Archive for January 2009

The Tip O'Neal Bill

Well, it appears that Democrats who were angry at the cost of the Iraq war (a feeling to which I was always sympathetic) are attempting to even the score by spending approximately the same amount in a single bill.

Looking at the stimulus bill was kind of an odd experience for me.  Despite everything I preach here about politicians, I must have, somewhere in my deep back brain, under the onslaught of cultish media attention, absorbed some small hope that maybe perhaps Obama was really different.   Then I looked at the stimulus bill.  It is all the same crap that various folks have been trying to peddle unsuccessfully for years, repackaged in a hurry-up emergency form to avoid close scrutiny.  This is politics as usual, but even more so.  Jeez, this easily could have come from Tip O'Neal.  Everywhere you look in the bill, it smells. And Republicans are almost going to have to go along because they have pissed away any credibility they have by doing the exact same thing under the guise of TARP.

By the way, if you are confused about Keysian stimulus, here it is in a nutshell:  The economy is contracting some as people deleverage from over-spending and an asset bubble.  I mean, that's certainly what we are doing in the Coyote den, setting goals for both de-leveraging the business and our household.  But folks are worried, because while this has happened many times, one of those times we had a depression.  So the government does not want you to deleverage.  It wants you to spend and spend.  But it knows you won't, and that it has not yet accumulated enough power to force you to.  So it will borrow and spend for you.  Government stimulus means that when you are trying to save and reduce debt, government is going to run up debt in your name.

By the way, for those wondering how well this works, the last time we tried it was during the aforementioned depression, and the depression lasted another 8-10 years.

Phoenix Building Codes and The Safety of Children

A few posts ago I discussed some of the onerous build code hurdles we had to pass in retrofitting our house to pass a pool inspection.  In short, the code is designed to keep small children from getting out of the house on their own to a pool area.  Dead bolts must be 54" off the ground where they cannot reach them, the doors must have automatic closers (and thereby be difficult for small children to open) and windows cannot open wide enough to allow the kids to pass.  This is, of course, nominally for the safety of kids.

I pointed out one obvious critique of this regulation:  the vast, vast majority of kids do not drown in pools by sneaking out of the house.  They drown in pools when their parents know full well they are outside and fail to supervise them closely.

But I failed to discuss an even more obvious critique.  Can anyone see any possible problem with making it impossible for small children to exit the house?  Perhaps, say, in a fire?   Once I bring my house up to code, because none of the children's wing of the house has any window or door except to the pool area, the state will have made it absolutely impossible for small children to escape in a fire.   Yes, the state has forced me to turn the back of my house into a fire trap for kids.  That is, of course, unless I reverse all the changes 5 seconds after the inspector leaves my property, which of course I would never, ever do because I am a good American who pledged allegiance to the state every shool day of my childhood.

Letter to Schwarzenegger on Unemployment Insurance

A letter I am drafting currently.  If you don't know how unemployment taxes work, see here.

Governor Schwarzenegger:

As a business operating in California as well as twelve other states, I have the ability to compare the regulatory and business climate across states.  And while I could discuss many issues with the state of California regulatory affairs, I will focus on just one in this letter:  administration of the state unemployment insurance program.

All the states have an unemployment insurance program with roughly similar rules.  The fund will pay workers some percentage of their past earnings if they are terminated for reasons other than with cause from their last employer and are actively seeking new employment.  Employers are typically charged an insurance rate as a percentage of wages that is based on past unemployment claims by ex-employees of that company.

Before I provide my observations on the problems in the California system, let me provide some data that helps indicate that California is indeed unique.  Here are our unemployment insurance rates by state  (we have roughly the same business profile in each state, though if anything our business is less seasonal in California so one might expect, all things being equal, that our rates in California would be lower than average)

New Mexico:  0.03%

Texas:  1.06%

Florida:  1.02%

Arizona:  3.30 %

Michigan:  1.5%

Colorado:  0.9%

Wisconsin:  0.25%

Minnesota: 0.40%

California:  6.2% + 1.1% disability adder

You can see that our rates in California are double that of any other state, and more than 6 times our average.  Further, the California rate could actually be higher by our experience, as 6.2% is the cap.  By the way, we did a study a while back as to why our Arizona rates were so high.  It turned out most of the claims were from people who had recently moved from California, and grew up under the California system.

In interacting with the California state unemployment system for a number of years, our company has observed two issues that raise costs:

  1. It is virtually impossible to convince unemployment office workers that an employee was fired for cause.  It is very clear they see their mission as making everyone eligible, and thus even a guilty plea of outright theft has not been enough to have the state unemployment office agree that a firing was "for cause."
  2. The state unemployment office does absolutely nothing to ensure that a worker collecting unemployment is actively seeking work, as is required by legislation.  We run a seasonal business, and our workers have told me the unemployment office tells them that it is perfectly fine to work 6 months and take the other 6 months off on unemployment.  I have had employees vacationing in Mexico for 6 months still collecting unemployment.  When I reported this fact to the state unemployment office and said that these workers obviously could not be actively seeking work in California, I was told by the workers comp. customer service staff that if I made such a claim, and did not succeed in proving it, I was subject to fines and even incarceration for making a false charge.  Of course, I dropped it.

No matter what the text of the legislation says or what you are told by the managers of the system, the front-line employees who make the decisions that drive costs see it as their job to ensure maximum payout to any individual, regardless of whether they are honestly looking for work or not.  I have, just as a test, asked trusted employees to call the unemployment office to ask about benefits.  They were told that they didn't really have to be looking for work, that no one would check, and that all they had to do was call in and say they were looking for work and they would get paid.  Your unemployment office was practically begging them to take as much money as they could.

Government, In One Sentence

"Meanwhile, the city's legal department is looking to see what, if anything, it can do about the First Amendment banner."

Via Radley Balko.  The city told Herb Quintero that he did not have the right to paint a mural on the side of his building, and had to cover it up.  So he did, with a banner containing the text of the First Amendment.  Image from here.

