The Ever Wise Boonton

Auto Bailout Alternative

2008-11-14T10:07:00.002-05:00

I've been leaning towards supporting an auto bailout but with a lot of reluctance. We've lived for decades with major airlines in bankruptcy and the economy can function normally. The bailout drug is very seductive once you start taking hits off of it. Detroit also needs a falling out. Bailout or not will not return the Big Three to their old glory nor will it return the old auto towns to what they were.

On the other hand these are not normal times. Credit is frozen and while the economy is on the edge of collapsing. I'm not sure the people who would normally pick up the pieces are able to at this moment. Additionally, since we are guaranteeing a lot of debt indirectly by asorbing AIG's 'insurance' on various corporate bonds, maybe this might be best way to avoid paying a lot more on the other end of the equation.

On the other, other hand I don't trust the government here. They don't have the incentive to force serious change on the Big Three, especially when that change is going to need to include serious union concessions, plant closings and a lot of other things the political system doesn't do very well.

Perhaps the best idea I've heard then is a concentrated effort to pick up the pieces. Namely the people and communities harmed by a collapse of the automakers. Target unemployed workers with additional unemployment insurance, grants for education and business starting, relocation grants for them to move to growing communities and assist towns devasted by plant closings. In the long run this is probably a more efficient bailout because even if the corporations survive, they are probably going to lay off thousands of workers anyway.

So Why is the Media Biased for McCain!

2008-11-03T21:13:00.000-05:00

Yes you heard me. Perhaps you’ve heard about the Project for Excellence in Journalism's report on positive versus negative stories. McCain has 57% negative versus 14% positive. Obama enjoys 36% positive, 29% negative and 35% neutral.

Well right now (about 9 PM EST 11/3/8) Intrade contracts for a McCain win are trading at $10.10 and an Obama win are at $91.20. I’ll go on the record now that Obama’s going to win because that’s where the money is. So why should the media be carrying positive stories on McCain?

This is probably the most intensely covered campaign ever. After nearly two years of nonstop campaigning, record numbers of convention and debate viewers and the maturation of blogs (the news cycle is now driven by blogs with the mainstream media summarizing what you missed by not watching your Google Reader) we have finally hit an end point. Let’s ask why people bother to consume media coverage of the campaigns.

One answer is to learn about the issues and where the candidates stand on them. Yes I hear the laughing too but we got to give this due diligence. If you watch media coverage you’ve probably noticed that very little is about learning about where the candidates stand. On most issues, you don’t really need to know where candidates stand…quick name the pro-choice candidate here, the pro-life one? Don’t know? Have you been in a coma since 1980?

The real answer is that we consume media coverage because we want to know whose going to win. We consume CNN and FOX the way odds makers consume the Betting News. Few of us actually bet on the election (although I wish I had some spare cash to buy Obama contracts from Intrade when they were selling cheap a few months ago) but most of us act as if we are. If, though, that is what we are demanding from the media then what has the media been giving us?

The media’s been bending over backwards to give McCain the benefit of the doubt. Why does every newscast feature paths for McCain to win? To be fair? How many times have you heard the major newscasts present a way for Libertarian candidate Bob Barr to win? The anecdote that sums this up perfectly, in my opinion, was the final debate where CNN’s analysts all declared McCain either the winner or ‘much improved’ only to immediately backtrack when the first polls found that most people thought he lost the debate (again).

So if the media is liberal and leans towards Obama, (Fox News excepted of course) what’s up with only 57% negative stories for McCain while Obama’s stories are more or less split evenly? McCain should be getting 90% negative stories. He is losing the election big time. If you’re using the media to bet on the election they are misleading you with this pathetic ‘fairness’. The media’s primary bias, though, is for money and a close race keeps more eyes on the TV than one that’s already done. So the media will do the best it can to pretend there’s still a cliffhanger here but there isn’t.

That’s it for tonight. We will see tomorrow if I’m made a fool but an insane upset. Go vote everyone!

Greg Mankiw's Blog: My Personal Work Incentives

2008-10-29T08:42:00.001-04:00

Greg Mankiw's Blog: My Personal Work Incentives

Another thought on incentives. Imagine a hypothetical world where everyone's tax rates were 0% except for one unlucky person who gets hit by the 100% rate. Using Mankiw's analysis, this world would be a much more horrible place than it is now or would be under either the Obama or McCain plans.

But it would be just the opposite. 99.9999% of the population would enjoy the massive $28 incentive for earning an extra $1. The one unlucky guy could even be well compensated if just a portion of the population were willing to pitch him a buck for drawing the short stick in the tax lottery.

Which leads us to a flaw in his analysis here. He focuses only on the worse case scenario rather than examining the entire population. For example, for most people the estate tax is 0% because their estates will not be more than the exemption. When confronting the issue of whether to push a bit harder to make that extra $1 they don't care about Warren Buffet's incentives, they care about their own.

To really measure the incentive impact of the different tax plans one has to divide the population into groups and calculate an incentive rate for each one. Computationally challenging but not impossible and it provides a better picture than simply looking at the worse case.

UPDATE: Greg Mankiw has covered this before here. However the calculation does not seem to take population into account. In the above hypothetical the average tax rate is 50% (100% + 0% = 100% /2 = 50%) but that's a very different economy than one where half the population is paying 0% and the other half is paying 100%.

Ceteris Paribus Is Now Always Your Friend

2008-10-28T11:40:00.001-04:00

Over on Pseudo-Polymath I was having a discussion over whether or not Obama is a socialist (or, ‘more socialist’ than McCain). I made the point that McCain’s health care plan is estimated to cost $2T while Obama’s is $1T.

McCain’s health plan is $0 you know. What sort of plans of his is he going to be able to push though a Democratic locked Congress?

Here we meet the old friend of economists, ceteris paribus or “all else being equal”. There are real relationships between variables in our world. If you raise the price of something, people will buy less of it and vice versa. But lots of stuff is always happening. You may raise the price of something and end up with more sales because people have suddenly decided it is popular, or because something else is sold out and this is the next best thing or any one of an uncountable number of possible scenarios.

