Posts tagged ‘risk’

A Small Silver Lining in the Very Black Torture Cloud

Well, the Senate torture report is out and it is every bit as bad, perhaps worse, than expected.   There are summaries all over but this one seems as good as any.  And here. Essentially the CIA:

  • Tortured and detained more people than they ever admitted
  • Were more brutal than they ever admitted
  • Were more haphazard and incompetent than can be believed (losing suspects, outsourcing torture to a couple of outside psychologists with no interrogation experience or credentials)
  • Achieved far less than they bragged from the torture, with results that now appear to approximate zero
  • Lied about everything to everyone, up to and including Congress and the President

The CIA needs a forced enema of its own, though I am skeptical they will get it.

I will say that there is nothing really particularly surprising here to a libertarian.  This sort of lawlessness often occurs in fairly transparent government agencies (think VA) so it should be no surprise that it occurs in an agency like this that has zero accountability (because it can yell "classified" as the drop of a hat).  An agency empowered to hide stuff and keep secrets is going to hide stuff and keep secrets.  I am not even sure that if we really could turn the CIA upside down that this would be the worst thing we would find.

At the risk of diluting the totally appropriate horror with which this report should be received, I will observe a couple of positives:

  1. Three cheers for partisanship and divided government.  They get a bad rap because gridlock, but without confrontational, competitive, even polarized rivals for power, this sort of thing would never have come out.  You can see pretty clearly from the minority comments that Republicans would have buried this had they controlled the Senate.
  2. One cheer for American exceptionalism.  Yes, the hubris and arrogance that often accompanies American exceptionalism went a long way to contributing to these errors.   But there are not many countries in the world that would publish this report.  Forget for a minute Russia or China or Mali.  Even among western democracies there are not many countries that would voluntarily call for penalty strokes on themselves.  I can't imagine, for example, France ever making such an admission (and not, I think, because the DGSE's hands are particularly clean).

Well, My Company Is Officially Required to Buy a Product That Does Not Exist For Us

As of next year, my company is required to offer health care plans to our full-time employees or else pay a penalty.    Unfortunately, after an extensive market search, no one will sell me such a policy -- not even the government health care exchange for small businesses.

Let's take a step back.  Business owners have had the rules pounded into us over the last few years, but many of you may not be familiar with the details.  The detail rules are here, as "simplified" as much as possible by the NFIB, but don't read them unless you have to or your head will explode.  The simple way to think of it is that there are two penalties out there:

  • The "A" penalty is for companies that do not offer any sort of health plan, no matter how crappy, to their full-time employees.  The A penalty in this case is $2,000 per full-time employee, with the first 30** free (so with 60 FT employees and no health plan, the penalty is (60-30) x $2,000 = $60,000 a year.
  • The "B" penalty is for companies that avoid the "A" penalty.  If a health plan is offered, but is not affordable (ie the employee monthly share of premiums is higher than a government-set floor) then the company gets penalized $3,000 for every full-time employee who both goes into an exchange and gets a plan with a government-subsidized premium.   There is a cap on the "B" penalty that it can be no higher than if the "A" penalty was applied to the whole company.

We have always pretty much assumed we were going to get the B penalty.  For minimum wage workers, the floor contribution is something like $9o a month, so the company share over a year for a typical employee of ours would be way over $3000.  Also, since over half of our full-time employees are on Medicare and another portion of them are on some sort of retirement plan from a corporation, we don't expect that many to go into the exchange anyway.  So we plan to just pay the penalty.

But we had expected to avoid the A penalty by offering some sort of policy to our employees.  When experts present this stuff, they act like only the dumbest of the dumb companies would ever be saddled with the A penalty.  After all, the company does not even have to pay anything for the policy, they just have to offer something.

But it turns out that all the things that protect us from the B penalty make us almost un-insurable.  First and foremost, insurers have a minimum participation rate they demand.  They are not going to go through all the overhead costs of setting you up on their plan if no one is going to sign up.  In the Government Small Business Health Care Exchange (SHOP), that minimum participation rate is around 70%.  No WAY we can meet that, since over half or our employees are on Medicare and would thus not sign up for anything.  The fact that the average age of our workforce is in the 60's, maybe even the 70's, just makes things worse.  Obamacare gives insurers only limited ability to price for higher risk, so they lose money on older people.  That means they are going to avoid like the plague signing up any group like ours that is all older people.

So, as a result, I am required by law, under harsh financial penalties, to purchase a product that is not available to me.  Had President Obama required that I buy 2 pounds of rocks from Mars, the result would not have been any more unfair.

By the way, I have for a couple of years now been discussing my efforts to convert all our full-time employees to part-time.  I have gotten a lot of grief for that in the comments.  But do you see why now?  The Administration is levying a penalty on me that I cannot avoid.  That penalty is calculated as a multiple of the number of full-time workers I employ.  The only way I can reduce the penalty is to reduce the number of full-time employees.

It is a sorry state of affairs to have to see my greatest business achievement of the last year was to get my number of full-time employees in a workforce of over 350 people down to just 42.  This year, we will work to get it under 30.  If we can do that, we will avoid all penalties entirely without having to mess with the health insurance marketplace.

 

** As a transition measure, the first 80 are free in 2015, which means my company will avoid penalties in 2015 no matter what but not in 2016 unless we can get our full-time employee count down further.

 

Postscript:  One of the oddball and confusing parts of the law is that the word "full-time" has multiple meanings.  This year, companies with more than 100 full time equivalents (FTE) are subject to the mandate.    Because of this, at cocktail parties, I have people walk up to me all the time saying the law does/doesn't apply to me based on a factoid they heard about minimum workforce sizes.  I have 350 total employees of whom 42 are full time.  Some say that puts me over 100 (the 350) and some say that puts me under the 100 (the 42).  It turns out that neither are relevant in determining if I am under or over 100, it is a third calculation that matters.  We do have more than 100 FTE, but we have less than 80 full-time employees that triggers the penalties in 2015.  Go figure.

An Example of Broken Discourse

Apparently there is a daily pill called Truvada that can help reduce (but apparently not prevent) the transmission of HIV through unprotected sex.   Many public health agencies are promoting its use.