NP_299968_CLIF_MURAL_1

Speaking of building codes, we are about to get some repairs on our pool inspected.  To pass the inspection on our pool, though, we have to spend thousands of dollars inside of our house.  Phoenix building codes require all kinds of crazy rules for home entry doors to the pool area.  For example, they all have to be self-closing and have to have deadbolts 54" off the ground, which I can assure you that no house built normally actually has. No window can open more than 4 inches.  This is a problem for us, because we have a series of French doors opening to the pool area, giving us 9 separate doors we have to modify or replace.  We are lucky we are grandfathered and don't have to put a fence around the pool area as new homes do (our backyard is fenced of course, but regulations require new homes to have a fence around the pool itself).  I know a lot of folks whose first activity in buying a new home is to pay someone to rip out the fence once the home passes inspection.

The rationale is to keep kids from drowning, I guess, but the number of kids who drown by sneaking out through 5 inch window gaps, or even unlocked doors, is vanishingly small  (the number of kids that drown in homes with no small kids is also small).   Kids drown when parents know they are outdoors but fail to supervise them closely.  We have no small kids in the house, but when we did, we supervised them very closely and put them through swim school before they were five.  But politicians, when there is a high-profile drowning, feel they need to "do something."  Since they can't legislate good parenting, they add to the already bloated building code, often sticking in pet requirements of lobbyists representing particular building materials and services.

Well, it turns out there are any number of companies in Phoenix who specialize in getting your home ready for this inspection.  They will come in and install all kinds of temprorary hardware, then come back after the inspection and remove it (filling and patching screw holes and the like).  Talk about dead-weight loss.

This Is Change?

Under Bush:

  • Iraq Invasion:  Hurry, we need this, emergency, rush, no time to argue, trust us
  • Patriot Act and Related Legislation:  Hurry, we need this, emergency, rush, no time to argue, trust us
  • TARP I:  Hurry, we need this, emergency, rush, no time to argue, trust us

Under Obama:

  • TARP II:  Hurry, we need this, emergency, rush, no time to argue, trust us
  • Stimulus bill(s):  Hurry, we need this, emergency, rush, no time to argue, trust us

Change we can believe in.

On a related note, Greg Mankiw looks at this graph in the TED spread:

ted-spread

And says:

[The TED spread's] decline suggests that the TARP is working and is certainly good news

Really?  You get all that from this chart?  I am not an economist, but I would have said the TED spread spiked up and came back down quickly in a very similar manner to any number of fear-induced price spikes, and had already fallen a fair ways before TARP was approved and had fallen a lot before the first dollar flowed (it is hard to read the chart, but by October 24 it had fallen to around 2.5).  This strikes me as pretty post hoc ergo propter hoc reasoning.  One could as easily say that the recent fall in oil prices was due to the most recent energy bill from Congress, but I am not sure even the most hard-core statist could say that with a straight face.

The longer-term history of the TED spread shows many such spikes, all of which came to earth quickly without a trillion federal dollars:

ted-spread-500x363

The Prisoner Online

Apparently Patrick McGoohan has passed away.  I suspect his death will further reinvigorate interest in the Prisoner series, a 17-episone show following a spy trying to come in from the cold, but who finds himself in an surreal small town structured for maximum surveillance and to try to extract as many secrets from him as possible.  A nice statement on the individual vs. the state, 1960s style.  I have not seen every epiosode, but I enjoyed most of it, right up to the ending, which I confess I didn't totally get but seemed to undermine the individual vs. the state theme and convert it to some Freudian surrealism.  If you become intrigued, you don't necesarily need to shell out to Amazon because AMC is streaming all the original episodes online in preparation for a remake they are producing this year.

Another Reason Why We'll Never See A Carbon Tax, But Instead Will Get A Crazy Cap-And-Trade Scheme

I have written enough on how much superior carbon taxes are to cap-and-trade as a CO2 reduction methodology (if we really are going to do "something," which I hope we don't).  An index of these articles is here.

In the title, I say "another" reason, becuase the number one reason we won't see a carbon tax is that politicians greatly prefer an indirect tax over a direct one, even if it is far more inefficient.  This was explained directly and clearly to me by the author of California's cap-and-trade program.

Close behind this, in second place, is the fact that cap-and-trade spawns a dizzying array of lobbying and special interest influence possibilities that carbon taxes do not, and all those lobbyists mean more power and campaign contributions for politicians.

But here is another reason why it will never happen:  Too many very influential Democrats have substantial investments in start-up companies whose entire existance depends on living in the cracks of cap-and-trade, particularly in generating various dubious offset schemes.  Al Gore is the most obvious example, but apparently Obama's new climate czar Carol Browner sits on boards of such companies as well.

A Paypal Security Hole and Poor Customer Service Judgement that Made it Worse

I have been having problems for a while receiving Paypal payments to my business account.  Today, I received an account notification for someone else's paypal account.  I have received phishing and spoof emails before, but I was pretty sure this one was legit.  I contacted the other person whose account notification I had received (they were horrified at that security breech, by the way), and sure enough, they were honest enough to admit they had been receiving some mystery payments they could not account for, which we quickly determined were mine.  I asked them to check their email addresses on their account, and sure enough, for some reason neither of us could fathom, my email address was listed as a secondary address on their account.  This is the same email that is the primary on my Paypal account, something Paypal claims is impossible.

I asked the other user to not touch it for a minute, and said I wanted to try an experiment.  I called Paypal and got a real person (a slog in and of itself) and described the situation:  I had solid reason to suspect that my email address on my account was on someone else's account as well.  They said that was impossible.  I insisted it might be possible.  Eventually, the customer service agent relented and said they would run a search (I presume they search their data base for my email address and check for multiple hits, an assumption later confirmed by the supervisor).

Well, the customer service agent returned and said "I am happy to tell you your account is fine and no one else has your email address."  She actually said the "happy" thing in a chirpy voice.  I said that now I was REALLY worried, as I had definitive evidence my email is on another account, and if their search programs are not finding the issue, I have no confidence that it is not on more accounts.  After getting nowhere with this, I asked for a supervisor.

I explained all of the above, and the supervisor admitted the first agent did not tell me the whole truth.  She said, "yes, in fact we did find your email on one other account and eliminated it.  The problem was on just that one other account.  We have had this problem a few times and are still trying to figure out why it happens because it should be impossible."  Fine.  But why did the customer service agent feel the need to lie?  I guess technically it was correct for her to report that my email was not on any other account, as they had eliminated the duplications before they took me off hold.  It just seems to be in the institutional nature of organizations to cover their errors and not admit them.

