A Quick Christmas Wish

I am hoping that all of you have a prosperous new year, filled with good health and some form of improvement in all aspects of your life.

Merry Christmas

A short letter to James B. Patterson

Dear Mr. Patterson,

I refuse to pick up any book that promotes itself using the word 'unputdownable.'

Sincerely,
M. Palko

If you only read one really long economics lecture this holiday...

Delong, again:

Alexander Hamilton and the Origins of the National Debt: Back in the early 1790s, the national debt was close to 40% of annual GDP. It was close to 40% because the first Treasury Secretary, Alexander Hamilton, thought it was a good idea to make it close to 40%. He convinced congress to let him go to the states and say:

You know all that money you spent winning us our independence from Britain by raising armies during the Revolutionary War? The federal government is going to pay you back for all of that. We in the federal government are going to assume your Revolutionary War debts, and pay off all the bonds you issued at full face value.

Alexander Hamilton did this for three reasons. One was he had a bunch of friends who were financiers in New York. Once they got wind of how he was thinking they had the opportunity to buy up pieces of the debt from the merchants, the soldiers, and the others to whom the government owed money--to say:

You don't think New Jersey will ever pay off that piece of paper, do you? I'm willing to gamble that they will eventually pay something--how about you trade it to me for 40 cents? You get the cash, I take the risk, it is a good deal for both of us.

Then Alexander Hamilton announces his debt assumption plan. New York financiers who understand how Hamilton thinks make an awful lot of money. And they are grateful.

That, however, was only a minor reason.

One major reason was that Alexander Hamilton saw that the United States was then a relatively small country in a world dominated by two super powers, Britain and France. Both Britain and France had ocean-spanning ambitions and blue water navies. Hamilton thought it likely that we would at some time in the future get into a big war with either Britain or France. And he wanted to make sure that if we did get into a big war that the federal government would be able to borrow money in order to fight it effectively. Moreover, even if we did not get into a big war a U.S. federal government that could not borrow--that had no debt capacity--would be weak. Both France and Britain would both notice that we were weak, and they would steal our stuff, press our sailors and make them man their navies, et cetera et cetera. Thus Hamilton thought it was important for the federal government to start its existence by building up its debt capacity. And what better way to convince investors that the federal government would pay off its debts in the future than for it to pay off the debts of the United States incurred during the Revolutionary War--even or perhaps especially if those debts had not been incurred by the current federal government?

The most important reason, however, was that Alexander Hamilton was Secretary of the Treasury in a country where the rich were at best uneasy about the revolution and independence. Of America's upper class as it stood in 1775, full half of them were gone: had fled to Britain or Canada during the Revolutionary War. Those who remained remembered that back before 1775 the British monarch had protected property, that the British army and navy had protected them against deprivations of all kinds, that it was quite clear who the police worked for. Now you have a republic with a much broader electorate. Might politicians run on a platform of soaking the rich and redistributing wealth to the poor? Thus the rich people were nervous--and at least thinking about how maybe it would be good if the British came back and ruled again.

This was where Alexander Hamilton had his good idea. Suppose, he thought, he could set things up so that the rich owned a lot of U.S. government bonds. Then if the British returned--well, the British were not going to pay off the Revolutionary War debt of the United States of America under any circumstances. Having a national debt was a way to bind the United States rich to the country--giving them a stake in the new republic's survival. And by large it worked: the national debt was a national blessing.

Definitely worth reading the whole thing.

The Peacock's Tail -- Analogy of the week from Brad DeLong

From an excellent post on the growth of financial services:

The obverse of that fall is the rise of a peculiar piece of the service sector: the growth of finance, insurance, and real estate transactions (i.e., the paper shuffling and the exchanging, not the construction). It was supposed to be the high-productivity sector of the future. It has turned out to be the equivalent of a peacock's tail--damnably awkward and reducing your mobility and survival characteristics, but fascinating to the peahen, for a while at least.

"Some of us are illegal, and some are not wanted"

There's a tendency to treat certain ideas and attitudes (particularly liberal ones) as modern inventions, usually going back no further than forty or fifty years, but if you do a little digging, you will inevitably find someone (albeit, in this case, someone on the far left) who was expressing these ideas decades (in this case, 1948) or even centuries ago (thanks to Brad DeLong for the Jefferson letter)



Plane Wreck At Los Gatos by Woody Guthrie

The crops are all in and the peaches are rott'ning,
The oranges piled in their creosote dumps;
They're flying 'em back to the Mexican border
To pay all their money to wade back again

Goodbye to my Juan, goodbye, Rosalita,
Adios mis amigos, Jesus y Maria;
You won't have your names when you ride the big airplane,
All they will call you will be "deportees"

My father's own father, he waded that river,
They took all the money he made in his life;
My brothers and sisters come working the fruit trees,
And they rode the truck till they took down and died.

