrees by moonlight

When you add up all of the associated costs of global warming, I don't see how a good cost benefit analysis could possibly support doing nothing.

From All Things Considered:

Phoenix actually suffers from two heat problems. One is a product of growth. Desert nights don't cool down they way they used to, because energy from the sun is trapped in roads and buildings, a phenomenon researchers call the "urban heat island effect."

As Phoenix grows, so does the problem, says Nancy Selover, the state climatologist.

"We keep thinking we'll probably see a night when we only get down to 100 as a minimum temperature, which is kind of shocking," Selover says.

Stock Markets

Brad Delong

Historically, people who invest in indexed mutual funds like the Vanguard S&P make 5.5%/year above inflation (but, alas! only 1%/year since January 1, 2000); people who invest in actively-managed mutual funds like those run by Fidelity make 4.5%/year above inflation (but, alas! only 0%/year since January 1, 2000); people who actively trade individual stocks turning over their portfolio once year or so as it appears Paul Ryan does make 3.5%/year above inflation (but, alas! only -1%/year since January 1, 2000); and day-traders who trade every day lose 5%/year (and, alas! have lost 10%/year since January 1, 2000).

These differences in returns are a lot of the reason that I see it as critical to have a paternalist view on retirement savings.  The more involved the individual invester is, the worse that they seem to do in the brave new world of finance.  Passive investing, the best option listed, depends critically on individual stocks not going out of balance with the whole (ask any Canadian about Nortal and Canadian stock index funds).  But all of the other options are worse. 

If the more recent (since 2000) figures are the result of demographic factors and not as a result of "unique" or "unlikely" economic factors (due to the liquidity crisis or what not) then the future of stock market investment is bleak indeed.  At the very least, periods of slow growth like this are not good signs for the future. 

Not sure about the message here

I just saw this ad. a few moments ago. I suppose it's a good sign that the Romney team got the updated ads out this quickly, but "Comeback Team" may not be the ideal slogan. It could be read as :the team to lead America's comeback." That's OK but it's not the first reading that comes to mind. 

When I see the phrase  "Comeback Team," I normally think "sure, we're behind but don't count us out." That may be a realistic message but I don't think it's one the campaign wants to push.

What's a winning strategy for a lottery (and what does winning really mean)?

Two interesting stories on lotteries, one recent, the other old but still relevant.

The first, from Felix Salmon, tells of a type of lottery with a positive expected value if you bought your tickets at the right time :

Because the jackpot was basically never won, it couldn’t just keep on rising indefinitely. So Cash WinFall had a mechanism for distributing it: when the jackpot rose above $2 million, it would “roll down” into smaller prizes. For instance, if you got five out of six numbers correct in a normal week, you would win $4,000; in a roll-down week, you would win $40,000.

A bunch of what can only be called professional lottery players jumped on this quirk, and would buy up hundreds of thousands of dollars’ worth of tickets in roll-down weeks, when the swollen jackpot was certain to get distributed. By buying so many tickets, they pretty much guaranteed that they would buy enough winning tickets to turn a profit — in a typical roll-down week, they would win back 15% to 20% more than they gambled.

Weirdly, the big risk here was the 1.4% chance that the jackpot would be won — as happened, for instance, on July 10, 2008. That worked out very well for the winner, Wenxu Tong, the general partner of a company called Tong’s Fortunelot Limited Partnership, who took home nearly $2.5 million. But all the other consortiums trying to game the system that week all did very badly, losing hundreds of thousands of dollars.

There was a tinge of scandal to Estes’s reporting. “Cash WinFall isn’t being played as a game of chance,” she quoted Mohan Srivastava as saying. “Some smart people have figured out how to get rich while everyone else funds their winnings.’’ And a few days after her story appeared, the Boston Globe ran an editorial under the headline “Lottery game is fatally flawed; treasurer should shut it down”. The argument? In any lottery game, according to the paper, “the odds should be stacked equally against rich and poor”. And eventually, earlier this year, Cash WinFall was indeed phased out.