Apparently there is also at least one skeptic, a man named Michael Weinstein, who fears the pill may not be as effective as advertised, but more importantly is concerned that the pill's existence will reduce the use of condoms among at-risk men.

As I read the article (and I know zero about it on my own)  the ranking in terms of effectiveness is:  condoms+Truvada > condoms > Truvada > nothing.

The amazing thing to me is how broken the dialog about these issues appears to be.  Truvada supporters claim that there is a consensus on Truvada and that Weinstein is alone in his criticism, and that he is as bad as a "climate-change denialist" (eek!)

Weinstein claims that many others believe as he does but have been silenced by intimidation by the Truvada supporters.  Further, he argues that public officials who support Truvada are all paid off by the drug makers in one way or another.

Jeez, this all sounds so familiar to this veteran of the climate wars that it is just amazing.  And the real tragedy of this broken discourse is that both sides have a totally valid argument.  I have no doubt that Truvada provides incremental protection (even Weinstein's clinic proscribes it).  On the other hand, it is fairly "settled science" in the safety world that an easier-to-use protection method can actually reduce total safety by undercutting a parallel protection mechanism -- the drop in seat belt use after air bags were added to cars is a classic example.    Weinstein argues that Truvada use will reduce use of condoms, and thus undermine safety.  Truvada supporters argue that condom use is so low already, even after 30 years of education efforts, that the drug is better.  Essentially, Weinstein sees the baseline as men who use condoms and worry about them getting worse.  The other side sees the baseline as men who don't use condoms and argues the drug makes things better.

It is a shame to see two groups of people who likely are motivated by good intentions devolve into name-calling and ad hominem attacks.   Just read the quotes in the article - no one in the debate seems to acknowledge that the other side includes people of good will who simply disagree.

So Why Is Paul Krugman Now Defending the Privileges of the 0.1%?

Apparently Paul Krugman has weighed in on Amazon and has concluded that it has "too much power".

I just cannot believe progressives are falling into the trap of defending major publishers against Amazon.  People like Krugman who bash Amazon are effectively setting themselves up as defenders of a small oligarchy of entrenched publishers who have, until recently, done a very good job of making themselves the sole gatekeeper of who gets into print.  Amazon is breaking this age-old system down, in the same way that Uber is challenging taxi cartels and Tesla is challenging traditional auto dealer networks, and giving most everyone access to the book buyer.

The system that Krugman is defending is the system of the 1%.  Or 0.1%.  The current publishing system benefits about 200 major authors who are in the system and whose work has traditionally been spammed by the large publishers to every bookstore and news outlet.  When you walk into an airport book seller, how much diversity of books do you see on the front table?   You just know that you are going to see Sue Grafton's "AA is for Aardvark" and Janet Evanovich's "Fabulous Forty-Six".  The publishers have risk-return marketing incentives to push the 46th Stephanie Plum novel over trying any new author.

So while the traditional publishers flog the 0.1% of authors, Amazon has empowered 20,000 authors.   Those who sell just a few thousand copies (or fewer) of books have found an outlet in Amazon that never existed for them (as disclosure, I am one of those).  And writers who distribute mainly through Amazon get a far higher percentage of their book revenues than they ever would get from the traditional publishers.

So Amazon is helping the consumer (lower prices) and 99.9% of authors (better access and higher profits).  It is perhaps hurting the top 0.1% and a few century-old entrenched corporations.  So what doesn't Krugman like?

From My Vantage Point, Social Security Disability is Totally Corrupt

Nicole Kaeding of Cato has an article on the SSD system heading for bankruptcy.  I can tell you from my experience that a week does not go by when someone doesn't come to me looking for work and saying something like, "I am on full disability but I am fully able to work.  However, I can't take any pay because that would screw up my disability payments.  Can I work for you and have you write my payroll checks to my wife?"

The easy answer to that is "no".  With a backlog of 25000+ people who want a job, why am I going to help them cheat, particularly when it would be me taking the legal risk?

I once had an ex-employee who was applying for a SS disability.  You may not understand that for many folks, getting a Social Security lifetime disability is like hitting the lottery.  This employee knew that if asked, we would have to tell the SS investigator that she seemed fully able to do her job and never demonstrated any reduced functionality.  So to pre-empt that, she and her attorney sent me a letter saying that if we in any way testified to her being able to work and prevented her from getting her disability payment, she would tie me up in court for years, suing me for sexual harassment, discrimination, and everything else she could think of.

I Can't Understand the Obsession with Streetcars

I just don't get it -- why the obsession with streetcars?  Why pay zillions of dollars to create what is essentially a bus line on rails, a bus line that costs orders of magnitude more per passenger to operate and is completely inflexible.  It can never be rerouted or moved or easily shut down if changes in demand warrant.  And, unlike with heavy rail on dedicated tracks, there is not even a gain in mobility since the streetcars have to wallow through traffic and intersections like everyone else.

What we see over and over again is that by consuming 10-100x more resources per passenger, rail systems starve other parts of the transit system of money and eventually lead to less, rather than more, total ridership (even in Portland, by the way).

But apparently, in DC the cannibalization of buses is even worse, as the streetcars are getting in the way and slowing buses down:  (hat tip to a reader)

Three District mayors have backed plans to return streetcars to D.C. streets, following in the transit-oriented footsteps of Portland, Ore., and other cities. Officials in the nation’s capital want to build a 20-plus-mile network connecting neighborhoods from Georgetown and Takoma to Anacostia, linking richer and poorer communities, giving people an alternative to the automobile and, they argue, spurring development along the routes. Eventually they see a system stretching about 37 miles.

... The inaugural 2.2-mile line, on H Street and Benning Road NE, is viewed by some as proof that the concept will work. Others see the opposite.....

Buses are facing significant delays behind the streetcars, which are making regular practice runs meant to simulate everyday operations. “We’re having to go around them. Since H Street has narrow lanes to begin with, it’s a challenge,” Hamre said. He said he has instructed bus drivers to pass streetcars only when they are stopped.

“That reduces the risk of misjudging,” Hamre said.