So we usually say, without actually saying it, that if everything else stays the same then something will happen if a certain other thing happens. Raise the price and you’ll get fewer sales. If the price of milk skyrockets, coffee demand will probably fall (most of us don’t drink it black) and you can probably come up with a million other examples.

In this debate the response is a bit unfair. Of course neither candidate’s plan will ever be enacted as currently written. If McCain, through some odd chance, wins the election he will face a very angry and very Democratic Congress and even if he is serious about pushing his healthcare plan, it almost certainly would end up dead on arrival or drastically changed in its final form. But if we are going to ask who is ‘more socialist’ we should try to hold everything else constant. What is Obama’s plan, what is McCain’s plan and let’s try to measure ‘how socialist’ they are. If we are going to try to predict what type of policies will actually be passed 1, 2, or 3 years from now we are going to have to play a lot of speculative games. McCain, for example, might agree to a ‘very socialist’ health plan in exchange for Congress not yanking the funding for an extended Iraq occupation. A President Obama might have to ditch healthcare if the financial collapse makes gov’t borrowing impossible. (Don’t get me wrong, I think this whole socialism debate is nonsense. In less than a month we just decided to spend almost a trillion dollars to buy up banks, bad debt and bail out huge companies….the ‘socialism’ argument at this point is a bit like the arguments over Star Trek versus Star Wars...except the people who get impassioned about that are typically more reality grounded).

But Ceteris Paribus isn’t always our friend. Over on Greg Mankiw’s blog, he has a fascinating post comparing work incentives under Obama versus McCain’s tax plans.

Basically he looks at a no-tax world. Assume you work today to feed yourself and your family and provide a standard of living that you find acceptable. You would take on extra work (an hour of overtime, a side job, etc.) primarily to benefit your kids by being able to leave it to them. If you earn $1 extra today, he estimates that it would benefit his kids by $28. Why? No taxes plus compound interest.

Under McCain’s plan the benefit is $4.81 and Obama’s it is $1.85. This is, of course, due to taxes. Some of this, though, is a stretch. For example, the estate tax would only be relevant if you’re estate was going to be larger than the relatively generous exempt amount. This assumes you do not shelter your earnings either as unrealized capital gains or inside a 401K/IRA but the general point is valid. You do suffer a lower incentive with Obama’s plan than with McCain’s and that is a real cost.

But what is even more fascinating is the ‘no tax’ case where the incentive is a whopping $28 (nearly 6 times as much as with McCain’s supposedly ‘market friendly’ plan). Why not simply propose no taxes?

Here is where Ceteris Paribus isn’t so much of a helpful friend. We during the ‘good years’ of the Bush administration we ran up over a trillion dollars of debt. In the blink of an eye, at the last moments of the Bush years, we just added another $1-3 trillion (depending on how you count the bailout combined with various ‘guarantees’ by the Federal Reserve and Treasury Dept).

There are two sides to the incentive to earn that extra $1. The first, of course, is the relatively easily measured tax implications of earning that extra $1. The arithmetic might get a bit complicated but it’s basically simple stuff. The second, though, is exactly how easy is it to earn that extra $1? Is spending 3 weeks looking for work as good as hopping on Craig’s list and discovering the local store is willing to pay you to spend a night helping them do their year end inventory? Certainly not and that has nothing to do with tax rates.

The question then is assuming we adopt a policy of lowering tax rates, what will that do to the economy over the long run after we have been aggressively adding to our debt and spending? If you answer is ‘everything will be great’ you are either totally deluded or you have discovered the ‘free lunch’ (hike government spending, drop all tax rates to zero and everyone will be happy). The non-existence of the free lunch is one of the few truths economics has that is non-debatable.

Mankiw, though, creates an artificial free lunch by the cleaver deployment of ceteris paribus. Because ‘all else is held equal’ the economy says nothing as tax rates are lowered as the government absorbs trillions in debt. All we are left with is asking ourselves do we prefer to have more incentive or less incentive…if only life were that simple.

Frost, Intellectual Bankruptcy & Baby Bonds

2007-10-14T12:33:00.000-04:00

Back again, I’ve been trying to keep my promise but as someone once said, the spirit is willing but the flesh is weak. Unfortunately it isn’t flesh that’s keeping me away but a host of other distractions which I’ve allowed to disrupt my blogging. This is not good, though, because I see my traffic has been literally exploding by several hundred percent in the last few days. Soon I will break into the double digits of visitors per day, at that point you’ll be happy you were reading me in the early days.

For a while I’ve been arguing that the right wing in the US is intellectually bankrupt. By that I mean a while ago (I’m going to say around the first Bush administration) they ran out of ideas. Not so much ran out as in using them all up but as in ran them down. Cheap tricks, character assassination, ‘spin’ replaced thinking as their defining characteristic. This is a shame because ever since the 1970’s the Conservative movement saw itself as an intellectual movement that got the ideas right even if they lost elections.

Of course all intellectual movements are limited in their access to truth and need to be taken with good humor and a healthy grain of salt. Getting access to power, though, is rarely good for an intellectual movement. Needless to say, that doesn’t mean that out of power ideas are best. A lot of ideas are out of power simply because they are stupid and don’t work.

Paul Krugman has a good piece on Graeme Frost. He is a 12-year old boy who suffered brain injuries after a car accident. He was selected to give the response to Bush’s weekly radio address two weeks ago. Frost received insurance through Maryland’s SCHIP program because his parents could not afford it. Soon afterwards the right went after him (technically after his parents) accusing them of not needing a government program to insure their kids. Many of the initial rumors, though, turned out to be false:

Soon after the radio address, right-wing bloggers began insisting that the Frosts must be affluent because Graeme and his sister attend private schools (they’re on scholarship), because they have a house in a neighborhood where some houses are now expensive (the Frosts bought their house for $55,000 in 1990 when the neighborhood was rundown and considered dangerous) and because Mr. Frost owns a business (it was dissolved in 1999).