Now Gregory Sullivan, the state inspector general, has written a 25-page report on the Cash WinFall game, which is well worth reading; Estes, naturally, has written it up for the Globe, under the headline “Lottery officials knew about Cash WinFall’s flaws, IG says”. She never mentions, however, the report’s conclusion: those “flaws” ended up being very profitable for the state, and were a way for Massachusetts to get significant lottery revenues not only from the poor but also from the rich.

The second, from This American Life back in 2007, looks at the impact of winning a lottery as reported by a man whose job it was to buy those jackpots for a lump sum payment:

What Ed found was that, if lottery winners felt like they could relate to him, could trust him, then they'd be much more willing to do the deal, no matter what the terms. And Ed found it wasn't hard to get them comfortable because they actually had a lot in common.


Ed Ugel: It was just a natural fit for me. One of the biggest things that helped me was my intimate understanding of the mind of a gambler.

A fellow I did a deal with in Florida, we went to a notary to get certain pages of the contracts, all the contracts needed to be signed. Some of the signature pages needed to be notarized. And this notary happened to also sell lottery tickets. And when we went and got these pages notarized, he whipped out a wad of bills out of his pocket and bought 1,000 scratch tickets while the notary slash lottery ticket salesperson was notarizing the signature pages on his contract to sell me his annuity from the lottery win. He was sitting there. He didn't even look at the contracts. He's just scratching away. He couldn't even wait to get away from the booth. I'll never forget the way the notary looked at me sort of in awe. And yeah, it was a little daunting, a little bizarre seeing it. But I knew just who this cat was. I'd been that guy. And I would like to think that maybe I was a little bit better than scratch tickets in the airport, but I don't know that scratch tickets in the airport are that much classier than video poker machines in the strip clubs of Oregon.

Is there a political historian in the house?

It seems unusual to announce a VP pick more than two weeks before the convention. How common is this sort of thing?

My problems with Matt Yglesias' Slate piece

Joseph recently had a post on Matt Yglesias's Slate piece on data. I pointed out in the comments that I wasn't that impressed. Here's a more detailed explanation.

I realize that Yglesias is writing for a general audience and that can muddle the issue, but I keep getting the feeling that he really doesn't get the subtlety here, that he misses the fundamental asymmetry between significance and insignificance and the importance of what Friedman and Rowe are saying.

I don't want to get caught up in the weeds of interpreting (let alone defending) p-value, but if you see a contextually significant result you pretty much know that there's a relationship there. It may not be causal or useful and it may not be what it appears, but there's something.

If you don't see a significant result, you don't know anything. Maybe there's nothing there or maybe there's too much noise or the relationship is outside the range of data or you could be using techniques that miss nonlinear relationships (an argument for CHAID and CART but that's a topic for another post). You certainly wouldn't draw a conclusion like burning fossil fuels doesn't cause heat.

As for the thermostat scenario, Yglesias focuses on this as an example of observational analysis missing a relationship. That's true but it's a very specialized case of a wide spread problem (lots of things cause us to miss relationships). Furthermore, it misses the real profundity of the analogy: it is the job of self-regulating systems to put forces in opposition, to set up destructive interference. The better the system works, the less appears to happen.

And finally, while I'm in a picky mood,  Yglesias should realize that lots of natural sciences (astronomy, meteorology) make very limited use of experiments.

Two essential posts on the Ryan pick

Nate Silver looks at the electoral implications.

Jonathan Chait handles the historical context.

Nate Silver answers a question I've had for a while

From Nate Silver's analysis of Ryan's selection as VP (emphasis added)

The economy? Well, it isn’t very good. But it also doesn’t appear to be getting much worse, and some recent signs — like the July jobs report — suggest a slight brightening of the outlook. It’s not quite the case that incumbent presidents are favored to win unless there is an outright recession, but that also isn’t that far from the truth. Incumbent presidents tend to get the benefit of the doubt from voters, especially when, as in Mr. Obama’s case, they are regarded as likable, their party is in its first elected term, they are perceived as competent on foreign affairs and they have avoided major scandals.