I guess this sort of thing might work with the average computer user who is unsure of his skills and can be convinced that he misunderstands the problem.  And to be fair, all of computer and software customer service seems to work this way, trying to convince users it was their error rather than a bug.  But in my case, knowing for an absolute fact that there was an error, this approach only panicked me more, as I became worried not only with the security hole in their payments system, but with the fact that the company was apparently unaware of the hole and unable to detect it.

The other issue is that I actually think I know how this happened, but neither the agent nor their supervisor took the time to try to get any background information on me that might help them diagnose what is obviously a bug in their system they have been chasing unsuccesfully.  It is a bit like having a mystery epidemic where a disease is spreading via an unknown vector but no one is doing any research into the patients' histories.  Yeah, I know they can't put a priority on every bug fix, but I would assume that for a payments processor a bug that allows money to flow to the wrong person might be of some priority.

Postscript: Not that it matters to any of you, but here is my hypothesis.  I actually had done a transaction with this other user years ago.  This user did not have a paypal account at that time, but one can actually send money via credit card to someone with a Paypal account even if the person sending money does not have an account.  The other user sent me the money with her Visa card from a public terminal, but called me because she could not complete the form because she did not have an email address.  I told her just to plug mine in, and if I got any emails on the transaction I would mail them to her.  Years later, she was more sophisticated and opened up her own Paypal account.  My hypothesis  (really, the only explanation that works) is that at the time she signed up, the Paypal computer went back into its records, found her name from this old transaction, and automatically attached the old email address (mine) from that transaction to the new account as an additional email.  Since this email was not entered via the data entry screen, it bypassed the duplicate email name check which presumably happens at data entry.  It is a back door that allows duplicates in.  I strikes me someone intheir development group might be interested in this hypothesis, since this is one of those bugs it is hard to track down, but no one asked.

All You Need To Know To Evaluate Government Health Care Proposals

OK, maybe not all, but there is really one critical issue at the heart of almost all the issues in health care.  It drives whatever cost problems might exist in the system, drives many of the quality problems, and is a source of much of the current dissatisfaction (at least from the middle class) with the current health care system.

For every proposal, you should make sure you understand 1) Who is choosing the amount and quality of the care and 2) who is paying the bills and is therefore trying to pay attention to the cost of care.

What the hell does that have to do with anything, Coyote?  What are you getting at?  Well, perhaps I can begin my explanation by talking about something, practically anything, other than health care.

Take purchasing a car.  When I need a new car, who determines what car I end up with?   Why, I do.  And who pays for the car and shops around for a price that makes sense in the context of the perceived value of the car?  Why, I do again.  The person who uses the car, the person who chooses the type and quality of the car, and the person who pays for the car are all the same person.

This clever procurement model of integrating the payer, the shopper, and the user all into a single individual is one we use for, well, just about every product and service we buy.  Milk, Internet service, DVD's, house painting, airline tickets -- all the same model.

OK, lets consider a model that does not work this way.  Let's say someone just rear-ended your car and, miracle of miracles, they actually have a good, solid insurance policy that owes you for your car repairs.  In this case, you will be consuming the repair services, and have the incentive to find the absolute best, cost-no-object body shop you can find to do the best, most fabulous job fixing your car, because someone else (ie the insurance company) is paying.  The insurance company has a different incentive.  They want to get off with as small a loss as possible, to protect their profitability as well as keeping prices low for future policy-holders.  They are going to want you car fixed cheap, particularly since you are probably not even their customer.  They are going to try to deliver the minimum.

No surprisingly, people tend to get ticked off in these situations, as they grind against the opposing incentives of the insurance company.  It's one reason that the insurance field is highly regulated (because nowadays people complain to their Congressman whenever they get irritated).  It's also a measure of how ineffective regulation is in really managing this friction, since despite zillions of government rules people still get pissed off.  The reason is that there is simply no good solution.   Both parties want a solution at the extreme end of a cost-value scale, neither have much of an incentive to compromise, and neither will be happy with a solution in the middle of these extreme incentives, and no amount of government fiddling with the tradeoff point is going to change this.

OK, but in this example, at the end of the day, it is just a car, and probably this is a once-in-a-lifetime event.  What if we replace "car" with "baby daughter" or "grandmother" or "your life?"  Now, as Bill Murray says, the kidding around is pretty much over.  It is a recipe for an incendiary disaster.  Which is exactly what we have in health care.

If we take these three roles - user, service quality specifyer, and payer/price shopper - there are very few places in medicine today where these three roles are united.  Further, despite the fact that the vast majority of the problems in US health care are demonstrably from this role separation, none of the plans currently being considered by Obama or Congress unify these three parties.

With my high deductible medical policy, I am actually one of the few middle/upper class folks who actually shops for health care.  And I can tell I am in the minority by the reaction I get from doctors and medical services companies, that look at me like I am from Mars when I ask for detailed pricing, or when I order less than the full and complete battery of potential tests and services based on my own judgment and price/value trade offs.  Folks in the medical profession are used to people saying "whatever, the insurance company is paying for it."

We all know the straights that the auto industry is in, but can you imagine how bad their price and product would be if everyone had some sort of policy that purchased just about any car they wanted for them whenever they wanted it?  What do you think would happen to the prices at your grocery store or at BestBuy if the proprietors of those stores knew, absolutely knew, that you were not even going to look at a price tag before you bought what you wanted?  So why do we expect anything but inflated pricing in the health care field?

Devon Harrick via Carpe Diem writes

The market for medical care does not work like other markets. Providers typically do not disclose prices prior to treatment because they do not compete for patients based on price. Payments are usually not made by patients themselves but by third parties "” employers, insurance companies or government (only 12% of medical costs are paid directly by patients, see chart [below]). And the amounts paid are not really market-clearing prices; they are "reimbursement" rates negotiated with bureaucratic institutions and networks. Furthermore, when providers do not compete on price, they usually do not compete on quality either. In fact, in a very real sense, doctors and hospitals are not competing for patients at all "” at least not in the way normal businesses compete in markets.

medical-1

The author above has an interesting analysis.  The one exception to the separation of roles in medicine is cosmetic surgery.  Not covered except in special circumstances by most insurance, cosmetic surgery is something the individual must pay for and thus has a tendency to shop for.  The results in prices are clear.

medical-2

This pricing differential is all the more compelling because itis probably opposite what most people would initially assume.  As cosmetic surgery tends to be a luxury good, one might expect it to have the higher-than-average inflation rate that many luxury goods have had over the past 10 years.