What’s interesting about this story is that this is exactly what government help should be. It sounds like the Frosts are your typical Americans trying to always improve their lot and sometimes having setbacks (losing a business) and sometimes getting it right (getting a house cheap that is now worth a lot more).

The original New Deal was similar in that it tried to address the concerns of ‘normal Americans’ with typical values. Take Social Security, for instance. You work hard and it provides you with something when you’re so old that you may not be able to work again. Take unemployment insurance, you pay while your working and collect should you get laid off. Neither program was designed or sold as tool for counter-cultural values. In fact, they were tools to make it easier to conform with what are normal values for most people.

Likewise many of the best liberal programs like the Earned Income Tax Credit work exactly like this. They reward positive values by limited help. Recently some on the right have gone ballistic because Hillary Clinton proposed giving every child born a $5,000 endowment.

Leaving aside the cost issue (which I suspect is not all that major. At $10K per year for 12 years a child already costs $120K or so to educate so a $5K endowment is actually minor in the big scheme of things), the idea is actually very good. It helps give everyone an equal opportunity but does not demand equal results. Some may simply cash in on their $5,000 at 18 and throw a huge party. Others, though, will do creative and productive things with it. Many will be unsurprising. They will pay for college, buy a car or maybe just roll it into retirement savings. What’s interesting is the surprising decisions many will probably take. They will start businesses, perhaps travel and explore, maybe religious ones will even found their own churches. The nice thing is that this will be their decision and their opportunity. I suspect many will make a lot of it.

Reaching for a pillow; Compassion and Loss

2007-09-30T09:58:00.000-04:00

Sorry I haven't kept my promise to post more often. Work and life always gets in the way but that is no real excuse since I seem to waste so much time doing other things.

One week and one day ago, Saturday morning, I was getting ready to go with my father-in-law on his truck (he has a garbage business). We received a call from Care One, a Morristown NJ nursing home/rehabilitation center. His wife was having trouble breathing and they were taking her to Morristown Memorial Hospital for an evaluation. A short while later he received a call from the emergency room. He knew where the doctor was going and couldn't listen to it. He handed me the phone. She had had a heart attack and died.

Patricia Delli Santi was a good friend for over ten years. Weight, diabetes and other health problems had taken their toll on her and in the end death won out as it always does over our mortal bodies. For the last, I don't even know, four months we had visited her almost every day as she slowly recovered from a previous heart attack and verbally sparred with her back and forth over all the problems, conflicts and other drama going on in the house. For decades nearly everyone came to her house and had coffee with her late into the night as they mulled over their divorces, affairs, fights, even indictments. More mayhem and chaos passed over her kitchen table than any episode of Jerry Springer. After spending a week thinking about this it seems so ironic now that all those supposedly important problems have passed into memories and history. What was important all along was the coffee and conversation.

There is nothing quite like the death of someone close. The rush of adrenaline as a funeral is quickly planned (we were literally picking out caskets before noon) and relatives are notified. The week was like running a marathon as the whole family had to dress, eat and attend the viewing and finally the funeral. At the same time there is so much that is normal still happens. People make jokes, there's small talk and always planning for the future.

Now that some time has gone by it is clear that we are all carrying around an emptiness. Feuds that took up so much of our energy before are now either on hold or have ended in a cease fire. What is ironic is that for so many months she wasn't even with us at home. Yet the house has changed from her loss. I have no insights to offer other than to say one has to always keep mortality in mind. This is something you all will go through at some point so we all must be as strong as we can and help others make it through.

The title of this entry comes from what Brad Warner wrote in his latest book:

One Zen master walks up to another and asks, "What does the Bodhisattva of Great Compassion do by using his limitlessly abundant hands and eyes?"..."He is like a person in the night reaching back with a hand to grope for a pillow."...It's not quite as nutty as it sounds. When you reach back for a pillow in the night, the action is totally unconscious. Someone is suffering from a stiff neck, and someone does something spontaneously to relieve that suffering. Forget about the way we usually conceive of both of these "someones" as being the same person. Just look at the action itself. It's totally spontaneous. There is no thinking involved. Something needs doing, and it gets done. When it's finished, no one even remembers it. There are no medals given out, no pats on the back from the master, no ticker-tape parades. In fact, there's no evidence it ever even happened. All truly compassionate action works exactly like this.

In retrospect I understand Patty's compassion for others. I see how the endless hours of conversation were not just gossip but was sincere compassion for all those people and their selfish problems. In the end we sit with a shrug and say "ten years ago I got a divorce", "I lost all my money" or "we were having some problems then" as if we were talking about a TV show. The most dramatic 'crises' we think we are experiencing are nothing in the big scheme of things. But those little things we didn't even notice at the time now loom so much larger and their importance is now so clear. I'm not even sure Patty would have understood what I just wrote about her. No doubt she would have told me she was just killing time and socializing with her family and friends. There were many times when she took direct action to help. Sought out people, found money and solutions for them. While important I don't think those times really made up the sum of her life. Her life was so many little acts while letting others take the 'center stage'.

All I can do now is sigh. She probably owed us a few more years but we will have to forgive that unpaid debt. She sometimes said all she wanted was to see everyone happy and getting along with each other. How ironic that her home often had so many people at war with each other. Perhaps, though, she was just unconsciously doing what needed to be done.

Being a Pin in the Bubble Factory

2007-09-09T23:29:00.000-04:00

Many of you have probably been asking yourself where have I been? Actually, I doubt that because I doubt many of you are even here. At best a few people came across my blog posts from back in January of 2005... So where have I been since then?