I'd noticed that while assessments of political history often talked about a one-term president, I didn't hear much about how long a party held the White House. which always struck me as an important potential factor in a model. It's good (though hardly surprising) that Silver is considering it, but I do have to wonder how many of the experts on CNN are being as thorough.

Harm Reduction

DrugMonkey has a post on legalization efforts for marijuana in Washington state.  I think that this might be my public health background, but why is the focus on on harm reduction and not the legal status of the drug? I have no trouble believing that use of this substance may have adverse effects over the long term.  But so do legal substances like tobacco and alcohol.  Furthermore, how does the harm stack up to the harm done by a term in a prison?  A lifetime of reduced employment opportunities, acculturation in a brutal environment as well as being a victim of the violence that occurs in jails.

Why not look for middle grounds?  A heavily taxed substance that minors are prevented from buying (the tobacco model)?  Decriminalization so that use equals fines and not police breaking down one's door (the Canadian model)?

Why is the focus not on maximizing public health outcomes?

Another data point on the competence of NBC Universal*

I was thinking about the Christian Slater show My Own Worst Enemy the other day (not a sentence I write that often) specifically I was thinking about how much valuable Olympic ad space NBC burned on the show in 2008 before panicking at a slow start and pulling the plug in the middle of the first story arc.

On today's All Things Considered, Andrew Wallenstein had a nice piece on NBC's attempts to use the Olympics to promote its fall schedule, complete with some embarrassing examples that had slipped my mind:

Sure, you may be spending a lot of time with NBC this summer. But they'd like you to start thinking about the fall, too. That's why what seems like every third commercial during the Olympics is for the network's own shows. Animal Practice, Go On, Chicago Fire ... they're all on NBC's fall schedule, and you may feel like you're hearing about them — complete with lame sports metaphors — as much as you're hearing about gymnastics and track.

But the network isn't stopping at mere promotion; they're airing entire episodes of select shows after primetime coverage of the competition. Some will even start their seasons right after the closing ceremonies.

You may ask yourself: If the Olympic Games are such a powerful viewer magnet, why not schedule all the fall shows to start right after they end?

The answer: Because it almost never works. NBC has tried again and again over the years to use the Olympics as a launch pad for other programming. But do you remember Father Of The Pride in 2004? Or Conviction in 2006? Didn't think so. Both are examples of shows that failed to take off after being heavily promoted during Olympic coverage.

There are a number of theories as to why it doesn't work. First, there's the distinct possibility that none of the shows NBC has tried to launch out of the Olympics were all that good. Or maybe it's the fact that the Olympics provide what NBC's rivals dismiss as a "rented audience," meaning they're the kinds of viewers who flock to the Olympics but aren't interested in much else.

Along similar lines, TV by the Numbers looked at the track record of the new shows NBC promoted during the 2008 Olympics:

My Own Worst Enemy (the Christian Slater curse is born!) lasted 9 episodes
Knight Rider, lasted 17 episodes
Kath & Kim, lasted 17 episodes
America's Toughest Jobs (reality, started late August, season/series finale Oct)
Crusoe (started after ATJ) lasted 12 episodes.

As mentioned before, NBC has been badly run for years. No network has ever done more to deserve fourth place. By comparison, CBS is much better run and the small upstart Weigel is even more impressive. In theory, we should see huge salaries at CBS, loads of market interest and good press for Weigel and heads rolling like bowling balls at NBC Universal. Instead we're getting one out of three. It took years and thirty plus million in severance to get rid of Zucker and the chances are good that you've never heard of Weigel outside of this site.






* The people who brought you Battleship -- the Movie and this remarkable piece of business logic.

Yglesias on the Dangers of Observational Data

Matt Yglesias has a piece on the Dangers of Data that really should be the Dangers of Observational Data!  True randomized or quasi-randomized experiments, when you can do them, have none of these limitations ascribed to the thermostat problem (and, in physics, an experiment is how you would figure out what the thermostat actually does). 