The flip side of the pricing situation is the incredible dissatisfaction that seems to permeate health care customers.  Because the users aren't paying the bills, health care providers have little incentive to provide good service, as even with bad service the value they provide will be able to exceed the user's price of zero, or close to zero.

But, like with the body shop in the collision, someone is indeed paying the bills.  And that someone faces a choice -- either let customers run amuck and buy absolutely as much health care as they want, or try to ration or restrain the care users receive in some way.  So, when Joe and Mary want the 9th sonogram performed just to make sure their fetus is still doing great, the insurance balks at the cost as unnecessary.  The insurance company is upset, because they feel like Joe, Mary, and their doctor are milking the insurance for unnecessary procedures.  Joe and Mary get upset, because they feel like the heartless insurance company doesn't care about their little darling baby.  Everyone calls their Congressman to tell him or her that they are unhappy and could the government please intervene to make them happier.

And so we get to current health care proposals.  Folks have, rightly, come to the conclusion that a system where the user benefits from the service and decides how much and of what quality should be consumed, while someone else pays, is not sustainable.  However, in response, no one in power is suggesting we end the split.  Instead, they are suggesting that the role of service determination and payment/price-shopping be performed by the government.  We as a consumer will just have to trust that the government will make this price-value tradeoff somehow close to how we would make it for ourselves.

But of course, this is absolutely freaking impossible.  First and foremost is the problem that the government can only choose one policy for everyone embodying a single point on the trade off curve.  But we have 300 million people with 300 million different preference functions.  No one is going to be happy.  Second, the government is a terrible shopper.  We all know this to be true.  So why do we think they are going to suddenly become wizards when it comes to health care?  Third, the government is a terrible administrator.  As a monopoly provider, they simply don't have the inventive to be either responsive of cost-effective.  Again, we all know this to be true, so why are we so willing to hope that things will suddenly change for health care?

The only thing that makes any sense at all to me is to try to give the user of health care some financial incentive to participate in the price value tradeoff and shopping process.  I know that I have simultaneously saved a ton of money as well as substantially increased my health care shopping IQ since our family adopted a high-deductible health insurance policy.  Incredibly, however, this is one solution that absolutely is off the table -- for example, the first step Massachusetts took in their single payer system was making it illegal for consumers to buy the kind of high-deductible insurance I have.  Illegal!

Hey! An Award!

In the 75th Annual (lol) Maggie's Farm blog awards, Coyote Blog tied with Tigerhawk (good company) for best Princeton Alum Blog.  Thanks!

OK, One Coyote Likes Light Rail

Sent to me by a reader, picture from this article.

coyotemax1

Fortunately, there seem to be plenty of empty seats for him ;=)

Knitted Handbag Patterns

Well, blogging has been light again as I a) watched the incredibly unlikely prospect of the Arizona Cardinals hosting a NFC Championship game become a reality and b) built yet another new web site, this one for my wife.  My wife has for several years had a business selling designer handbags and other fashion accessories, for which she has won a number of awards.  This week she is kicking off a new business selling knitted handbag patterns.  You can guess who was named, in absentia I might add, the new business's CTO and webmaster.

Anyway, not wishing to add another platform to my stable of web site solutions, I built it using wordpress using a template that may be suspiciously familiar to Coyote Blog readers.  No appologies here, because I spent way too much time making the transaction engine work (it turns out that digital fulfillment is actually harder, rather than easier, to implement than regular mail and ship).   Since this is basically a hobby of mine rather than a real job, getting one template to work flawlessly using css is my limit.

Anyway, check her out if you are interested (or even if you are not, she will be thrilled to see some traffic).

kt_bag_pattern

PS-  before I get comments, I know there is something wrong with the image manipulation system I used as the site is hanging up serving up resized images.  Working on it.

Men are From Mars, Women are from Venus, and GM CEOs are from Another Universe

Wow!  How far out of touch with reality can you be?

General Motors Corp. Vice Chairman Bob Lutz said he is looking forward to having a "car czar" in place so U.S. automakers have someone sympathetic to its needs in Washington.

"We will have someone to talk to about the pain being inflicted on use [sic] for no unearthly [sic] reason," Lutz said Sunday on the sidelines of the North American International Auto Show.

Via the Libery Papers

Un-Freaking-Believeable

A month ago, the Arizona Cardinals mailed me (as a season ticket holder) my playoffs tickets.  I usually don't advertise myself as an Arizona Cardinals season ticket holder, just because numerous academic studies have demonstrated that this fact is not highly correlated with the average person's perceptions of intelligence.

Because of logistics and time limitations, when one gets NFL playoff tickets one typically gets a ticket for every possible game the team could play in.  Because there was an oddball small statistical chance the Cardinals could host an NFC championship game if a) the Cardinals won two playoff games, which has never happened in franchise history and b) all the top 3 seeds lost, they sent me NFC championship game tickets.  My son and I literally laughed out loud when we saw them.  Hosting an NFC championship game with a franchise that has not hosted any sort of playoff game for 60 years seemed, well, laughable.

Well, I just ran to my desk to make sure I actually kept the tickets, because with the Eagle's win today the Cardinals will actually be hosting the NFC championship game next week.  Go Cards!

Paging JM Keynes

I don't think I need to even bother expressing to my regular readers my utter disdain for this kind of trough-feeding:

Overall, the article notes "the mayors of all 641 cities [represented by the U.S. Conference of Mayors] are asking for $96.6 billion in federal funds for 15,221 municipal projects." Whole bit here.

Here is my question for supporters of this bailout garbage as an economic stimulus.  I understand that in Keynesian economics, government spending has a multiplier effect that causes it give a bigger boost to the economy than private spending  (I don't agree, but I understand that people believe this and understand the faulty assumptions that get them to this conclusion).

But under what economic theory are we operating now that says that having the federal government borrow or raise taxes to spend on municipal projects has a greater stimulus effect than having local governments do it?  None, of course.   What is happening is that a bunch of munipal government weenies are going to Obama and saying "we don't have the credibility, support, and or cajones to raise taxes.  You seem to be hot now, can you do it for us?"

Can You Say, "Moral Hazard?"