Numerous things in my personal life but mostly a random post about creationism on Andrew Sullivan's blog (www.AndrewSullivan.com) lead me to Joe Carter's blog (www.EvangelicalOutpost.com). Joe is not at Sullivan's level. He is quite an amateur but that is what blogging is supposed to be about. No one blog will contain all wisdom, the average of all of them, though, will contain quite a bit. It's the wisdom of crowds, which I'm sure you have all heard about in one form or another. If you haven't, here's the short story from economics. One time there was this fair which included a contest to guess a pig's weight. An economist didn't much care about the winner but instead cared about all the guesses. He took the entries and averaged them all together and discovered that the average of all the guesses was much closer than the winning guess. In fact, it was almost amazingly close to the true value. So I keep maybe thirty or forty news feeds going in my Google Reader.

As the comment writers on Joe's blog know quite well, I've spent much of my free time there inflicting much pain on their poor souls. While many of them might have wished I kept to my own field here (where they wouldn't read me since no one does here...just about), I think the crossing sides is useful to both of us. A blog is kind of like a whale. It cruises the ocean and tourists and documentary filmmakers love to watch it. The whale, though, is surrounded by a little city of various parasites, hangers on, helpers and so forth. A blog that is updated often develops its own little city around it of comments and hopefully fellow blogs that reference it.

Like any city, what usually makes it fresh and exciting is its diversity. Sure sometimes you don't want diversity in a city. Visiting the Amish country, for example, would be missing something if right next to bearded farmers there were hip-hop kids, techno-geeks, and Republicans (then again I've never been there, I wouldn't be surprised if those types were right there in 'Amish Country'). Just like in any city you get community types that try to preserve the culture, flavor, style of the 'authentic city' and you get disrupters. You need both. A disrupter can be a developer who wants to tear down those 'historic' buildings to make condos or it can be someone challenging an unjust prejudice. The community builder can be the noble activist seeking to stop that mega-highway from tearing the neighborhood apart or it could be the less noble activist trying to keep out 'undesirables'.

Blogs need their communities and it's good to be part of them. I know here I'm speaking to more people than I would if I just addressed blog owners. After all, there's usually one blog author but maybe a dozen regulars who comment and perhaps dozens more who chime in every now and then.

If you have a monochrome community things get stale quickly. As much as one should value traditions and history you wouldn't want to live inside a 'historic recreation' all the time. The old historic building that is so charming is so charming because all the other buildings are new. So like everything else in life you need a mix of disruption and conservation, yin and yang if you will.

So for quite some time now I've given a lot of effort playing the role of devil's advocate over on Joe's blog. For that I'm quite thankful. Even though I disagree with Joe on just about everything, his blog is a wonderful place where all types of issues get discussed and explored. While I would happily change every part of it, I also wouldn't change a thing about it. (BTW, Joe had a post once on how a rational person cannot embrace such contradictions....) If my role as the disrupter has helped some over there be a little bit less full of themselves, a little bit more willing to explore their positions a bit more deeply then my time has been well spent. If not, at least I've spent some good time practicing my writing.

But balance is important. While I will continue to comment all over the place on other people's blogs, I should work on my own home rather than being forever the traveling tramp. So I'm going to make an effort to post here more often. At least once a week although I'd like to post once a day. So hopefully some of you are still reading this and some will come back and some new faces will show up. So here we go...

2005-01-17T13:47:00.000-05:00

One of the common arguments against Social Security is the rate of return. Basically it boils down to “why should I get X% on the money I pay in Social Security Taxes when I can get X+% just putting it in the bank!”

I would like to first explore what the actual rate of return is on Social Security and what it means to have been able to earn something in the past. Social Security for many people will have a positive rate of return and for those who need it most the return will be quite good. Kevin Lansing had an interesting article published by the Federal Reserve Bank of San Francisco back in 1999. http://www.frbsf.org/images/pdfcharts/el99-34.pdf

http://www.frbsf.org/images/pdfcharts/el99-34.pdf shows the real rates of return he found depending on birthdates. In general you are probably look at a real return around 1-2%. Keep in mind that a real rate of return is the rate you actually see minus inflation. This is what the author grudgingly concludes:

The authors find that, under current OASI rules, today's lowest paid workers (those in the bottom 20% of the income distribution based on lifetime earnings) can expect internal rates of return between 4% and 5% after adjusting for inflation (Panel A). Today's middle income workers can expect real rates of return between 1% and 2%. Today's highest paid workers can expect real rates of return below 1% and may even face negative rates of return if born after 1975.

If you explore deeper you’ll note that blacks and whites have nearly the same rate of return, however women outpace men quite a bit. This is caused by Social Security’s nature. Your rate of return is going to be higher if you live longer (which women do) or if you can collect from someone else’s contributions (which many women do as widows).

Private savings, which is both 401K’s and other types of savings in bank accounts, home ownership, even comic book collections has a different return structure. If you are higher income then you should be able to get higher than average returns because a larger account should have smaller transaction fees as a portion of investment. In theory a well educated low income person could find savings options at financial institutions that accept small deposits and do not charge high fees and also find mutual funds and index funds with low fees. However, this requires a great deal of study and I believe on average the typical low income saver is going to end up seeing a larger share of his return eaten up in fees than a high income saver.

Also, except in the unusual case where a person buys annuities, returns are lump sums. In other words, if you and your friend have the same 401K balance & return at 65 but you live 20 years longer than he does you get nothing extra except having to stretch the balance for that much longer.

A pattern that emerges is that Social Security provides a different type of return than private savings accounts. It provides a counter balance to what one expects from private savings. For the low income it offers much lower fees while private savings demands higher fees. For the long lived it promises larger returns while private accounts simply require one to stretch things out. While we are on that subject, let’s note that Social Securities benefit to the long lived is automatic. With a lump sum private account a person has to estimate how long they will live and spend accordingly. Since they cannot be certain about the future they will feel the need to keep some in reserve. If they still under-estimate they may end up with a serious problem, running out of money at the end of their retirement rather than the beginning. That would be at the point where they are less likely to be fit enough to take corrective measures like returning to the workforce.

Returns are Supposed to be Equal (with risk considered)

Let’s get to the meat of what returns are. Returns are paid to you by someone else. There is no magic ‘interest fairy’ who rewards you for putting $100 aside. Someone pays you for doing that and the reason they pay you is that they are able to take your $100 and do something with it to not only pay you back your $100 and your interest but also have some profit for themselves.