I am also amazed by the different foci that fields put on different methodological issues.  In observational pharmacoepidemiology we are obsessed with the issue of confounding by indication and constantly worry that it is leading to non-trivial amounts of bias.  The concept behind confounding by indication is awfully similar to the problem described by Milton Friedman's thermostat.  But I never hear economists bring that up as a major issue with observational data; perhaps because they lack experiments to tell them how often an observational estimate is wildly inaccurate (whereas in pharmacoepidemiology these experiments are slow and rare rather than non-existent). 

None of this is to say that you cannot do valid inference with observational data -- you most definitely can.  But it does highlight the need to be very, very careful. 

An almost perfect example of modern political reporting (and I don't mean that in a good way)

From NPR, sadly, Ari Shapiro reports that both candidates have tried to associate themselves with the Clinton legacy. That's a valid, newsworthy topic, but to cover it you have to acknowledge some basic asymmetries. Having a popular Democratic ex-president is more likely to help the Democrats. By the same token, it's easier for Obama to point out similarities between his policies and Clinton's than it is for Romney.

You won't, however, get that from Shapiro. In his report, both parties are pursuing the same strategy with apparently the same risks, potential rewards and level of rhetoric consistency.

As long as Bill Clinton has been on the public stage, there have been people of both parties willing to say negative things about him. But this year, even high-profile Republicans are waxing nostalgic about the Clinton years. This was Newt Gingrich on CNN after Democrats announced that the former president will have a prime speaking spot at the convention.

NEWT GINGRICH: President Clinton got four consecutive balanced budgets. President Obama has had huge deficits. So I think having Bill Clinton there is going to remind people of a Democrat they used to like, and may in fact shrink Obama by comparison.

SHAPIRO: On the campaign trail, Mitt Romney has been applauding the Clinton welfare program as an accomplishment for the ages. Here he was in Illinois this week.

MITT ROMNEY: One of the things that happened in the last couple of decades was one of the greatest bipartisan successes we've seen. And that was President Bill Clinton and Republicans coming together to reform welfare.

SHAPIRO: Republicans who praise Bill Clinton can show that they are not mindless partisans. It's a way of saying: There are Democrats I like, just not the one in office right now. Of course, the Democrat in office right now has tried to co-opt Clinton's legacy, too.

PRESIDENT BARACK OBAMA: My theories have been tested. Last time they were tried was by a guy named Bill Clinton.

SHAPIRO: On the campaign trail, Barack Obama makes it sound like he's running to continue the Clinton administration.

(APPLAUSE)

OBAMA: And that's why I'm running for a second term as president of the United States, to go back to what works.

Do we really have to go to the tape here? Do we have to compare the "bad things" Democrats said about Clinton (irresponsible, opportunistic triangulator) to those said by Republicans (drug dealing, Manchurian Candidate who raped his lesbian wife and countless other women and had his best friend murdered)? Do we have to review the statements that Republicans like Gingrich made about Clinton's policies at the time? Do we need to point out that Obama "makes it sound like he's running to continue the Clinton administration" because his policies actually are largely a continuation of Clinton's policies, and where there are difference on things like taxes, Clinton is generally to the left of Obama?

As James Fallows, Paul Krugman and many others have noted, journalistic fairness does not consist of saying the same number of good things and bad things about both parties. That's not balance; it's cowardice and it's undermining our ability to have a productive discussion (and in a democracy that's a bad thing to undermine).

the clothesline paradox

Shane Greenstein has some smart things to say about orphan technologies:

Does the clothesline paradox apply to information technology? There is a relationship between the clothesline paradox and digital dark matter, but there is also a subtle and important difference. It is important to keep those differences straight. It makes a difference to several contemporary policy debates.

That will take some explaining. There are some terms to define.

The clothesline paradox comes from energy economics. For a definition here is a quote from this well-meaning article from the Whole Earth Catalogue:

If you take down your clothes line and buy an electric clothes dryer the electric consumption of the nation rises slightly. If you go in the other direction and remove the electric clothes dryer and install a clothesline the consumption of electricity drops slightly, but there is no credit given anywhere on the charts and graphs to solar energy which is now drying the clothes.