Moral hazard is the term for what occurs when one shelters an entity from the full cost or downside of taking risks.   The result is that the entity will tend to take on more risk than it would have had it had to bear the full costs.  For example, if a company knows that the government will make up the shortfall if its pension investments suffer, it will tend to invest in high-risk, high-return investments that reduce the company's need to contribute funds in the good years.   This is sometimes called privitizing profits and socializing losses.

One of the problems with demonstrating moral hazard is that the hazard often occurs years after the action (usually a government action) that creates the hazard.   But this week we have an amazing opportunity to see moral hazard operating within days of a government bailout:

Immediately after GMAC became eligible for TARP money, GM reduced to zero the interest rate"¦ on certain models. This, of course, penalizes GM competitors, including Toyota, Honda and other "transplants" whose cars are made in America by Americans for Americans, and Ford, which does not have the freedom of maneuver conferred by TARP money because Ford is not taking any"¦

GMAC has begun making loans to borrowers with credit scores as low as 621, a significant relaxation of the 700 minimum score the company adopted just three months ago as it struggled to survive. America's median credit score is 723"¦

If you pay people trillions of dollars in response to a bad behavior (in this case, credit lenience) then you will just encourage more of that behavior, even if everyone achnowleges it to be a bad behavior.

Comparing College to Home Ownership

Sorry, an unfinished version of this post may have shown up earlier today in your feed readers.  This one is the completed version.

For years, America has pushed home ownership.   Mortgage interest is one of the few personal expenses that is tax deductible, giving people a strong financial incentive to shift from renting to owning.  The Federal Reserve has pursued a policy of keeping interest rates low, further decreasing the cost of owning.   Congress passed a myriad of laws and created numerous organizations to help insure that anyone who wanted to buy a home could probably get credit.  And every politician, talking head, "expert", etc. who ever got in front of a camera tended to advise everyone regardless of circumstance to try to buy a home.  It was not just home ownership, it was The American Dream Of Home Ownership.

Hayek could have told us years ago that there was a fundamental problem with this.  In short, 300 million people do not have the same situation and needs and preferences.  Take just one example.  Does it really make sense to encourage a worker who has a risky income stream (e.g. is vulnerable to layoffs or reduced hours) to buy a house?  Leasing provides much greater flexibility to adjust fixed housing costs to changing circumstances.  Rent, get your hours reduced, move to a smaller apartment.  Buy, get your hours reduced, default, ruin your credit.

The result of our full-court press for home ownership has been rising home ownership rates ... and rising foreclosure and bankruptcy rates.

OK, none of the above is new information.  But I was having a conversation with my dad about education, and it struck me that we may be doing the exact same thing with four-year college liberal arts degrees.  Every talking head, from talk show hosts to politicians, push kids to go to college.  Along with home ownership, the BA is described as a keystone to the American Dream.  As with home ownership, we subsidize college education with state-run schools and government loan programs.  Just as the government tries to make sure everyone can own a home, they try to make sure every kid can go to college.

Returning to Hayek for a moment, is it really likely that spending four years getting a college liberal arts degree is really the best possible course for every single person?  Sure, one can argue that the state offers community colleges and other alternatives to the standard 4-year degree, as do private companies like the University of Phoenix, but I get no sense that politicians and the intelligentsia are really promoting this kind of nuance and choice.  I think the message clearly is "four year liberal arts degrees are the goal, everything else is second best."

State university systems that were originally founded to help teach scientific agriculture to farmers wouldn't be caught dead having anything so pedestrian show up in their marketing brochure today.  They want to have Nobel prize-winning faculty and be influencing public policy and be doing (and getting grants for) state-of-the-art research.   Teaching students a useful trade?  That's so ... uncool.  Let 'em go to DeVry if they want that.

To some extent this is the result of the takeover of most campuses by the faculty, who wield most of the power nowadays (just ask Neil Rudenstein and Larry Summers at Harvard).   Academics are a special class of folks who work as much for, or more for, prestige among their peers as for money.  Those incentives are great when you want someone to focus in 120 hours a week on inventing a new type of superconducting material.  But in a university, it tilts the entire institution towards a focus on teaching interesting things vs. teaching useful things.

So what has been the result?  Well, college has an equivalent to foreclosure and bankruptcy, and it is called drop-out rates.  And drop-out rates seem to be rising, at least reading articles anecdotally.  The only actual figure I can find was this one:

Just 54 percent of students entering four-year colleges in 1997 had a degree six years later "” and even fewer Hispanics and blacks did, according to some of the latest government figures. After borrowing for school but failing to graduate, many of those students may be worse off than if they had never attended college at all.

I can't prove there is a trend, because I just can't find a good online source, but 46% non-graduation rate strikes me as pretty high.  And I would argue that there is, in addition to drop-out rate, a second figure one must consider.  How many of those that did graduate could actually do with their degree what they thought they could?  How many have a 4-year journalism degree from Michigan and now are working at Starbucks, either by choice or necessity?  I call this the soft drop-out rate, the rate of, for lack of a better word, underemployment of one's education investment.

I know that education leaders can all give a nice speech about how important a liberal arts degree is to the health and functioning of the polis, but the fact of the matter is that it is a luxury.  It is an incredibly rich world that can have its youth in their strongest and most productive years studying Italian Renaissance poetry or Portuguese literature for four years.  And I am not talking about this as a luxury for garbage collectors or auto mechanics, but a luxury even for future white collar workers, who need basic skills like these but are, based on my hiring observations, graduating from college without them:

  1. A strong sense of personal responsibility and a commitment to excellence in one's work
  2. The ability to break down a task and organize work towards its completion
  3. The ability to write a well-organized five paragraph persuasive essay or letter
  4. The ability to do basic computational math
  5. The ability to manage personal finances and make smart financial decisions
  6. The ability to understand basic accounting terms and concepts
  7. The ability to interact with other people honorably and on the basis of a reasonable level of self-awareness
  8. A reasonably well-developed sense of ethics and responsibility

To illustrate this further, I want to end with something I have observed over the past year.  During the last election, I sensed something in the average 20-something Obama supporter that went beyond just frustration with the incumbent President and the normal level of youthful flirtation with progressivism.   I sensed a real anger that somehow some promise had not been kept to these folks.  One interpretation of this is that these folks were all promised that a 4-year liberal arts degree would be the guaranteed ticket to success, and that their college degree would make them future leaders and the world would soon tremble at their pronouncements (seriously, just go read the marketing literature from any college).  Having gotten this "promise," they suddenly find the world doesn't really hang on the every word of a 22-year-old who has never really been out of the womb, and the employers of the world are not beating the doors down to hire a gender studies major who wrote a really well-received thesis on the role of women in the Paraguayan post-modernist movement.