But it also forces faster-moving buses to hang back and wait for the less-agile streetcars, prolonging commutes for the much larger population of bus riders.

Back in 2010, District transportation officials estimated that 1,500 people a day will ride streetcars on the H Street/Benning Road line once it opens. But the X-line Metrobuses that travel the same streets — and go farther east and west — carry more than 12,000 passengers a day.

Apparently, the line creates so much value that no one is willing to pay even a dollar to ride it, so they will not be charging for the service for now.  By the way, from the "I don't think that word means what you think it means" files, note the use of the term "revenue service":

Early plans were to charge $1 or more a ride. But now “DDOT has determined that fares will not be collected at the start of revenue service,” according to a DDOT plan dated Oct. 2.

And from the "and other than that, how was the play Mrs. Lincoln" files:

District officials said the move will solve a pair of outstanding problems: They don’t have a system in place to collect fares, and ridership is projected to be underwhelming.

Feminists and Disarming the Victim and a Modest Proposal

I have just been flabbergasted at the feminist reaction against efforts to teach women to be more difficult targets for sexual predators (e.g. communicating the dangers of binge drinking, nail polish that detects date rape drugs, etc).  Nobody thinks that encouraging people to buy burglar alarms or lock their doors is somehow shifting blame for robbery to the victim.  But that is exactly the argument feminists are making vis a vis sexual assault on campus.  They argue that any effort to teach victims to be a tougher target is an insult to women and must be avoided.

This is just stupid.  So stupid that I wonder if there is an ulterior motive.  There is no way you ever are going to get rid of bad people doing bad things.  Our historic messaging on things like date rape may have been confused or insufficiently pointed, but we have always been clear on, say, murder and there is still plenty of that which goes on.  I almost wonder if feminists want women to continue to be victims so they can continue to be relevant and have influence.  It's a sick thought but what other explanation can there be for purposely disarming victims?

So I was jogging the other night through a university (Vanderbilt) and saw all those little blue light emergency phones that are so prevalent on campus.   In most cases, the ubiquity of those emergency phones is a result of the growing female population on campus and are there primarily to make women (and perhaps more importantly, their parents who write the checks) be safer feel more comfortable.  Women's groups were big supporters of these investments.  But why?  Isn't that inconsistent?  Shouldn't we consider investment in such emergency devices as wrong-headed attempts to avoid fixing the root cause, which is some inherent flaw in males?

If you say no, that it would be dumb to rip out the emergency phones, then why is it dumb to teach Freshman women some basic safety skills that may prevent them from being victims?   I have taken numerous campus tours with my kids and in almost every one they point out the blue light phones and in almost every case say, "I have never heard of these being used, but they are there."  I guarantee 30 minutes helping women understand how to avoid particularly risky situations would have a higher return than the phones.

I say this with some experience.  I was in a business for a while that required international travel and in which there was some history of executives getting attacked or kidnapped in foreign cities.  The company gave us a one-day risk-identification as well as beginner escape and evasion course.  It was some of the most useful training I have ever had.  And not for a single second did I think anyone was trying to blame me for street crime in foreign cities.

Apparently, Corporations Are Not Investing Because They Are Not "Socially Engaged"

Paul Roberts has an editorial in the LA Times that sortof, kindof mirrors my post the other day that observed that corporate stock buybacks (and investments to reduce tax rates) were likely signs of a bad investment climate.  Until he starts talking about solutions

Roberts begins in a similar manner

Here's a depressing statistic: Last year, U.S. companies spent a whopping $598 billion — not to develop new technologies, open new markets or to hire new workers but to buy up their own shares. By removing shares from circulation, companies made remaining shares pricier, thus creating the impression of a healthier business without the risks of actual business activity.

Share buybacks aren't illegal, and, to be fair, they make sense when companies truly don't have something better to reinvest their profits in. But U.S. companies do have something better: They could be reinvesting in the U.S. economy in ways that spur growth and generate jobs. The fact that they're not explains a lot about the weakness of the job market and the sliding prospects of the American middle class.

I suppose I would dispute him in his implication that there is something unseemly about buybacks.  They are actually a great mechanism for economic efficiency.  If companies do not have good investment prospects, we WANT them returning the cash to their shareholders, rather than doing things like the boneheaded diversification of the 1960's and 1970's (that made investment bankers so rich unwinding in the 1980's).  That way, individuals can redeploy capital in more promising places.  The lack of investment opportunities and return of capital to shareholders is a bad sign for investment prospects of large companies, but it is not at all a bad sign for the ethics of corporate management.   I would argue this is the most ethical possible thing for corporations to do if they honestly do not feel they have a productive use for their cash.

The bigger story here is what might be called the Great Narrowing of the Corporate Mind: the growing willingness by business to pursue an agenda separate from, and even entirely at odds with, the broader goals of society. We saw this before the 2008 crash, when top U.S. banks used dodgy financial tools to score quick profits while shoving the risk onto taxpayers. We're seeing it again as U.S. companies reincorporate overseas to avoid paying U.S. taxes. This narrow mind-set is also evident in the way companies slash spending, not just on staffing but also on socially essential activities, such as long-term research or maintenance, to hit earnings targets and to keep share prices up....

It wasn't always like this. From the 1920s to the early 1970s, American business was far more in step with the larger social enterprise. Corporations were just as hungry for profits, but more of those profits were reinvested in new plants, new technologies and new, better-trained workers — "assets" whose returns benefited not only corporations but the broader society.

Yes, much of that corporate oblige was coerced: After the excesses of the Roaring '20s, regulators kept a rein on business, even as powerful unions exploited tight labor markets to win concessions. But companies also saw that investing in workers, communities and other stakeholders was key to sustainable profits. That such enlightened corporate self-interest corresponds with the long postwar period of broadly based prosperity is hardly a coincidence....

Without a more socially engaged corporate culture, the U.S. economy will continue to lose the capacity to generate long-term prosperity, compete globally or solve complicated economic challenges, such as climate change. We need to restore a broader sense of the corporation as a social citizen — no less focused on profit but far more cognizant of the fact that, in an interconnected economic world, there is no such thing as narrow self-interest.