In other words, standard approaches to economic measurement do not count inputs that lack a price. The clothesline paradox leads to under-counting the importance of activity that uses free endowments from nature. It is one of the quirks of modern economic measurement. No price equals no value.

Why does that matter? For one, out of sight leads to out of mind. The sun does not have a firm that lobbies on its behalf. Policy conversation tends to favor existing firms with seemingly big economic contributions, and tends to underestimate the importance of the free.

Perhaps more importantly, when a new technology (which uses the free inputs) substitutes for existing economic activity, on first glance it looks like the new technology brings about a decline in total economic activity. That appearance is misleading, of course, because the savings goes into other economic activity, but those gains are diffuse and difficult to identify.

A third aspect matters as well. An unpriced input tends to come without restrictions on use. There are very few laws governing the proper use of the sun. (Ok, there are a few zoning laws, actually, but you get my point).

This bothers Tim O’Reilly. Why? He argues that open source software suffers from a clothesline paradox. Open source software is an input into one trillion dollars worth of activity, he estimates. Yet, because the open source is unpriced, it gets little or no credit.

Simon Phillips of InfoWorld liked this point, and gave a catchy label for the effect, calling open source software “The Stealth Stimulus Package.” Phillips goes on to compare the open source software and the clothesline paradox, arguing for their similarity.

There is a good insight there, but also an interesting oversight. The interesting insight is worth stressing. Open source software deserves credit, but there is more. This comparison reminds me of an old column in this space, one devoted to “digital dark matter.” Digital dark matter are “important building blocks of the digital economy that we do not measure using standard tools.” (Indeed, the first example of digital dark matter in that essay is open source, where the lack of price is the source of the issue.)

There is a key difference between using the sun and using open source software, however. Nobody has to invest in the sun in order to keep the light coming. Not so for some digital dark matter. Fail to invest, and stuff will not arise.

For my take on a related subject, check here.

This ought to reassure all those doubters of the uncertainty effect

Some of the comments following our recent post on Glenn Hubbard's op-ed were rather skeptical. To recap, Hubbard argued that uncertainty over Obama's possible implementation of policies similar to those under Clinton "reduced GDP by 1.4 percent in 2011 alone."

Now Mike Konczal has dug in the source material to explain where these numbers come from:

That said, the rate is elevated starting around 2009. Why is that? The uncertainty index consists of three parts. The first a news search for articles on policy uncertainty, which we'll return to in a minute. The second part has to do with disagreements among economic forecasters. And the last part is "the number of federal tax code provisions set to expire in future years." Tax code provisions set to expire are weighted by the formula 0.5^((T+1)/12), where T is the number of months until the tax code expires. That means these provisions weigh more in the analysis as they get closer to expiring -- those with more time left have weights approaching 0, and those close to expiration approach 1.

Having an interest in text mining techniques (n-grams and that sort of thing) I was wondering how they approached the problem. It turns out their methods were a little less sophisticated than you might expect.

A Magic Trick

But now for that magic trick. How do they construct the search of newspaper articles for their index, which generates a lot of the movement?

Their news search index is constructed with four steps. They first isolate their search to a set of articles from 10 major newspapers (USA Today, the Miami Herald, the Chicago Tribune, the Washington Post, the Los Angeles Times, the Boston Globe, the San Francisco Chronicle, the Dallas Morning News, the New York Times, and the Wall Street Journal). They then search articles for the term "uncertainty" or "uncertain." They then filter again for the word "economic" or "economy." With economic uncertainty flagged, they then filter again for one of the following words to identify government policy: "policy," "'tax," "spending," "regulation," "federal reserve," "budget," or "deficit."