The Washington Post had a great profile on such folks (though written with far more sympathy than I would have mustered).  Here is an example from that article:

Armed with a Georgetown University diploma, Beth Hanley embarked in her 20s on a path hoping to become a professional world-saver. First she worked at nonprofit Bread for the World. Then she taught middle school English in central Africa with the Peace Corps. Finally, to certify her idealism, she graduated last spring with a master's degree in international relations from Johns Hopkins University.

But now the 29-year-old faces a predicament shared by many young strivers in Washington's public interest field. After years of amassing so many achievements, they struggle to find full-time employment with decent pay and realize they might not get exactly what they set out for. Hanley, a think tank temp who dreams of aiding the impoverished and reducing gender discrimination in developing countries, is stuck.

TJIC had some classic comments on this article, and I added some more.

Which brings me finally, of all places, to Michelle Obama.  She said something that I thought was relevant to this post:

Despite their Ivy League pedigrees and good salaries, Michelle Obama often says the fact that she and her husband are out of debt is due to sheer luck, because they could not have predicted that his two books would become bestsellers. "It was like, 'Let's put all our money on red!' " she told a crowd at Ohio State University on Friday. "It wasn't a financial plan! We were lucky! And it shouldn't have been based on luck, because we worked hard."

You can see the whole piece here, but she is a pretty clear example of what I am talking about.  She got a Princeton liberal arts degree and is just amazed that it did not automatically pay off for her.  Somehow, some promise to her has been broken.

Just as she is an example of this phenomenon, she is now endeavoring to be part of the problem, working hard to further confuse the expectations of young people.  Her message to them is -- go get an expensive education, but whatever you do don't do anything money-making with it:

"We left corporate America, which is a lot of what we're asking young people to do," she tells the women. "Don't go into corporate America. You know, become teachers. Work for the community. Be social workers. Be a nurse. Those are the careers that we need, and we're encouraging our young people to do that. But if you make that choice, as we did, to move out of the money-making industry into the helping industry, then your salaries respond." Faced with that reality, she adds, "many of our bright stars are going into corporate law or hedge-fund management."

I have no particular problem with people taking on these occupations, as long as I don't have to pay for it.  And I am proud that my university, Princeton, is one of the few that has changed its financial aid rules to allow students to graduate debt-free and have the financial flexibility to pursue careers that are not high-paying (making Ms. Obama's comments doubly ironic since this is her alma mater as well).

But the general expectation here is just unrealistic.  Here is how I responded previously to Ms. Obama's comments on her education:

This analogy comes to mind:  Let's say Fred needs to buy a piece of earth-moving equipment.  He has the choice of the $20,000 front-end loader that is more than sufficient to most every day tasks, or the $200,000 behemoth, which might be useful if one were opening a strip mine or building a new Panama Canal but is an overkill for many applications.  Fred may lust after the huge monster earth mover, but if he is going to buy it, he better damn well have a big, profitable application for it or he is going to go bankrupt trying to buy it.

So Michelle Obama has a choice of the $20,000 state school undergrad and law degree, which is perfectly serviceable for most applications, or the Princeton/Harvard $200,000 combo, which I can attest will, in the right applications, move a hell of a lot of dirt.  She chooses the $200,000 tool, and then later asks for sympathy because all she ever did with it was some backyard gardening and she wonders why she has trouble paying all her debt.  Duh.  I think the problem here is perfectly obvious to most of us, but instead Obama seeks to blame her problem on some structural flaw in the economy, rather than a poor choice on her part in matching the tool to the job.

And this is what it is all about when you cut through all the misty-eyed Utopian notions about education:  For most people, it is a tool.  And the tool needs to fit the circumstance, the goals, the capabilities, and the budget.  Its time to stop advocating (and subsidizing) and one-size fits all college education program.

Ooh, Really Bad Day

Via the Smoking Gun

a skier at Colorado's ritzy Vail resort was left dangling upside down and pantsless from a chairlift last Thursday morning.

0106091vail1

Wherin TJIC Again Shows He Cares

TJIC gives Meaghan Cheung -- who was chief of the enforcement division for the NYC branch of the SEC when Madoff was first investigated but who now claims to be an anonymous bureaucrat; and who ignored a number of detailed whisteleblower accounts that something was not right in the state of Madoff back in 2006; and who signed the report giving Madoff the "all clear, keep sending him your money" finding-- exactly as much sympathy as she deserves.

OK, I Will Link An Actual Fun Game

In penance for that other game link, here is my favorite online flash game, called desktop tower defense.

Single Most Irritating Game Link I Have Ever Followed

Click the ball to change the color

Via.

And yes, it does change color.  It is not a practical joke.

Update: I mean what I say in the title. I posted this because it was irritating, not because it was fun.

More Recognition of the Health Care Trojan Horse

I have argued for a while that one of the undiscussed problems with nationalized or universal health care is that by socializing the costs of individual lifestyle decisions (e.g. eating, drinking, smoking, wearing a bike helmet, etc) it creates a strong financial incentive for the government to micro-manage individual behavior.  I call this the health care trojan horse for fascism (other posts here).

Q&O has a good post, quoting from Paul Hsieh, on this very topic.

Here's how I understood freedom and liberty worked:

Of course healthy diet and exercise are good. But these are issues of personal "“ not government "“ responsibility. So long as they don't harm others, adults should have the right to eat and drink what they wish "“ and the corresponding responsibility to enjoy (or suffer) the consequences of their choices. Anyone who makes poor lifestyle choices should pay the price himself or rely on voluntary charity, not demand that the government pay for his choices.

Does anyone have a particular argument with that?

In fact, if you believe in freedom and liberty, there really isn't another choice, is there?

But here's what's being offered as the alternative:

Government attempts to regulate individual lifestyles are based on the claim that they must limit medical costs that would otherwise be a burden on "society." But this issue can arise only in "universal healthcare" systems where taxpayers must pay for everyone's medical expenses.