There is so much crap here it is hard to know where to start.  Since I work for a living rather than write editorials, I will just pound out some quick thoughts

  • As is so typical with Leftist nostalgia for the 1950's, his view is entirely focused on large corporations.  But the innovation model has changed in a lot of industries.  Small companies and entrepreneurs are doing innovation, then get bought by large corporations with access to markets and capital needed to expanded (the drug industry increasingly works this way).  Corporate buybacks return capital to the hands of individuals and potential entrepreneurs and funding angels.
  • But the Left is working hard to kill innovation and entrepreneurship and solidify the position of large corporations.  Large corporations increasingly have the scale to manage regulatory compliance that chokes smaller companies.  And for areas that Mr. Roberts mentions, like climate and green energy, the government manages that whole sector as a crony enterprise, giving capital to political donors and people who can afford lobbyists and ignoring everyone else.  "Socially engaged" investing is nearly always managed like this, as cronyism where the politician you held a fundraiser for is more important than your technology or business plan.  *cough* Solyndra *cough*
  • One enormous reason that companies are buying back their own stock is the Federal Reserve's quantitative easing program, which I would bet anything Mr. Roberts fully supports.  This program concentrates capital in the hands of a few large banks and corporations, and encourages low-risk financial investments of capital over operational investments
  • All those "Social engagement" folks on the Left seem to spend more time stopping investment rather than encouraging it.  They fight tooth and nail the single most productive investment area in the US right now (fracking), they fight new construction in many places (e.g. most all places in California), they fight for workers in entrenched competitors against new business models like Lyft and Uber, they fight every urban Wal-Mart that attempts to get built.  I would argue one large reason for the lack of operational investment is that the Left blocks and/or makes more expensive the investments corporations want to make, offering for alternatives only crap like green energy which doesn't work as an investment unless it is subsidized and you can't count on the subsidies unless you held an Obama fundraiser lately.
  • If corporations make bad investments and tick off their workers and do all the things he suggests, they get run out of business.  And incredibly, he even acknowledges this:  "And here is the paradox. Companies are so obsessed with short-term performance that they are undermining their long-term self-interest. Employees have been demoralized by constant cutbacks. Investment in equipment upgrades, worker training and research — all essential to long-term profitability and competitiveness — is falling."  So fine, the problem corrects itself over time.  
  • He even acknowledges that corporations that are following his preferred investment strategy exist and are prospering -- he points to Google.   Google is a great example of exactly what he is missing. Search engines and Internet functionality that Google thrives on were not developed in corporate R&D departments.  I don't get how he can write so fondly about Google and simultaneously write that he wishes, say, US Steel, were investing more in R&D.  I would think having dinosaur corporations eschew trying to invest in these new areas, and having them return the money to their shareholders, and then having those individuals invest the money in startups like Google would be a good thing.  But like many Leftists he just can't get around the 1950's model.  At the end of the day, entrepreneurship is too chaotic -- the Left wants large corporations that it can easily see and control.

Should Government Contractors Do Business in California?

Hans Bader of the CEI takes my post the other day on Obama's Executive Order 13673 and runs with it much further.  I had written

Government contractors would be insane to operate in California (and perhaps other regulatory hell-holes, but I am familiar with California).  California has a myriad of arcane labor laws (like break laws and heat stress laws) that are difficult to comply with, combined with a legislature that shifts the laws every year to make it hard to keep up, combined with a regulatory and judicial culture that assumes businesses are guilty until proven innocent.  If state labor violations or suits lead to loss of business at the national level, why the hell would a contractor ever want to have employees in California?

Bader provides the numbers:

Whether a large company is sued for discrimination or labor law violations often has more to do with its location than whether it violated the law. A recent study shows that “California has the most frequent incidences of [employment-practices] charges in the country, with a 42 percent higher chance of being sued by an employee for establishments . . . over the national average. Other states and jurisdictions where employers are at a high risk of employee suits include the District of Columbia (32% above the national average) [and] Illinois (26%).” It’s because of their location, not because California employers are more racist or anti-union than employers in other states (indeed, California employers spend more time and money on compliance mechanisms than employers elsewhere).

He goes on to discuss what I think is actually is a bigger issue than differential penalties, which is the criminalization of things in California that are perfectly legal in other places.  The best example is lunch breaks.  Companies don't just have to provide lunch breaks, they have an affirmative responsibility to make sure an employee takes a non-working lunch.  An employee who voluntarily does some work while taking a lunch break (e.g. answers a question from a customer that might walk up to her) makes the company liable for a penalty.  I kid you not.  That is why California corporations have sometimes made it a firing offense to be caught doing work at lunch, because it makes the company liable under the law.

If You Like Federal Curbs on School Bake Sales, You Are Going to Love the Results of Obamacare

From George Will, the logic behind what I call the health care Trojan Horse

Washington’s response to the menace of school bake sales illustrates progressivism’s ratchet: The federal government subsidizes school lunches, so it must control the lunches’ contents, which validates regulation of what it calls “competitive foods,” such as vending machine snacks. Hence the need to close the bake sale loophole, through which sugary cupcakes might sneak: Foods sold at fundraising bake sales must, with some exceptions, conform to federal standards.

So if school lunch programs are a platform for so much micro-regulation, how much regulation do you think the government takeover of healthcare will justify?  If government is paying most of the health care bills, then any activity that might affect your health is then logically subject to government regulation, if for no other reason than to protect against additional costs.  Motorcycle helmet laws have been justified for years on this logic that helmetless riders impose additional costs on government health programs.  Well, if that works for motorcycling, why shouldn't government be heavily regulating skiing?  Or for that matter, why should it allow people to drive cars at all?  Perhaps we should have to get government approval before every car trip to make sure it is not "frivolous" and creating future health care costs through accident risk.

Or how about that most costly-to-health-care activity of all: sex.  Sex spreads expensive diseases.  It can lead to expensive procedures like abortion.  And of course it can lead to costly pregnancies and, worst of all, new lives that have to be maintained for another 80 years by the government health care system.  If funding school lunch programs leads logically to banning cupcake sales at schools, why won't Obamacare lead logically to micro-regulation of our every activity?