Imagine the economy that has no money and produces only cookies. Say a cookie baker is hungry. If you lend him ten cookies he will eat them and have the energy to bake 20 cookies at the end of the day. For this he agrees to pay you five cookies in interest. So the economy that starts out with ten cookies in the morning ends the day with 20 cookies…you have 15 (ten cookies plus five interest) and the baker has five of his own. Everyone wins, you are richer and so is the baker. Return wise, economic growth was 100% (ten cookies to twenty cookies) and your return was 50% (ten to fifteen). The balance of the growth was given to the baker.

At some point, total returns are capped at economic growth. A casino generates an average return based on how they set their odds (but they always set the odds so that in the long run they and not you win). Like a casino, however, everyone doesn’t split the loss or gain evenly. Some people win big and others lose big. At the end of the day, if the casino took in net $1M from 1000 people then the average person must have lost $1000. But if one person won $3000 then someone else must have lost more than a simple $1000.

In an economy the returns realized by people is capped by economic growth. If one person is able to get returns larger than the growth of the economy then someone else must be paying for it. This leads to confusion because historical returns for both stocks and bonds make it appear that you can get a better return than economic growth.

The element that is missing is risk. Everything except maybe death and taxes is a risk. All assets carry with them a host of different risks. Cookies can become stale and worthless. Your favorite stock may turn out to have lied about their books like Enron. The gov’t may change the tax laws so you can’t cash in on some really profitable investment without taking a huge tax bite.

Another missing element is realized returns. A stock starts the year at $50 a share and ends it at $100. That’s a 100% return even though the economy only grew at 5%. But what was the realized return? Price quotes for stocks are based on actual sales so we can be sure at the start of the year at least one block of 100 shares was sold for $50 each and at the end at least one block was sold for $100. Someone realized a gain of $5,000. But could the entire economy have pulled off the same trick? No. We know supply and demand will tell us if a huge number of people tried this the price at the beginning of the year would soar. Likewise the price at the end of the year when everyone tries to cash in would be less. The more money that tried to capture this lucky stock the less its paper return would have been.

This doesn’t stop some commentators from saying silly things like “If only people could have taken their social security taxes and brought that stock…they would have had more money in retirement than they would have gotten from social security if they lived to be 190!” What goes for a particular stock also goes for a mutual fund or anything else. If all of Social Security had been ‘invested’ in some mutual fund that yielded 20% returns in the 70’s and 80’s all that would have changed would be that funds real returns.

Realized returns also are the returns that really matter because those returns are what puts food in your mouth. In the example of the stock that went from $50 to $100 in a year, all that tells us that at least one trade happened in the beginning of the year and one at the end. All the people who own the stock during the year will see their ‘balance’ double but that doesn’t become real for them until they actually sell their shares and take the profits.

So in order for private investments to generate realized returns in excess of economic growth to finance retirements other returns have to be less than economic growth…even negative.

This leads me to returns all being equal given risk. There’s a host of different returns at any given time but there’s a trade off with higher returns. They have higher risk. If they didn’t people would sell off their assets and purchase the asset that generated a high return with lower risk. This would increase the price of the asset (thereby decreasing its return) until the return was in line with a low risk-low return asset. If markets work, then returns will fall along a line of increased return to increased risk similar to the CAPM model.

The author concludes that Social Security’s return is inferior:

The "average" U.S. worker faces a rate of return on contributions that is quite low--less than 2% after adjusting for inflation. By comparison, the real yield on a 10-year inflation-indexed Treasury Bond is currently around 3.5%. In addition to being low, rates of return from Social Security must be viewed as risky because they are subject to change from future political actions that will be needed to ensure long-term solvency of the program.

What’s wrong with this? Well Social Security has only political risk and economic risk. Political risk in that the gov’t may change the rules of the game. Economic risk in that the entire economy may not be able to fund benefits in the future.

The 10 year inflation indexed bond has a stated yield of 3.5%. Bonds, however, are no different than stocks. They can increase or decrease in value. The 3.5% yield is only what you earn if you hold it to maturity and the interest doesn’t compound. Every year will have coupon payments that you will hope to invest for at least 3.5% Plus remember transaction fees. While you can purchase bonds directly many times they are sold through brokers and mutual funds. As soon as this happens you incur fees that lower your return. If you do not have enough money to buy a whole bond you have to buy them in a fund which automatically exposes you to fees. For an asset as safe as a 10 year inflation protected T-Bond, we can identify all of Social Securities risk elements:

1. Political risk – That the gov’t may not honor the bond given the horrible state of the overall Federal Budget. That gov’t may ‘change the rules’….it may apply taxes against the interest income of the bond, it may change the rules for capital gains taxes on the bond, and so on.

2. Economic risk – the Economy may collapse leaving the gov’t unable to pay off the bond or its interest.

But the bond also carries two additional risks that social security dodges:

1. Interest rate risk – Interest rates may fall leaving you unable to re-invest your coupon payments at 3.5%.

2. Market risk – The price of this bond goes up and down every day. If you sell the bond before it matures you cannot predict ahead of time how much you’ll receive until you actually do it.
So looking at it objectively it doesn’t appear that the case for Social Security being a raw deal has really been made.

Social Security: Not a Problem

2005-01-16T16:31:00.000-05:00

Hi Everyone, sorry I've been away for so long. I want to get back to ecnomics and I'm especially interest in the Social Security debate. The next few posts will concentrate on Social Security:

Roger Lowenstein has an excellent piece on SS in this sunday's NYT Magazine

http://www.nytimes.com/2005/01/16/magazine/16SOCIAL.html?adxnnl=1&oref=login&adxnnlx=1105908962-VmD18LAtUwPFXLD1jloySQ&pagewanted=all&position=

But is it? After Bush's re-election, I carefully read the 225-page annual report of the Social Security trustees. I also talked to actuaries and economists, inside and outside the agency, who are expert in the peculiar science of long-term Social Security forecasting. The actuarial view is that the system is probably in need of a small adjustment of the sort that Congress has approved in the past. But there is a strong argument, which the agency acknowledges as a possibility, that the system is solvent as is.