See the problem? We don't know what specific stories are in their index; however, we can use their search terms listed above to find which articles would have likely qualified. Let's take a story from their first listed paper, USA Today, "Obama taking aim at GOP pledge on campaign trail," from August 28, 2010 (for the rest of this post, I'm going to underline the words in quotes that would trigger inclusion in their policy uncertainty index):

Brendan Buck, a spokesman for the House GOP lawmakers who crafted the pledge, said "it's laughable that the president would try to lecture anyone on spending." [....] Buck said the pledge was developed to address voter worries about high unemployment and record levels of government spending and debt.

"While the president has exploded federal spending and ignored Americans who are asking, 'Where are the jobs?', the pledge offers a plan to end the economic uncertainty and create jobs, as well as a concrete plan to rein in Washington's runaway spending spree," Buck said. Spokespeople for the conservative movement tell reporters that President Obama's policies are causing economic uncertainty. Reporters write it down and publish it. Economic researchers search newspapers for stories about economic uncertainty and policy, and create a policy uncertainty index out of those talking points. The conservative movement then turns around and points to the policy uncertainty index as scientifically justifying their initial talking points about Obama and uncertainty as well as the need to implement their policies. Taa-daa! Magic.

"The employees’ incentives are aligned more with the markets than they are with Zuckerberg"

Felix Salmon delves into some of the issues I was alluding to in this earlier post.

From Facebook’s Faustian bargain

The point here is that although Facebook might be controlled by Zuckerberg individually, it’s still nothing without its thousands of employees. And those thousands of employees have entered into a bargain with Zuckerberg: they’ll accept relatively modest salaries, and work hard, because Zuckerberg is giving them substantial amounts of equity in the company. Once Facebook went public, every single Facebook employee became acutely aware of the company’s share price, what direction it was going in, what that move was doing to their net worth, and what public investors wanted to see from the company (revenues, and profits, rising sharply).

As such, despite his voting control at board level, it’s actually really hard for Zuckerberg to keep his employees focused on long-term platform-building, rather than short-term obsession over the share price. For one thing, they don’t own the company; many of them are going to leave, at some point, and so their time horizon is necessarily going to be shorter than Zuckerberg’s. And at any company with broad share ownership and a public share price, employees are always going to pay a huge amount of attention to whether it’s going up or going down.

On top of that is the classic Silicon Valley problem — which is that employees are always searching for the new new thing, the company where they can get early-stage equity and make themselves a fortune. Or, at the very least, join a mature company like Apple where the stock can still rise enormously. If Facebook’s stock is going down rather than up, its employees will start looking for other opportunities, and the company will find it much harder to attract talent.

If you want to know what's wrong with the movie industry

Listen to this interview with Peter Berg, director of Battleship (sorry, no transcript). Lots of troubling information if you listen for it but the one that jumped out at me was the part about thirteen minutes in where the Berg says (and I'm inclined to believe him) that the studio actually pressured him to go from the original 150 million to 200. There were all sorts of elaborate rationales for this, but in the final analysis, none of them undercut the conclusion that the business model here is deeply screwed up.

When is a conclusion credible: health care edition

I think that critical thinking skills are needed when discussing health outcomes now more than ever.  Consider this prelude to reporting study results by Matt Yglesias:

Conservatives don't like Medicaid because they believe programs that tax the rich to transfer resources to the poor are bad for long-term economic growth and violate principles of cosmic justice. But since nobody likes to admit to the existence of a tradeoff, conservatives have lately taken to mounting the bizarre argument that giving health care to low-income poor people doesn't improve health outcomes.

 Now, let us consider just what this would likely imply.  If Medicaid, a conservative, inexpensive, and rationed health care system cannot improve outcomes what help is there for any possible level of health care?  After all, this care is focused on the sickest possible patients who have the fewest resources to handle a medical condition on their own.

So one would actually begin to wonder if any health care at all is effective at all.

Now it turns out that more careful studies are showing that Medicaid is a pretty cost effective way of saving lives.  But, if we believed the original (flawed) studies, wouldn't the really exciting take home point be that modern medicine is ineffective at saving lives?  That is a hige area of GDP that we could simply stop and re-allocate to more productive activities.

It really was an odd argument, all around. 