When Regulation Makes Things Worse -- Banking Edition

One of the factors in the financial crisis of 2007-2009 that is mentioned too infrequently is the role of banking capital sufficiency standards and exactly how they were written.   Folks have said that capital requirements were somehow deregulated or reduced.  But in fact the intention had been to tighten them with the Basil II standards and US equivalents.  The problem was not some notional deregulation, but in exactly how the regulation was written.

In effect, capital sufficiency standards declared that mortgage-backed securities and government bonds were "risk-free" in the sense that they were counted 100% of their book value in assessing capital sufficiency.  Most other sorts of financial instruments and assets had to be discounted in making these calculations.  This created a land rush by banks for mortgage-backed securities, since they tended to have better returns than government bonds and still counted as 100% safe.

Without the regulation, one might imagine  banks to have a risk-reward tradeoff in a portfolio of more and less risky assets.  But the capital standards created a new decision rule:  find the highest returning assets that could still count for 100%.  They also helped create what in biology we might call a mono-culture.  One might expect banks to have varied investment choices and favorites, such that a problem in one class of asset would affect some but not all banks.  Regulations helped create a mono-culture where all banks had essentially the same portfolio stuffed with the same one or two types of assets.  When just one class of asset sank, the whole industry went into the tank,

Well, we found out that mortgage-backed securities were not in fact risk-free, and many banks and other financial institutions found they had a huge hole blown in their capital.  So, not surprisingly, banks then rushed into government bonds as the last "risk-free" investment that counted 100% towards their capital sufficiency.  But again the standard was flawed, since every government bond, whether from Crete or the US, were considered risk-free.  So banks rushed into bonds of some of the more marginal countries, again since these paid a higher return than the bigger country bonds.  And yet again we got a disaster, as Greek bonds imploded and the value of many other countries' bonds (Spain, Portugal, Italy) were questioned.

So now banking regulators may finally be coming to the conclusion that a) there is no such thing as a risk free asset and b) it is impossible to give a blanket risk grade to an entire class of assets.  Regulators are pushing to discount at least some government securities in capital calculations.

This will be a most interesting discussion, and I doubt that these rules will ever pass.  Why?  Because the governments involved have a conflict of interest here.  No government is going to quietly accept a designation that its bonds are risky while its neighbor's are healthy.  In addition, many governments (Spain is a good example) absolutely rely on their country's banks as the main buyer of their bonds.  Without Spanish bank buying, the Spanish government would be in a world of hurt placing its debt.  There is no way it can countenance rules that might in any way shift bank asset purchases away from its government bonds.

Another Plea to Global Warming Alarmists on the Phrase "Climate Denier"

Stop calling me and other skeptics "climate deniers".  No one denies that there is a climate.  It is a stupid phrase.

I am willing, even at the risk of the obvious parallel that is being drawn to the Holocaust deniers, to accept the "denier" label, but it has to be attached to a proposition I actually deny, or that can even be denied.

As help in doing so, here are a few reminders (these would also apply to many mainstream skeptics -- I am not an outlier)

  • I don't deny that climate changes over time -- who could?  So I am not a climate change denier
  • I don't deny that the Earth has warmed over the last century (something like 0.7C).  So I am not a global warming denier
  • I don't deny that man's CO2 has some incremental effect on warming, and perhaps climate change (in fact, man effects climate with many more of his activities other than just CO2 -- land use, with cities on the one hand and irrigated agriculture on the other, has measurable effects on the climate).  So I am not a man-made climate change or man-made global warming denier.

What I deny is the catastrophe -- the proposition that man-made global warming** will cause catastrophic climate changes whose adverse affects will outweigh both the benefits of warming as well as the costs of mitigation.  I believe that warming forecasts have been substantially exaggerated (in part due to positive feedback assumptions) and that tales of current climate change trends are greatly exaggerated and based more on noting individual outlier events and not through real data on trends (see hurricanes, for example).

Though it loses some of this nuance, I would probably accept "man-made climate catastrophe denier" as a title.

** Postscript -- as a reminder, there is absolutely no science that CO2 can change the climate except through the intermediate step of warming.   If you believe it is possible for CO2 to change the climate without there being warming (in the air, in the oceans, somewhere), then you have no right to call anyone else anti-science and you should go review your subject before you continue to embarrass yourself and your allies.

Another Reason for Declining Business Formation

I often criticize others for attributing 100% of any bad trend to their personal pet peeve.  To some extent I am guilty of that in my last post, where I blamed declining business formation on increasingly complex regulation and licensing.  I think there are good reasons for doing so -- I have spent the last 6 months passing up on business growth opportunities because I was too consumed with catching up on regulatory compliance minutia, particularly in California.  And I have watched as many of my smaller competitors who have fewer resources to dedicate to such compliance issues have left the business, telling me they could no longer keep up with all the requirements.

But there is seldom just one single cause for any trend in a complex, chaotic system (e.g. climate, but economics as well).  One other reason business formation may have dropped is the crash of the housing market and specifically in the equity many have in their homes.

Home equity has historically been an important source of capital for small business formation.  My first large investment in my company was funded with a loan that was secured by the equity in my home.  What outsiders may not realize about small business banking nowadays is that it is nothing like how banking is taught in high school civics.  In that model, the small business person goes to her local banker and presents a business plan, which the banker may fund if they think it is a good risk.

In the real world, trying to get such an unsecured loan from a bank as a small business will at best result in laughter.  My company is no longer what many would call "small" -- we will do millions in revenue this year.  But there is no way in the world that my banker of over 10 years will lend to my business unsecured -- they will demand some asset they can put a lien on.  So we can get financing of equipment purchases (as a capital lease on the equipment) and on factored receivables and inventory.  But without any of that stuff, a new business that just needs cash for startup cash flow is out of luck -- unless the owner has a personal asset, typically a house, on which the banker can place a lien.

So, without home equity, one of the two top sources of capital for small business formation disappears (the other top source is loans from friends and family, which one might also expect to dry up in a tough economy).