The projections:

Politicians and other commentators tend to speak about these long-range trends, or at least about Social Security's finances, with an air of precision. This is almost amusing, since few economists can predict the swings in the federal budget even a year in advance. Joshua Bolten, head of Bush's Office of Management and Budget, said of Social Security last month, ''The one thing I can say for sure is that if left unattended, the system will be unable to make good on its promises.'' But the Social Security Administration itself pretends to no such certainty. Its actuaries (about 40 are on staff) frankly admit that the level of, say, immigration in 2020, or of wages in 2040, is impossible to forecast. ''The only thing we are sure of is that it won't happen precisely as we project,'' says Stephen Goss, the chief actuary at the agency. And the trustees' annual report, which is based on the actuaries' analysis, takes pains to say that it is not making a prediction. It makes a projection -- three different ones, actually -- that amount to informed but very rough guesses. The agency's best guess, labeled its ''intermediate'' case, is that the system will exhaust its reserves in 2042. At that point, as payroll taxes continue to roll in, it would be able to pay just over 70 percent of scheduled benefits. That would leave a substantial deficit, but one that Congress could easily avert if it were to act now when the projected problem is more than a generation away.

So the 'huge liability' amounts to only 30% of benefits. Therefore if nothing is changed 70% of benefits will be paid for by not touching taxes. If current taxes will take care of 70% how exactly is the remaining 30% going to swamp the entire GDP????

Past performance is no indication of future success but:

No one can definitively predict that outcome, either, of course, but David Langer, an independent actuary who made a study of Social Security's previous projections compared with the actual results in 2003, thinks the ''optimistic'' case is its most accurate. Over a recent 10-year span, the trustees' intermediate guesses turned out to be quite pessimistic. Its optimistic guesses were dead on, and its pessimistic case -- sort of a doomsday situation -- was wildly inaccurate.

And, contrary to widespread belief, recent demographic trends have been modestly better (from an actuary's gloomy standpoint) than anticipated. For instance, longevity hasn't increased as much as expected. Partly as a result, since 1997 the agency has pushed back, by 13 years, the date at which it projects its reserves will be exhausted. In other words, as the cries of impending doom started to crescendo, the guardians of the system have grown more optimistic.

Interesting how critics of global warming are so eager to jump on predictions that failed topan out.

BTW, rising wages do push SS more into the black. Contrary to what some critics have said, rising incomes do allow us to 'grow' out of any problems:

Rising wages are also a boon to Social Security's finances. Forecasting wages is difficult, as the trustees' report frankly admits, but it seems undeniable that as society ages, businesses will be harder pressed to find workers, and that should push wages higher. The trustees, however, project that real wages will grow at only 1.1 percent a year -- roughly equal to the level of the last 40 years

This point has been explored by other like Brad DeLong. Basically only the beginning benefit is indexed to wages but after that it is indexed to price. If wages are rising and I retire tomorrow, that will boost my benefit. But if wages continue to rise then the tax revenue coming into the system will increase while my benefits remain constant...adjusted only for inflation.

Putting the cost into perspective:

One way or another, societies with more old people have to devote more resources to them. Right now, benefits amount to 4.3 percent of G.D.P. The trustees' most likely projection assumes that over the next 75 years that figure will rise to 6.6 percent. In the more optimistic case, benefits will rise to 5.2 percent. Given the substantial increase in the elderly population, neither of these figures seems rash or out of proportion. The increased cost would be on a par with that of making Bush's first-term tax cuts permanent, which is projected to be about 2 percent of G.D.P.

LambdaMOO Down

2004-10-19T21:32:00.000-04:00

Before the world of web browsers and instant messengers there were MOO's. A step above simple chat rooms and a step below the 'virtual worlds' of online gaming, MOO's were interactive chat where you maintain a permanent presence in the form of a character. They included not only chat but mailing lists, role playing games (if your old enough, think back to the days of Zork and the Scott Adams Adventures...pure text). Anyway LambdaMOO is the best and until about a week ago it was still around. It is the best because it is the most popular, online societies need population and with 100-200 people logged on at any given time LambdaMOO had it. Being a MOO, you don't access it by using a web browser directly. You use a program called telnet (you probably have it, just select 'run' and type in 'telnet'). Since the interface was pre-web, the medium was never invaded by the commercial spam that plagues Usenet and chat rooms. Word over on YibMOO is that Rog, Lambda's current caretaker, is having DSL trouble at his home and Lambda may be down until the end of the month. This is the longest I ever remember Lambda being down (and Boonton has graced its presence for over 10 years). Hopefully the society will remain undamaged by the outage but it is quite disturbing how difficult it is to get information. Sadly, no one has ever thought to maintain even a simple updated web page to let people know what's going on or who they can contact. If I get more information or you have some, please feel free to post it here in the comments. It will be a shame if the community drifts apart while we wait for the technical bugs to iron themselves out.

2004-10-11T22:18:00.000-04:00

Volokh is guilty of over analyzing an analogy.

Here is the dictionary definition of an analogy:

a. Similarity in some respects between things that
are otherwise dissimilar.

b. A comparison based on such similarity.

Note part a, the things that are subject to an analogy are by definition dissimilar. In fact, the two things can be mostly dissimilar except in the few respects that are being compared. Kerry compares what life is like where organized crime is controlled to what life would be like if terrorism is controlled. In such a world terrorism exists but it is reduced to a "level where it isn't on the rise. It isn't threatening people's lives every day, and fundamentally, it's something that you continue to fight, but it's not threatening the fabric of your life".

Volokh wastes a great deal of space telling us how prostitution & gambling are different from terrorism. For example, those two tend to be victimless crimes or at least crimes where only willing volunteers are victims while I don't think 'victimless terrorism' is possible even in theory. That's nice. He might as well tell us that illegal gambling uses playing cards and dice but terrorism doesn't. Someone whose field is law should not be so bad with fundamental definitions.