Some of us are illegal, and some are not wanted,
Our work contract's out and we have to move on;
Six hundred miles to that Mexican border,
They chase us like outlaws, like rustlers, like thieves.

We died in your hills, we died in your deserts,
We died in your valleys and died on your plains.
We died 'neath your trees and we died in your bushes,
Both sides of the river, we died just the same.

The sky plane caught fire over Los Gatos Canyon,
A fireball of lightning, and shook all our hills,
Who are all these friends, all scattered like dry leaves?
The radio says, "They are just deportees"

Is this the best way we can grow our big orchards?
Is this the best way we can grow our good fruit?
To fall like dry leaves to rot on my topsoil
And be called by no name except "deportees"?

And bonus stat-nerd points for the title

This New Republic article by Ed Kilgore is a good (if troubling) read and it's an excellent complement to Joseph's earlier post on government services in Washington (the state, not the district).

More on Jump$tart

From an email from Frances Woolley:

Mark: "There are no questions that refer to charts or tables though the ability to read both is an essential part of financial literacy." This is a really good point. I also very much like your point about question 24, with its highly dubious generalization from the general to the particular.

In many ways, teaching people what they don't know, and the types of systematic mistakes they are likely to know, is probably as valuable for financial literacy as anything. For example, when dieting, knowing about standard psychological biases, e.g. that people eat less when they eat from a small plate, more from a large one, helps a person trick herself into eating less - and that's more help than being told that celery is less fattening than cookies.

It's unfortunate in many ways that the Jump$tart has so many flaws of this kind, because it could be really valuable.

If we actually care about financial literacy, we ought to commission a decent test.

Washington Ferries

There was a recent article in the Seattle Times that was quite interesting. It was discussing the consequences of anti-tax initiatives in the state of Washington on government services. In particular, the recent Initiative 1053 means that the state can no longer implement a planned increase in ferry fees. Of course, the alternative (at this point) is cancelling ferry runs.

The reaction of the local representatives of one of the hardest hit communities was instructive:

Yet the first people to squawk about the route cuts and fare hikes were a couple of no-tax Republicans, from Whidbey Island, state Reps. Barbara Bailey and Norma Smith. They pronounced the cuts unfair and "devastating."

What is odd about this case is that there really is a disconnect with reality here. Could we easily imagine telling a private business that it was no longer permitted to raise fares to meet expenses? Or at least consider a business that we wanted to keep around. Now, there is some government subsidy here (clearly to make sure that there is reliable service) – this is not normally considered to be an issue given that transportation networks make commerce possible (imagine not having roads or only privately owned roads). But here the people of the state have decided to cut both the government subsidy (via a previous initiative) and the ability to charge users market rates (via the current initiative).

At some point the result looks awful silly . . .

Toys for Tots

A good Christmas can do a lot to take the edge off of a bad year both for children and their parents (and a lot of families are having a bad year). It's not too late to pick up a few toys, drop them by the fire station and make some people feel good about themselves during what can be one of the toughest times of the year.

If you're new to the Toys-for-Tots concept, here are the rules I normally use when shopping:

The gifts should be nice enough to sit alone under a tree. The child who gets nothing else should still feel that he or she had a special Christmas. A large stuffed animal, a big metal truck, a large can of Legos with enough pieces to keep up with an active imagination. You can get any of these for around twenty or twenty-five bucks at Target;

Shop smart. The better the deals the more toys can go in your cart;

No batteries. (I'm a strong believer in kid power);

Speaking of kid power, it's impossible to be sedentary while playing with a basketball;

No toys that need lots of accessories;

For games, you're generally better off going with a classic;

No movie or TV show tie-ins. (This one's kind of a personal quirk and I will make some exceptions like Sesame Street);

Look for something durable. These will have to last;

For smaller children, you really can't beat Fisher Price and PlaySkool. Both companies have mastered the art of coming up with cleverly designed toys that children love and that will stand up to generations of energetic and creative play;

'Confidence' and 'Rationality'

This post by Andrew Gelman suggests replacing "confidence interval" with "uncertainty interval" based in part on the "awkwardness of explaining that confidence intervals are big in noisy situations where you have less confidence, and confidence intervals are small when you have more confidence."

At the risk of putting words into Dr. Gelman's mouth, his concern is partly about the confusion that often comes from assigning common words specific technical meanings that are subtly different than their common usage. 'Confidence' here doesn't quite mean what people think it means.

One way of addressing that concern is finding new terms that don't have the same potential for confusion. Another is finding better ways of explaining the distinction. But the very fact that this is a concern illustrates an important difference between statisticians and economists.

Both statisticians and economists take common words and assign them specialized meanings. Of course, this is a reasonable, even necessary, process. As thinking in a field becomes more precise, language has to follow suit, which is why you can find a similar process in many other disciplines, but the difference in attitudes toward refined words seems particularly marked in these two.