Postscript:  Banks will make cash flow loans if guaranteed by the SBA.  This is another whole can of worms, which I will not discuss today.  SBA loans are expensive and difficult to get, and the SBA has a tendency to turn the money spigot on and off at random times.  I have often wondered if the SBA helped to kill cash flow lending by banks.  First, why make risky small unsecured loans when you can get a government guarantee?  And second, with more formulaic lending criteria, SBA lending eliminated the need for loan officers who were good at evaluating business risks.  I can say from personal experience that the folks who can intelligently discuss a business plan and its risks are all gone from banks now (at least in the small business market).

California State-Mandated Employee Leaves of Absence

We just worked with an attorney to rewrite our California employee handbook.  For your enjoyment, here are all the state-mandated leaves of absence we are required to provide employees (most unpaid, but some paid) and for which we must write detailed rules in our employee manual.  We'd likely provide most of this stuff anyway if asked, but the administrative hassle of having this all be a point of law (backed with the threat of expensive litigation if we make even the smallest mistake) is expensive and irritating.

  • Family/medical leaves (including more restrictive California Family Medical Leave Act)
  • Pregnancy disability leave
  • Organ donor and bone marrow donor leave
  • Military leave of absence
  • Military spouse’s leave of absence
  • Civil air patrol leave
  • Drug/alcohol rehabilitation accommodation
  • Time off for adult literacy programs
  • Time off for required attendance at school of suspended pupil
  • Time off for attending activities at child’s school or licensed day care facility
  • Time off for duty as election official
  • Time off for jury and witness duties
  • Time off for victim of domestic violence, sexual assault or stalking – obtaining relief for victim and children
  • Time off for victim of domestic violence, sexual assault or stalking –additional time for victim’s participation
  • Time off for victim of certain felonies
  • Time off to attend court proceedings for certain crimes
  • Time off for volunteer firefighter, reserve peace officer or emergency rescue personnel duties
  • Time off for volunteer firefighter, reserve peace officer or emergency rescue personnel training
  • Time off for voting
  • Workers' compensation leave

PS-  this is not necessarily a comprehensive list and it is published at the risk of having a California lawyer see it and say "aha!  They have forgotten time off for the death of a beloved hamster.  Let's sue him."

A Slightly Different Take on High Frequency Trading (HFT)

My guess is that HFT will soon become one of those bogeyman words that people automatically associate with "bad stuff" without ever actually understanding what it means.  But it is worth understanding the underlying problem, and that problem is not high speed or frequency per se.

As I understand it, when an order to buy, say, 10,000 shares of Exxon gets placed, the purchase will get pieced together by searching across multiple servers where offers are listed and putting together the 10,000 shares in bits and pieces from these various servers.  What HFT's are doing (and I am sure this is grossly oversimplified) is that once it sees this order pinging  a server, it runs ahead at high speed to other servers and buys up blocks of Exxon at price A and then offers it up to the pokey buying search when it finally arrives at those servers at A+a bit more.  That "a bit more" may be less than a penny, but the pennies add up and if done right, there is almost no trading risk.

This is bad, though generally not for us small investors but for our mutual fund companies.  For my little trade of 100 shares that might be cleared on the first server, HFT's have no opportunity to play.  Moreover, I may not even notice a penny or two difference in the price I get.  This is a much bigger deal for mutual fund companies and large investors clearing larger trades, where a few pennies can add up to a lot of money.

An exchange always has to be really careful to maintain its image of fairness, and systematically allowing such behavior, called front-running, is not good for the health of the market.   Which is why you are hearing a lot about this.

Here is what you are not hearing, and I will admit that it is all a hypothesis of mine.  But it may well be possible that HFT's actually reduce the total cost of front-running to investors.  It may be that HFT's real crime is that what they are doing is more transparent and visible than what market makers were doing in the past -- ie they are not increasing the volume of front-running, they are just making it more obvious.   I would not be at all surprised if such front-running always existed in market-making (certainly Goldman Sachs has been accused of it) and that HFT's are actually the Wal-Mart or Amazon of front-running -- not doing anything new but doing it cheaper on tighter margins.   Kind of ironically, I suppose this is what efficient markets theory would predict for the market in front-running.

If this is the case, while we would rather see front-running eliminated entirely, HFT's may actually be reducing the cost of front-running and making things more rather than less efficient.

How Did Obamacare Authors Ever Fool Themselves Into Believing They Were "Bending the Cost Curve" With These Kind of Incentives?

I guess I never really paid much attention to how the Obamacare "risk corridors" work.  These are the reinsurance program that were meant to equalize the risks of various insurers in the exchanges -- but as exchange customers prove to be less healthy than predicted, they are more likely to become a government subsidy program for insurers.

I never knew how they worked.  Check out the incentives here:

According to the text of Obamacare, the health law's risk corridors—the insurance industry backstop that’s been dubbed a bailout—are only supposed to last through 2016. For the first three years of the exchanges, insurers who spend 3 percent more on health costs than expected will be reimbursed by the federal government. It’s symmetrical, so insurers who spend less will pay in, but there’s no requirement that the program be revenue neutral

So what, exactly, are the incentives for cost control?  If you lose control of your costs, the government simply pays for the amount you overspent.  Combine this with the fact that Obamacare puts caps on insurer non-patient-cost overhead spending, and I don't think you are going to see a lot of passion for claims management and reduction.  Note after a point, excess claims do not hurt profits (via the risk corridor) but more money spent on claims reduction and management does reduce profits (due to the overhead caps).

Nice incentives.

Postscript:  There is one flaw with my analysis -- 3% is a LOT of money, at least historically, for health insurers.  Why?  Because their margins are so thin.  I know this will come as a surprise with all the Obama demonization of insurance profits, but health insurers make something like 3-5% of revenues as net income.  My Boston mother-in-law, who is a very reliable gauge of opinion on the Left, thinks I am lying to her when I say this, even when I show her the Google finance pages for insurers, so convinced is she by the NYT and PBS that health insurer profits consume a huge portion of health care spending.

All that being said, I am pretty sure if I were an insurer, I could raise prices slightly, cut back on claims overhead, and make a guaranteed profit all while the government absorbs larger and larger losses.