The article has a lot of good examples that follow.  Mr. Hsieh's op-ed is here.

As a side note, I was watching the movie "The Golden Compass"  the other day.  The author and the original book are quite critical of religion, at least of the organized kind, and the evil fascist entity against which the protagonists fight is a world-controlling church.  The movie actually purged most of the religion criticism (or at least made it more subtle) and made the bad buys more generically totalitarian, but hangover criticism of the book stuck to the movie as well.

It was not really a particularly good (or bad) movie, but it had one set of lines spoken by the Nicole Kidman character that I couldn't believe came out of Hollywood.  The protagonist, Lyra, asks Kidman about the contradiction between Kidman's unwillingness to let anyone tell her what to do and the rule-making and absolute obedience that her organization demands of all citizens.    I need to go back and watch the movie to get it exactly right (of course, no one on the movie sites found it memorable enough to post).  But it was something like "Only a few of us are capable of making good decisions for ourselves.  We few have to make decisions for everyone else.  It is really for their own good."  It was really a brilliant summary of the modern political mentality, and slipped through I think only because people in Hollywood took it as a criticism of the religious right, not recognizing it as an equally damning indictment of the left.  (if anyone has the exact quote or a link, please post.  It was on the dirigeable fairly early in the movie, I think).

Update: OK, the Golden Compass lines I wanted start about the 3:00 minute mark in this video [thanks to commenter for showing how to link to a specific point in a YouTube video].  Here is how I transcribed it:

Kidman (Mrs. Coulter):  The Magesterium [the world-girdling totalitarian organization] is what people need, to keep things working, by telling people what to do.

Lyra:  But you told the master that you do whatever you please

Kidman:  That's right, clever girl.  Well, some people know what's best for them, and some people don't.  Besides, they don't tell people what to do in a mean and petty way, they tell them in a kindly way, to keep them out of danger.

Its really hilarious to read through reviews, as I have trying to find this quote.  Apparently (though I missed it at the time) it became a left-right debate about the movie.  The hilarious part is all the left-leaning blogs criticising the right for not seeing how well the shoe fits, without for a second considering that this is a perfect recitation of their end game as well.

Again, about 3:00 into the below:

More on "Green Jobs"

It is interesting watching a group of folks sink into mass hypnosis.  Specifically, much of the left is working really hard to convince itself that obsoleting much of the current energy and transportation infrastructure and raising the price of electricity and fuel will result in net jobs growth.  And, that despite 100 years of failure in countries too numerous to name, the government will suddenly become able to successfully plan and manage investment to the greatest economic benefit.  Here is just one example:

My meditation comes in the wake of reading an article about green jobs. Obama and (other) progressives have been making a case for government spending to develop a green energy infrastructure. As Van Jones said in his powerful speech at GreenFest, that's how we got the highway system and the space program that, to some extent, fueled the prosperity of the 50s.

The article makes the point that when the government picks favorites, it sometimes picks wrong, terribly wrong, as is the case with ethanol. That had me scratching my head for a minute, but then I remembered some key differences:

  • Ethanol was an invention, lock stock and barrel, of the agribusiness lobby. It wasn't promoted by scientists as a good source of energy, as solar power is.
  • The government already picks winners. It gives huge subsidies and incentives to the fossil fuel industry.
  • If solar power turns out to be a boondoggle like ethanol, we should push the government to dump its incentives.

However, it seems unlikely that solar power will be such a dud, given that it's already boosting the economy as a sole sector of growth in these bleak economic times, according to the L.A. Times article.

Here was my response (with some links and additional thoughts added) from his comments section:

With your ethanol statement, aren't you contradicting your point about the government's ability to make sensible energy choices?  I agree that ethanol is a bad energy and environmental strategy, and that most scientists who were not industry shills thought it a break-even proposition at best.  But the fact is that Congresses and Administrations of both parties have backed tens of billions of subsidies for ethanol.  No matter what the rhetoric, when the rubber hits the road, politicians make political, not sensible, decisions.

The study you cited a while back about job gains is just silly - most economists laughed it off.  The study claimed 1.5 million net job gains from California electricity and energy efficiency regulations.  Based on October job numbers, this would mean 9.8% of Californians in October would not have had a job if these regulations hadn't been passed.  Really?  Does this pass any kind of smell test?  These regulations created a few visible jobs and killed some invisible jobs, which is how politicians always manipulate these numbers in their favor.

California has low per capita electricity consumptions primarily for three reasons:  1) it has the mildest climate in the country (when weighted for population location) 2) it has among the ten highest state-average electricity prices in the country and 3) its regulatory regime has driven a disproportionate number of heavy industrial electricity users out of the state (as demonstrated by manufacturing job losses higher than the national average and a low percentage of industrial electricity use vs. other states).

One may believe all of these things are a good thing from an environmental standpoint, but they certainly don't add up to net job gains.  Since you often drape yourself in the scientific mantle when responding to climate skeptics, I will do the same -- economics a science, and it is just as bad to willfully ignore this science as any other.  Claiming that being forced, by CO2 concerns, to obsolete current energy infrastructure and rebuild it in a different form is a gain to the economy is falling into Bastiat's broken window fallacy.

But here is the real argument for not letting the government pick winners -- any small body of people, no matter how smart, has too little information to do such planning on a national scale.  The better alternative is simply to raise the price (ie via a carbon tax) of the fuel or electricity that is viewed to have a high environmental cost (the tax can be made less regressive by offsetting the tax with a reduction in payroll taxes).

When prices rise due to the tax, you don't have a few hundred folks in government trying to figure out how to reduce demand, you have 300 million people trying to figure out how to reduce their consumption  (or start a business to help others reduce their consumption), all with their own knowledge of the opportunities they see around them.  Technocrats hate this kind of solution -- its too anarchic, its not "controlled" or "planned" -- but the fact is that it works.  In a large sense, since you are the environmental guy, I will say that it's more like nature.  Nature isn't planned or controlled from above - order and behaviors emerge bottom up from the responses of individual living things to stimulus.

We Love [Name of Government Project] As Long As Someone Else Bears the Cost

A reader sent me this, and I found it pretty funny:

Minnesota Public Radio and two neighboring churches in downtown St. Paul are escalating their opposition to the proposed line.