Based on anecdotal but extensive evidence, statisticians (and I'm definitely guilty of this) constantly, almost compulsively, stop to point out that what we said isn't what you think we said. This is especially true for 'significance,' which often comes with a brief (and unwelcome) lecture on p-value and types of error. This is part of the culture of statistics. We are taught early and repeatedly that the distinctions we are making are important and need to be spelled out explicitly.

Compare this to the way economists (particularly a freshwater economists) tend to use terms like 'rational.' When economists say an actor is rational, they mean that this actor's behavior can be modeled using a simple but highly restrictive set of assumptions. Many behaviors that qualify as rational in the common sense of the term fail to meet these assumptions while more than a few behaviors that do qualify would strike most people as irrational.

But unlike statisticians, economists generally don't feel compelled to spell out these distinctions. You will often see economists using phrases like "Are people rational?" These phrases are occasionally followed by 'in the economics sense,' but they are seldom accompanied by an explanation of just how narrow this sense is.

When an economist says "people are rational" or (Steven Levitt's preferred variation) "people respond to incentives," most listeners tend to take away the impression that they mean "people act in ways that are generally considered rational" or "incentives can change the way people behave." These latter statements are completely reasonable. Most of us would agree with them. They are not, however, what the economist meant.

Wall Street Bonuses and Motivation

Felix Salmon links to a Washington Post article about large “wall street” bonuses:

Fortunately, there were many happy students - and the happiest were by no means the best paid. The most important factor behind job satisfaction was how supervisors handled performance appraisals. Bosses who took the time to give real feedback had happy employees. Those who blew it off had resentful and confused workers.

"Given that junior employees were spending 90 hours per week at work," one student wrote, "we all wanted to be recognized for our efforts."

For many executives, the myth that a big bonus is enough to ensure motivated employees persists. But at least for this next generation of business leaders, it's simply not true. When the public is already infuriated by outsize bonuses for chief executives, clinging to this model is a bad idea. Management matters. Good management pays off. Bad management - including ignoring management altogether - will cost us.

I think that this is an insightful point. It can be taken too far (high levels of compensation do make up for a lot of frustrating moments) but I think that the idea of "fairness" and "predictability" are key items. It's worth a lot to know that you will make $80K this year. Replacing that with a 50% chance of $40K and a 50% chance of $200K is not the same (even if the expected value is higher). Now, if you remove robust feedback and clear expectations than it is only reasonable that workers will not feel like they can predict what the outcome of their year end review. That will be highly demoralizing (and take even higher levels of compensation to correct for).

This principle actually goes back to Adam Smith (if not before). He (paraphrasing the original passage) pointed out that, for a worker paid by the piece, that you not only have to compensate the worker for all of the time spent between jobs but also for the anxiety that the worker suffers.

Is it really efficient to import this type of model to areas like education?

NIH Merger

From DrugMonkey:

Instead it makes it look very much as if NIAAA is being subsumed into NIDA simply to make statutory way for the creation of this new translational medicine Center.

And that is a whoooole ‘nother ballgame. Because the discussion now should be “Is NIAAA worth losing in favor of the new Center?”.

To remind my readers, my approval of the NIDA/NIAAA merger is based on the stipulation that merging ICs is a good idea, will lead to efficiencies, etc. And that there is a general will to further scale back the number of ICs. Given this motivation the NIDA/NIAAA merger is about as obvious as can be. If those goals are not a given, then I’m in a very different stance about this current merger.

And I really, really do not like disingenuous bait-and-switch arguments. This is starting to smell like one.

I was never really sold on the merger, myself, as I thought alcohol research was different (in some interesting ways) then research on other recreational drugs. That being said, I wonder if (at some point) it might be worth rethinking the 27 centers from first principles and making sure that they are the one that best serve the goals of public health?

Testing the Jump$tart Test

The Jump$tart Coalition is a leader among organizations seeking to improve the personal financial literacy of students from kindergarten to the university level. In particular, through its biennial survey of high school seniors—the results of which you will hear about shortly—Jump$tart has brought increased attention to the need for greater financial literacy among the youth of our nation. During the Jump$tart survey’s 12-year history, the data gathered have served as the basis for useful measures of what young adults do and don’t understand about finances. Undoubtedly, we will soon learn that there is plenty of work to be done and that our students have much to learn.

Ben S. Bernanke at the Jump$tart Coalition for Personal Financial Literacy and Federal Reserve Board joint news conference, April 9, 2008

April of 2008 was definitely a time of signs and portents. Many economists and a few farsighted journalist like the good people at This American Life were warning us that we were entering dangerous territory. It's fair to assume that Bernanke didn't need the warning -- the man had essentially spent his entire career preparing for this crisis -- but he took time out of what was unquestionably a very busy day to laud the accomplishments of the Jump$tart Coalition and its survey.