Disability Fraud

Today I have yet another person with a full disability settlement (e.g. from Social Security) telling me that they are fully capable of working and pestering me to hire them.  The rub is that paying them any money would endanger their disability payments, so they ask me to pay the money to someone else (husband, child) or to pay them off books in cash.  Essentially, they are asking me to violate the law in order the help them violate the law.

Why would I take this risk?  Last year I had 21,000 people sign up on a mailing list looking for work.

Perhaps I am somehow an outlier because I hire so many older folks, but I get dozens of request like this a year.  You can't convince me that the disability system is not broken.

Mandatory Minimum Sentences are Bad Precisely Because Prosecutors Love Them

Apparently, hundreds of US prosecutors have written Eric Holder opposing his support for reduced mandatory minimum sentences.    Their letter to Holder illustrates exactly why these mandatory minimums need to be reduced:

As you know, mandatory minimum sentences are a critical tool in persuading defendants to cooperate, thereby enabling law enforcement to dismantle large drug organizations and violent gangs. Present law provides numerous opportunities for deserving defendants to avoid mandatory sentences through: cooperation in providing information about other criminals and criminal enterprises; plea bargaining, which resolves the vast majority of federal cases; the “Safety Valve,” which has allowed tens of thousands of defendants to receive lower sentences; and executive clemency, which President Obama recently employed.

The last of these is of course a joke, since Obama plays more rounds of golf in two weeks than he has commuted sentences.  But this does illustrate exactly why prosecutors all love mandatory minimums and why we should hate them.  Read what they are saying in this paragraph.  Basically it says that mandatory minimums take sentencing out of the hands of judges and juries and puts it in the hands of ... federal prosecutors.

The problem is that very high mandatory minimums raise the stakes so high that even the innocent are often forced to cut a deal.  People sometimes wonder how the innocent could ever plead guilty to something.  Well, think of it this way.  Can you stand on one foot for 10 seconds without losing your balance?  Are you sure?   Would you bet $100 on it?  You would?  OK, would you bet 20 years of your life on it?

How sure of something would you have to be to bet your life on it?  And no matter how innocent you are, can you ever be that sure that a jury will see it your way when the federal government is sending everything it has at you?

Mandatory minimum sentences raise the stakes of trusting the judicial process so high that few people can tolerate that much risk.  They cannot afford to risk going to a jury.  So with this threat in hand, prosecutors gain 1) a slave that will basically do or say whatever they demand and 2) total control of the outcome of cases that should be going to trial.

I was not aware Eric Holder had supported this change but despite having my issues in the past with Holder I have to give him Kudos.

Update:  Ken White at Popehat (writing about a different story) says, "As I often say here, the criminal justice system is full of people who believe that its purpose is to deliver convictions and any other result shows a malfunction."  By the way, read the Popehat article at the link, it will horrify you.

How Regulators Strangle Legal Businesses

Apparently the Feds are using banking regulation to strangle businesses, even legal ones, that they don't like by cutting off their access to the banking system (via Overlawyered).

Wall Street Journal reporter Robin Sidel, along with Andrew Johnson, reported on the success that the federal government is having in barring access to the banking system for a number of businesses. As we've discussed previously, "Operation Choke Point" and related arm-twisting efforts by the Feds are aimed at making life difficult for a variety of targeted businesses. Among those disfavored businesses are online lenders, payday lenders, check cashers, virtual currency dealers, gaming businesses, and marijuana-related businesses (although our beloved US Attorney General has been making noises that he simply will look the other way when it comes to enforcing federal drug laws against marijuana businesses that are operating legally under state law)....

In the article and a companion audio interview, Sidel states that the primary concern appears to be with the difficulty of complying with BSA and money laundering risk. While that's certainly true with many of the businesses, it's also true that some of the businesses have been targeted by the regulators for extra scrutiny because they're in a line of business, like payday lending, where the regulators simply don't like the business model on social policy grounds. If we see the Feds back off of weed but still keep the heat on payday lenders, then the argument that it's all about money laundering risk becomes a bit tenuous.

Unreported Obamacare Data -- Exchange Sales Conversion Is Much Worse When The Taxpayer is Not Subsidizing the Policy

I like digging through the raw data in the Obamacare report rather than just accepting the bits the New York Times wants to report.  As a business guy, I was looking at the data from a sales-conversion perspective -- ie, who is buying and who is not?  And of course, why?

When I was in the marketing world, we used to call the process of sales conversion the sales funnel.  For the exchanges this means some percentage of the available market actually show up at the exchange, and then some percentage of those actually complete the arduous sign-up process, and some percentage of those actually select a policy, and presumably some percentage of those actually pay, though we don't know what that latter percentage is.  At each step, we ask ourselves what people are we converting from one step to the next, and why.

Here is the Obamacare exchange sales funnel through December (as has become tradition, it is a scavenger hunt to fill this in and the data locations move around from month to month).

click to enlarge

 

As you can see, of the nearly 3.7 million people who have selected a private plan or been put in Medicaid or CHIP, fully 88% are on the government dole (subsidized or full Medicare).

The interesting new data is on the plan selection breakdown between subsidized and un-subsidized.   This leads to an interesting finding that is a bit non-obvious from the report itself because the data is spread all over the report.  But lets look at conversion of applicants to plan selection based on whether folks are subsidized or subsidized.

For the 2,383,131 applicants who find they are no going to be subsidized, only 436,603 have selected a plan, for a 18% conversion rate

For the 2,756,667 applicants who find they will get supported by the taxpayer, 1,646,237 selected a plan, far a 60% conversion rate.

In essence, applicants are more than 3 times more likely to sign up if they are getting taxpayer money.  The exchanges are not selling health care, they are selling subsidies.  People sign up, check to see if they have money coming, and go away if they don't and stay if they do.

The next really interesting piece of data would be the demographics and health status of the 18% who did sign up for an unsubsidized plan.  I would not be at all surprised if the demographics there were far, far worse than the average.  Emerging hypothesis:  People come to the exchange, and sign up if they get a subsidy, or if they have health problems or high risk.

It's All About Control

I can't think of any justification for the FDA's shutdown of 23andme's genetic testing service except one of pure control.  It is yet another case where you and I are not smart enough or sophisticated enough to be trusted with information about our own bodies.  Because we might use the information in some way with which Maya Shankar might not agree.