MPR said noise and vibrations from the train, connecting Minneapolis and St. Paul, could harm their ability to record and broadcast. The churches say those very same effects could rattle their aging buildings and disrupt their worship services.

In the latest salvo, MPR has asked the project planners to study alternative routes through downtown St. Paul.

MPR and the churches say they support light-rail, but not the proposed route along Cedar Street. The tracks would be laid about 14 feet from the front door of the broadcast center.

"As far as we know, this is the closest a light-rail line will run to federally designated noise- and vibration-sensitive facilities anywhere in the country," said Jeff Nelson, public-affairs director for MPR.

I am not sure a comment is even necessary.   MPR has published any number of light rail stories about budget and approval battles that were thinly disguised cheerleading for light rail.  Take this article for example, which discusses how light rail might be saved from trouble, but because it only quotes light rail supporters, a reader can't even figure out why the trouble exists.

Basically, MPR is saying "please put the rail line, which we support, near someone else who may hate it being nearby as much as we but don't have the access to the media and the political process to make a big stink about it."   Already, the line has apparently made an expensive accommodation for just one organization -- the University of Minnesota, a state agency.  The arrogance of this is staggering.  It reminds me of the NY Times and Columbia University, both of whom claim to be advocates for the underdog, except when the underdog gets in the way of their real estate deal and eminent domain grab.

By the way, am I the only one who has never heard of a federal designation for "noise- and vibration-sensitive facilities?"  If such a designation really exists (and I sure can't find it with any similar search terms on Google), what percentage of the list would you guess is politically connected organizations using the designation to get privileged treatment vs. those without power?

Update: The "federally designated" thing is a bit of an exaggeration.  The PR department of MPR was kind enough to send me a link.  They are referring to the category 1 designation in this report, which merely says that amphitheaters and recording studios should be in the quietest category when assessing impacts of transit nearby (neither MPR or any other facility is mentioned by name).  This same report essentially comes to the conclusion that it is perfectly possible for light rail to be near to recording studios and amphitheaters, just that some care needs to be taken in design.

By the way, the "As far as we know, this is the closes a light-rail line will run to" such a facility is just nuts.  I guess the "as far as we know" covers them from outright fraud, but I have to look no further than my own town of Phoenix to find light rail in proximity to such venues.   I know of a few radio stations and TV stations right on the rail line, but a quick Google maps search found at least 9 radio stations and TV stations and recording studios right on just the Central Avenue portion of the route.  In addition, I know of at least 5 ampitheaters on the route, not to mention our main public library.  (In fact, the library is right near the intersection of the rail line and Interstate-10, and I find it perfectly quiet there).  In fact, I would challenge MPR to identify one urban passenger rail line where there is NOT a radio station, TV station, recording studio, or ampitheater in close proximity.

Science Project Idea: Electro-Magnetic Propulsion

There are no more dreaded words to the middle school parent than "I have a science project due."  Every year through four years of middle school we have had to come up with two (one for each kid).  The first couple are easy.  But trying to come up with a unique project #8 that engages the kids is hard.

The Internet is a great resource.  Search for "science project ideas" and there are loads of folks who have shared their project ideas, making it easier for kids to select from a menu of potential projects.  So, as a way of giving back, I want to, over time, publish some of the projects we have done so that others might benefit.  The first such project I published was my son's science project to measure the Phoenix urban heat island.

This project involves electro-magnetic propulsion.  My kids really like the Rockin' Roller Coaster at DisneyWorld.  Like many new coasters, this one uses a form of electro-magnetic propulsion to rocket the cars to 60+ miles per hour in just a few seconds.  We decided to try to simulate this effect (note:  there are several different approaches to electro-magnetic propulsion.  The simplistic model we used is NOT the one used by coasters, but it is close enough for a 7th-grade science project).

We first looked at building a simple rail gun, but some of the aspects of the construction were either dangerous or difficult (see here for an example of a simple one).  In particular, the energy that needs to be stored in the capacitor is really too dangerous for 12-year-old kids.   We decided instead simply try to roll a metal ball down a track, turning magnets off and on to move the ball along.  We ended up being successful, though don't expect really high speeds  (if you want cheap and easy high speeds with magnets and marbles, try this.  We used the gauss gun for a different science project for a different kid in another year).

The key is trying to turn the magnets on and off at the right time to propel the marble.  We imagined a number of approaches using electric eyes and such, but that seemed really hard.  Fortunately, as a model railroader, I had an answer.  The marbles we were using rolled perfectly on N-scale track.  Since the marbles were also conductive, they could complete a circuit between the two rails  (which is in fact how a model engine works).  By putting electrical gaps spaced in the rails, as the ball rolled, it would progressively activate different rail sections.  If each progressive section was wired to the next magnet, the marble effectively turns the magnets on and off as it rolls.

Here is the final model, with five electro-magnets (click any picture for more detail)

track5

The only thing that is missing is the power supply.  The two red wires are connected to the positive and negative leads of a DC power supply.

Here is a view from above.  The magnets are also a model railroad part -- HO-scale uncoupling ramps made by a company named Kadee -- but other strong electro-magnets would probably work.  Note that the magnet needs to create a wide field, which was why we used these.

track4

We ended up with the circuit breaks centered on each magnet.  So, when the ball gets to a magnet it crosses to the next track section, turning off the magnet under it and turning on the magnet in front of it.  If we did it again, we probably would have experimented with the position of this break.  Here are some detailed views  (sorry, the depth of field in the photos is awful):

track3

Hopefully you can see the principle here.  As the ball approaches the magnet, it is completing the circuit to energize the magnet in front of it (ball is moving from right to left in this picture).  Right over the magnet is a break in the track that isolates the track electrically from the next section.  As the ball crosses this break, the magnet under it is turned off (preventing it from pulling backwards on the ball as it passes) and the next magnet in line is turned on.

track_diagram

Here are a couple of other views:

track2

track1

Potential Improvements: As mentioned above, I am not sure the correct position to switch power to the magnets is right when the ball is over a magnet -- some experimentation would probably yield a more optimal location.  Also, I continually feared that performance was being degraded because the previous magnet was not turning off fast enough (due to inductance effects in the coil).  If this is the case, then performance is hurt because the last magnet is still pulling backwards on the ball as it passes.  Smart circuit makers could probably fix this with some electronics, or moving the changeover point earlier, before the ball is over the magnet, might help.