Flypaper against terrorists

2004-10-10T22:53:00.000-04:00

Found this interesting comment on LambdaMOO:

FWIW, though, when Bush proposed a `flypaper' approach,
that the terrorists should go to Iraq and blow up stuff
there, was that also an unworthy goal? It feels very
much that you're taking Bush's positions and applying
them to Kerry despite that he didn't say so.

Speaking of flypaper, Thomas Friedman's column had an interesting observation:

Let's start with a simple observation: There have been some 125 suicide bomb attacks against U.S. forces in Iraq in the last 16 months, carried out most likely by Sunni Muslims. We need to think about this. There is some kind of suicide-supply chain working in the Muslim world and in Iraq that is able to draw recruits, connect them with bomb makers and deploy them tactically against U.S. and Iraqi targets on an almost daily basis. What is even more unnerving about these suicide bombers is that, unlike the Hamas crew in Israel, who produce videos of themselves, explain their rationale and say goodbye to families, virtually all the bombers in Iraq have blown themselves up without even telling us their names.

We don't really know how they are chosen, trained, indoctrinated, armed and launched. What we know is that the suicide bombers have killed and maimed hundreds of Iraqis, many of them waiting to join the police or army, and in doing so have done more to block U.S. efforts to reconstruct Iraq than any other factor. To put it bluntly: We are up against an enemy we do not know and cannot see - but who is undermining the whole U.S. mission. In fairness, this sort of network is very hard to crack, especially when it has the support of many Sunnis, but our ignorance about it is part of a broader lack of understanding of changes within Iraqi society.

There is an old argument against social engineering. Hayek pointed out the problem with 'planned economies'. A social institution like the market can be thought of as a giant computer that accepts the input of all its members and averages the information into a simple variable like price. A 'planned economy' is doomed to failure because no official, no matter how smart, can evaluate all the information necessary.... he couldn't even find all the relevant information! There's an older argument between classical liberals and conservatives. You cannot simply go around altering time tested institutions because you don't really know why they are there. You can't be sure of everything they are holding together so radical change is something to be feared.

Bush has embarked on a huge flip flop; nation building in a grand scale while running against tiny nation building projects Clinton undertook in Haiti, Serbia and tried in Somalia. The longer the US stays in Iraq with a weak hand the greater the chance that this thing is going to fall apart.

Or to keep the analogy simple, fly paper is great if you have a finite number of flies. If you have a pile of rotting food, though, the fly paper is just going to mask the real problem.

More 'Incorrect' Statements by Cheney

2004-10-06T08:12:00.000-04:00

Assorted Cheney lies:
1. "Now, in my capacity as vice president, I am the president of Senate, the presiding officer.... The first time I ever met you was when you walked on the stage tonight."

National Prayer Breakfast on 2/1/01. Brad-de Long has the picture.

2. "We busted the A.Q. Khan network. This was a proliferator out of Pakistan that was selling secrets to places like North Korea and Libya."

A. Q. Khan is sitting in comfort, considered a national hero and a friend of the corrupt and brutal dictator of Pakistan, Pervez Musharraf (you might remember Musharraf as one of the global leaders Bush could not name last time he ran for president). In fact, Musharaff officially pardoned Khan! Not only is Khan suffering not at all for endangering you, me, and the entire world, Musharraf has not allowed U.S. intelligence officials or U.N. weapons inspectors to interrogate him. Jonathan Alter

3. Kerry voted for tax increases 98 times

Cheney accused Kerry of voting for taxes 98 times. That's down from the 350 times wrongly claimed by Republicans, but it's still a stretch. Those 98 votes include times when Kerry voted for lower taxes -- but not as low as Republicans wanted. And times when many procedural votes were cast on a single tax increase or package. CNN

As usual any number that gets tossed around in a campaign such as 'Senator X voted for Bad Thing(tm) 91,999 times!' is almost always a distortion.

4. Kerry will increase taxes on the 900,000 small businesses who create 7 out of 10 new jobs.

On one occasion, Cheney said the Kerry-Edwards tax plan would raise taxes on 900,000 small businesses, and he said that was a bad idea because small businesses create 7 out of 10 jobs in America. But the two statements have nothing to do with each other. Those 900,000 small businesses—double the real number that would be affected, according to CNN—don't create 70 percent of the nation's jobs. Chris Suellentrop

Did Cheney Lie about Zarqawi in Iraq?

2004-10-05T23:13:00.001-04:00

I briefly remember some reports about a terrorist camp in Iraq. It turned out to be in the North were Saddam had no control. Brad De Long has picked up on what may be the first correction of the VP debate. Or as someone writes in the comments section:

The claim is (or was) that Zarqawi was briefly in Baghdad for medical treatment. The story was a leg amputation, but as noted, Zarqawi's amputated leg can't grow as fast as Cheney's nose.
Recently the CIA has concluded that there is no conclusive evidence that Zarqawi was ever in Baghdad (I mean until we invaded, he's probably been there since).

UPDATE: Here is the Reuters article on the CIA report that indicated there is no conclusive evidence that he had sanctuary in Iraq during Saddam's rule and if he did there is no evidence it was with Saddam's knowledge.

Cheney & Kerry Debates

2004-10-05T22:32:00.000-04:00

We're about 3/4 of the way thru the the VP debate and I'm calling it a draw. Edwards did a good job of bringing up Bush flip-flop examples. Both did a good job of countering the other's attacks but in my opinion they both ended up looking like 'boring men in suits'. On top of the facts but neither exciting or notable.