The uncertainty paradox

Via DeLong, Glenn Hubbard has been making the point that uncertainty hurts the economy. Here's what he had to say in the WSJ:

As a consequence, uncertainty over policy—particularly over tax and regulatory policy—slowed the recovery and limited job creation. One recent study by Scott Baker and Nicholas Bloom of Stanford University and Steven Davis of the University of Chicago found that this uncertainty reduced GDP by 1.4% in 2011 alone, and that returning to pre-crisis levels of uncertainty would add about 2.3 million jobs in just 18 months.

(Matthew O'Brien points out that this uncertainty was driven by the debt ceiling crisis and the European crisis, but that's somewhat off-topic for this post.)

Without getting into the weeds here (or mentioning how close the idea of fear of uncertainty affecting the economy comes to sounding like Keynes talking about animal spirits), my question here is how have Romney decisions affected uncertainty. I'm sure Hubbard would argue that Romney has a good chance of winning in November which would mean we would have a good chance of seeing Romney's policies implemented, but Romney has been extremely reluctant to release specifics.

If you need to make a business or investment decision that depends on tax policy, you have no way of accurately evaluating that decision until the election is decided and, in the event of a Romney victory, actual proposals are made in 2013. We're talking six months here, closer to to twelve if you include time for the legislation to pass and the dust to settle.  Therefore doesn't Hubbard's point about uncertainty imply that Romney is hurting the economy by refusing to supply essential information to businesses and investors?

(Much of this applies to Paul Ryan as well.)

I can imagine valid arguments for keeping policies broad and open-ended early in the process and I can imagine valid arguments for the need to reduce uncertainty.

But for the life of me, I can't imagine a valid argument for both.

Feeling better about Burton Malkiel

Burton Malkiel wrote one of my favorite (and a lot of other people's favorite) books on econ and investing, A Random Walk Down Wall Street. Given that, I was more than a little disappointed to hear that the following blurb appeared on the back cover of Dow 36000: The New Strategy for Profiting From the Coming Rise in the Stock Market by James K. Glassman and Kevin A. Hassett:

“Dow 36,000 is a provocative and well-written treatise that cannot be dismissed… .” — Burton G. Malkiel, Wall Street Journal

(in case you've forgotten, the 1999 book in question promised  the Dow would hit 36000 in three to five years)

With Hassett back in the news, Brad DeLong has been digging through the archives and has uncovered context for Malkiel's quote:

Dow 36,000 is a provocative and well-written treatise that cannot be dismissed as easily as many of its critics have suggested. But what is at stake here is much more important than a debate among economists. This is a book with the goal of giving investment advice. For this reason I believe Dow 36,000 is a dangerous book that may lead some investors who can ill afford the significant risks of equity investments to throw caution to the wind.

A bit more on persuadables

Following up on the last post, persuadables are one of those ideas with a high utility to difficulty ratio. They aren't hard to understand but they come in handy. So I thought I'd tack on a simple but fairly realistic example.

You own a casual dining place, think Red Lobster. You're sending out good coupons -- a popular twenty dollar entree for  fifteen  (still leaving you a profit of about a few dollars) -- to a random selection of people in the area. You've seen an uptick in business associated with the offer and you're seeing new faces (always a good thing), but the mailings cost you a quarter a piece and with a response rate of about two percent, the campaign is costing you a lot of money.

So you hire a statistician who builds a logistic regression model that lets you rank recipients and you only mail people who are highly likely to respond. Your response rate is now ten percent. A while later, though, you notice that your number of customers since you started using the model is back down to pre-coupon levels and your profits are way down. What happened?

The explanation lies in the three primary kinds of people who got your coupon in the mail. The first group is non-responders. They cost you a quarter a piece. Next are people who normally wouldn't have gone to your restaurant but decided to because of the coupon. These are the ones you like; they bring in money and may go on to become regulars. Finally, there are people who used the coupon but would have come by even without it. Giving them a coupon represents five and a quarter in lost revenue.