It's easy to understand why Chairman Bernanke was concerned about financial literacy. With the complex, unstable economy, the shift away from traditional pensions and the constant flood of new financial products, financial literacy might be more important now than it has been for decades. You could even make the case for financial illiteracy being a major cause of the economic crisis.

But if the supporters of financial literacy need a good measure of how well we're doing, they'll need to find a better instrument than the Jump$tart survey.

The 'test' part of the survey consists of thirty-one questions. That's not very long but that many questions should be sufficient for a tightly focused, well-structured test. Unfortunately the focus of the Jump$tart survey is ridiculously broad, ranging from investments to retirement to credit cards to debt counseling to auto insurance to macroeconomics to really questionable career advice.

Even within the categories the questions have a random, pulled-from-a-hat quality with no apparent effort to prioritize. There are multiple references to credit histories but no mention of credit scores. None of the few questions on credit cards mention teasers or other cases where rates can change on a credit card. There are no questions that refer to charts or tables though the ability to read both is an essential part of financial literacy.

On the individual question level the situation is no better. Most of the questions are either badly written, trivial/irrelevant, open to interpretation, guessable or factually challenged. The test resembles nothing so much as the homework paper a student teacher might turn in when asked to come up with 31 questions on financial literacy.

If you compare this test to something like the SAT where every question has been repeatedly proofed, tested and rewritten, it becomes obvious how sloppy the writing is here, complete with rookie errors like using the wrong person in a question like this:

24. If you went to college and earned a four-year degree, how much more money could you expect to earn than if you only had a high school diploma?
21.9 a.) About 10 times as much.
8.6 b.) No more; I would make about the same either way.
22.0 c.) A little more; about 20% more.
47.6 d.) A lot more; about 70% more. *

[note: Numbers to the Left of Answers are Proportion Giving Response. The asterisk indicates the correct answer.]

What's the problem with using the second person here? This is one of those statements that's true for a population at large but may not be true for most subgroups of the population. The value of a college degree varies greatly based on proposed career plans. For an architect or database analyst, a ten fold increase would probably be conservative; for a truck driver or someone who plans to work in a family restaurant, a college degree may provide nothing but personal growth opportunities and bragging rights.

Another rookie mistake is the high number of guessable questions, questions where students who know nothing about the information of interest have a good chance of guessing the right answer.

18. Don and Bill work together in the finance department of the same company and earn the same pay. Bill spends his free time taking work-related classes to improve his computer skills; while Don spends his free time socializing with friends and working out at a fitness center. After five years, what is likely to be true?
11.5 a.) Don will make more because he is more social.
9.8 b.) Don will make more because Bill is likely to be laid off.
67.9 c.) Bill will make more money because he is more valuable to his company.*
10.8 d.) Don and Bill will continue to make the same money.

By the time they reach high school, students have long since learned the simplistic moral vision of tests and textbooks. When in doubt, pick the answer that shows hard work and self-discipline pay off. Questions like this may be better measures of students' cynicism than of their financial literacy, particularly given the suspect answer.

As Frances Woolley observes, it is "not at all obvious to me that (c) is the right answer." In most companies, the management track tends to pay better and move faster than the technical track, making (a) a reasonable choice and, in a age of off-shoring, the employee who just brings computer skills to the job is particularly vulnerable to replacement, making (b) a possible choice. In other words, you could argue that the 'correct' choice is neither the best nor the second best answer.

In order to provide useful data with tests and surveys, you have to make sure that the response to each question tells you what it's supposed to and that those questions adequately cover the areas of interest. The Jump$tart survey completely fails under both criteria.

Temporary Workers

The recent rise in temporary workers is appears to be higher than in previous economic downturns:

This year, 26.2 percent of all jobs added by private sector employers were temporary positions. In the comparable period after the recession of the early 1990s, only 10.9 percent of the private sector jobs added were temporary, and after the downturn earlier this decade, just 7.1 percent were temporary.

Temporary employees still make up a small fraction of total employees, but that segment has been rising steeply over the past year. “It hints at a structural change,” said Allen L. Sinai, chief global economist at the consulting firm Decision Economics. Temp workers “are becoming an ever more important part of what is going on,” he said.

I think that this trend has a couple of features that are worth thinking about. One, it tends to mean that workers will have less institutional knowledge than before. I suppose that there are some employment circumstances where basic skills transfer but one assumes that most workplaces benefit from knowledge of the corporate culture, product knowledge, and so forth.

Second, I think that this trend continues to make the link between employment and benefits health insurance less sustainable. It is unclear if the end game is a government based system, but it sure makes the complexity of constant insurance coverage (without an employer) look like a difficult task.

I am not really sure what the best outcome looks like but I do think that this trend, if it should continue, will bring as many challenges as benefits.