The Draft & Casualities in Iraq

2004-10-05T13:39:00.000-04:00

Cafe Hayek has a good piece on why US military deaths have declined so dramatically in the last 20 years versus just about every war that came before it. It comes down to capital versus labor. When capital is cheap it makes sense to throw lots of manpower at a problem. When labor is expensive it makes sense to try to substitute capital to save on labor. This is why, despite great advances in weapons since the end of WWII and Korea, the US lost so many troops in Vietnam. Labor was cheap because the draft threw thousands of young men at their disposal. Nowadays it costs a lot of money to get someone into the armed forces (even before 9/11). Recruiters have to spend thousands in signing bonuses, college tuition and so on. If a million dollar smart bomb can take down a target as well as 250 infantrymen then it makes all the sense in the world to spend the money on the bomb.

Democrats who advocate a return of the draft for social engineering reasons such as 'spreading the burden' of war to everyone's family should keep in mind that this will likely result in greater causalities as military planners find it cheaper to throw troops at the enemy rather than machines. While we are talking about this, look at Thomas Friedman's piece on Bush's fumbling in Iraq. The jist of it is that Rumsfeld botched the post war occupation was due to a desire to run the war with as few people as possible.

What happened? The Bush team got its doctrines mixed up: it applied the Powell Doctrine to the campaign against John Kerry - "overwhelming force" without mercy, based on a strategy of shock and awe at the Republican convention, followed by a propaganda blitz that got its message across in every possible way, including through distortion. If only the Bush team had gone after the remnants of Saddam's army in the Sunni Triangle with the brutal efficiency it has gone after Senator Kerry in the Iowa-Ohio-Michigan triangle. If only the Bush team had spoken to Iraqis and Arabs with as clear a message as it did to the Republican base. No, alas, while the Bush people applied the Powell Doctrine in the Midwest, they applied the Rumsfeld Doctrine in the Middle East. And the Rumsfeld Doctrine is: "Just enough troops to lose." Donald Rumsfeld tried to prove that a small, mobile army was all that was needed to topple Saddam, without realizing that such a limited force could never stabilize Iraq. He never thought it would have to. He thought his Iraqi pals would do it. He was wrong.

Will Undecided Voters Give Kerry the Election?

2004-10-04T20:00:00.000-04:00

http://www.mysterypollster.com/main/2004/10/the_incumbent_r.html has an interesting theory regarding races with an incumbent. Basically undecided voters will break for the challenger about 80%+ of the time. This means that while Bush seems to have a slight edge at the moment he is really behind.

MysteryPollster has some good empirical examples of the 'undecided rule' on his blog. This also passes the common sense test. Why would someone be undecided in an election with an incumbent? Because they know what the incumbent is about and they want something better. That's an opportunity for a challenger and a bad thing for the incumbent.

Meanwhile, http://www.tradesports.com/ is still betting that Bush will still win. This will be an interesting test of the so-called 'prediction markets'. One aspect that I haven't seen explored yet is whether the political parties can game the 'prediction markets' for spin value. The stock market & other established financial markets require too much money to move anything but penny stocks for any serious period of time but how can we know the prediction markets won't be hit by manipulation?

Why Not Let People Buy a Good Credit Score?

2004-09-27T18:21:00.000-04:00

Those who use credit scores the most are usually in the business of loaning money. People who loan out money like to get it back with as little trouble as possible. The two biggest problems they fact are deadbeats who won't pay their bills and those who go for bankruptcy so they don't have to.

Now I oppose the 'bankruptcy reform' that Bush & many other Republicans advocate because I view it as an unjust windfall for the credit card industry. It is common sense that if you make riskier loans you will incur higher defaults. That comes with the game. I also view it as a violation of the implicit contract entered into by debtor and creditor. The creditor (credit card companies) made their loans knowing the debtor could declare bankruptcy.

However, why not form a coalition of creditors and credit ranking agencies and allow people to buy points on their credit reports? The way it could work is that people seeking to improve their credit could make payments to the credit agencies who would raise their scores. The funds raised would be placed into a fund and distributed to creditors who agreed to abide by the new system. The distribution could be weighted by losses experienced by creditors due to bankruptcy. In other words, if Fleet Bank suffered 50% of the credit card losses caused by bankruptcy and Chase Manhatten Bank 25% then Fleet would receive 50% of the payout and Chase only 25%.

The advantages I see:

There would be less financial incentive for banks and financial firms to push for harsher bankruptcy laws.
Credit card companies would have a mechanism to recover a portion of their losses thereby allowing savings to be passed onto those with good credit.
Individuals seeking to improve their credit could do so provided they considered it worth the price. There might have to be some element of fraud protection here. Think a sliding scale where the cost of each point increases dramatically above a certain level.
This would increase saving in the economy since old debts would be (partially) paid off by those seeking to be rewarded with a better credit score.

Spam & Pay Per Click Markets

2004-09-20T23:33:00.000-04:00

So let's take a never ending problem like spam. More than a few ideas are around for attacking spam, including mandatory labeling with bounties for catching offenders (see Alex Tabarrok's post at Marginal Revolution http://www.marginalrevolution.com/marginalrevolution/2004/09/spam_bounty.html. Here's my take:

Why not work with the existing Pay Per Click system that has delievered billions to Overture, Google and other big name portals? Here is how it could work. The big mail clients (Outlook, Yahoo Mail, Google etc.) would filter their mail for spam. However, advertisers could opt to pay a bounty to go through the filter. The user would set a bounty on receiving spam.

For example, at my old job I was hit with up to 300 spams per day. It didn't bother me much at all but when my IT dept. set up a good filter that number dropped to 25 a day. So imagine I set my spam bounty at $0.001 per spam. A spammer, on the other hand, offers to pay $0.002 per spam delivered. The difference would go to the email client (Microsoft, Yahoo, or whoever). If I received 300 spams per day I would earn $3 and the email client would earn $3 while the spammers would pay $6. Of course, if I had more value for a clean inbox I could set a higher price. Some spammers, of course, would be willing to pay a premium to reach users who are not flooded with spam.

Now for this to work the spam filter has to be pretty good but the email client has a good incentive for creating a good filter. After all, every spam that gets through the filter represents lost revenue to both the user and email client.

Here I am

2004-09-08T00:37:00.000-04:00

Here is my first post everyone.