Remember, the model was built to rank likelihood to respond and as a general rule, the people most likely to come by after receiving a coupon are the people who would have come by anyway. By mailing only to the top deciles, you effectively selected the worst possible customers to market to.

This may seem like an obvious mistake, but it's not that unusual. Most people  who've worked with marketing analytics can come up with a few examples, some of which came with hefty price tags.

Facebook edges closer to underwear gnome territory

Following up on

Loan Sharks, Facebook and the Growth Fetish

All Things Considered chronicles the continuing slide from innovative company with good business model to cautionary tale:

For years the vast majority of business stories about Facebook seemed to describe some kind of unstoppable force. A company that was doubling in size every year — with members who spent more time on the network month after month, and a user base so large it rivaled the most populous nations on Earth.

And then as Facebook prepared to go public, suddenly the only thing business writers and analysts were interested in talking about was the money.

Analyst Debra Aho Williamson says Facebook's projected annual revenues are now more than $1 billion less than what she and other analysts had expected before the company went public.

"So Facebook is now in the ranks of the big companies, and essentially it'll stop innovating the way we've seen innovation before," says technology researcher Vivek Wadhwa.

Anant Sundaram, with the Tuck School of Business at Dartmouth, says, "We're talking about Facebook having to grow its revenues at between 25 and 30 percent per year."

Facebook Stories

They are among many analysts who recently have expressed their skepticism about Facebook's future as a business. Now Facebook is trying to change this narrative. The company is launching Thursday what it calls a micro-site, facebookstories.com.

It's really an online monthly magazine devoted to stories on how Facebook can be used.

The story featured is a genuinely touching story of a man who lost his memory trying to rediscover his past on Facebook. From a business standpoint, though, the micro-site is a pointless exercise, and if the executives at FB actually expect this to move the needle, the company is in even more trouble than we thought.



The problem here is one that almost every business analyst has faced. You want to convince people to do something (buy your product, not cancel their membership, spend more time on your site, whatever). These people can be put into three groups, lost causes who will never do what you want, sure things and persuadables (people who will do what you want given the right pitch or incentive). This last group is why marketing departments exist (and why marketing statisticians  like me have jobs).

FB has to meet incredibly aggressive growth targets that require both bringing in more accounts (extraordinarily difficult for a product this close to saturation) and getting more activity from many millions of low traffic users. The stories site may have a slight positive effect on brand but for the problem at hand it's so comically inadequate that it raises questions about whether the people running the company realize how much trouble they're in.

For starters, Facebook is too big and too famous to get much of a PR bump out of, well, anything. These "extraordinary stories" would be of great value to a little known business but people already know about FB and how to use it.

Second, for this to make a difference it would have to change the behaviors of at least tens of millions of persuadables, but by its nature this type of site will be most likely to attract regular/heavy Facebook users (sure things).

Finally, not every persuadable will be persuaded by every message. Watching an inspiration video might well make someone more likely to spend more time on FB but how much more likely?

If you run any kind of realistic numbers through this scenario, you won't get more than a trivial impact, and when you consider that at the end of the month, employees are probably going to start dumping their shares en masse, initiatives with trivial impact shouldn't be on anyone's schedule now.

"I have recently seen the silliest film."

I just saw a film heavily influenced by Metropolis* and I don't mean that in a good way. Not that I have a low opinion of Lang's movie. It's an often stunning collection of stunning images and some remarkable action sequences in the climax, but it really is a silly story with fascist elements (Goebbels was a fan though not so much of Lang's later work).

H.G. Wells wrote a memorable if brutal review. You should read whole thing but for now here's a taste of the opening.

I have recently seen the silliest film.

I do not believe it would be possible to make one sillier.

And as this film sets out to display the way the world is going,

I think [my book] The Way the World is Going may very well concern itself with this film.

It is called Metropolis, it comes from the great Ufa studios in Germany, and the public is given to understand that it has been produced at enormous cost.

It gives in one eddying concentration almost every possible foolishness, cliché, platitude, and muddlement about mechanical progress and progress in general served up with a sauce of sentimentality that is all its own.

* If you think you know, you probably do.