Let me be clear, I am not offended by all regulation of genetic tests. Indeed, genetic tests are already regulated. To be precise, the labs that perform genetic tests are regulated by the Clinical Laboratory Improvement Amendments (CLIA) as overseen by the CMS (here is an excellent primer). The CLIA requires all labs, including the labs used by 23andMe, to be inspected for quality control, record keeping and the qualifications of their personnel. The goal is to ensure that the tests are accurate, reliable, timely, confidential and not risky to patients. I am not offended when the goal of regulation is to help consumers buy the product that they have contracted to buy.

What the FDA wants to do is categorically different. The FDA wants to regulate genetic tests as a high-riskmedical device that cannot be sold until and unless the FDA permits it be sold.

Moreover, the FDA wants to judge not the analytic validity of the tests, whether the tests accurately read the genetic code as the firms promise (already regulated under the CLIA) but the clinical validity, whether particular identified alleles are causal for conditions or disease. The latter requirement is the death-knell for the products because of the expense and time it takes to prove specific genes are causal for diseases. Moreover, it means that firms like 23andMe will not be able to tell consumers about their own DNA but instead will only be allowed to offer a peek at the sections of code that the FDA has deemed it ok for consumers to see.

Alternatively, firms may be allowed to sequence a consumer’s genetic code and even report it to them but they will not be allowed to tell consumers what the letters mean. Here is why I think the FDA’s actions are unconstitutional. Reading an individual’s code is safe and effective. Interpreting the code and communicating opinions about it may or may not be safe–just like all communication–but it falls squarely under the First Amendment.

I know that libertarians want to kill the FDA altogether.  That is never going to happen.  But what might be more realistic is to shift their governing law from validating that medical treatments are safe and effective to just safe.

Brad Warbiany has more, including real life examples of how 23andme's service has been useful to his family.

The Real Health Insurance Shock Is Coming Next Fall

Obviously, the whole Obamacare implementation is in disarray.  Some of this I expected -- the policy cancellations -- and some of it I did not -- the horrendous systems implementation.  But I actually thought that most of this would be swept under the rug by a willing media.

What I really expected was for the true shock to come next fall.  And I think it is still coming.  I believe that despite rate increases, insurers are likely being overly optimistic about how much adverse selection and cost control issues they are going to have.  As a result, I expected, and still expect, huge premium increases in the fall of 2014.

Why?  The main benefit of Obamacare is for people who cannot afford health insurance but want it, and for people who are very sick and have lost their insurance.   Obamacare is a terrible plan as implemented because it futzes with virtually everything in the health care system when a more limited plan could have achieved the same humanitarian coverage goals.

Anyway, one reason Obamacare is so comprehensive is that it is based on a goal of cost control for the whole system.  Unfortunately, most all of its cost control goals are faulty.  From Megan McArdle, in an amazing article covering a huge range of Obamacare issues:

But I think it’s also clearly true that the majority of the public did not understand this. In 2008, the Barack Obama campaign told them that their premiums would go down under the new health-care law. And the law’s supporters believed it.

Q. Obama says his plan will save $2,500 annually for my family. How?

A. Through a combination of developing efficiencies in the system, expanding coverage to all Americans, and picking up the cost of some high-cost cases. Specifically:

-- Health IT investment, which will reduce unnecessary and wasteful spending in the health care system. Examples include extra hospital stays because of preventable medical errors and duplicative diagnostic tests;

-- Improving prevention and management of chronic conditions;

-- Increasing insurance industry competition and reining in the abusive practices of monopoly insurance and drug companies;

-- Providing reinsurance for catastrophic cases, which will reduce insurance premiums; and

-- Ensuring every American has health coverage, which will reduce spending on the “uncompensated” care of uninsured people who end up in emergency rooms and whose care is picked up by institutions and then passed through higher charges to insured individuals.

The part about reinsurance was always nonsense; unless it’s subsidized, reinsurance doesn’t save money for the system, though it may reduce the risk that an individual company will go broke. But the rest of it all sounded entirely plausible; I heard many smart wonks make most of these arguments in 2008 and 2009. However, it’s fair to say that by the time the law passed, the debate had pretty well established that few to none of them were true. “We all knew” that preventive care doesn’t save money, electronic medical records don’t save money, reducing uncompensated care saves very little money, and “reining in the abusive practices” of insurance companies was likely to raise premiums, not lower them, because those “abuses” mostly consist of refusing to cover very sick people.

The result?  Many of these things that supposedly reduced costs actually increase them.  So if you think the shock is high now, wait until next fall.  We will see:

  • Rates going up
  • Less choice, as insurers pull out of many local markets
  • Narrowing of doctors networks, and reduced choice in doctors
  • Companies dropping health care and dumping workers (and retirees if they can get away with it) into the exchanges and Medicare.

The Arrogance of Obama, and Obamacare

So I guess the Left has hit on its favored meme in response to the millions of insurance cancellations.  From Obama to Valerie Jarrett to any number of bloggers, the explanation is that the cancelled policies were "sub-standard".  We may have thought we liked them, but it turns out we were wrong.  Deluded in fact.

These folks -- despite not knowing my income, my net worth, my health situation, my age, my family size, my number and age of kids, my risk adversity, my degree of hypochondria, my preventative care habits, my diet, my lifestyle, my personal preferences and priorities, or any details about my insurance policy that I spend many hours analyzing and cross-comparing -- have decided they know better than I what health insurance I should want.

My plan was not substandard.  I graduated magna cum laude in engineering from Princeton and was first in my class at Harvard Business School.  I spent hours shopping for my coverage and was fully satisfied with my resulting policy.  Many of the aspects of my policy that cause Obama to call it "sub-standard" -- lack of mental health care, lack of pediatric dental care, lack of maternity care, lack of free contraception, a higher than average deductible -- were my preferences.  I got what I wanted.

More expensive, more highly featured products are not necessarily "better".  A Mercedes is not necessarily the best car choice for a middle class buyer just because it has more features than his Taurus.  Would Obama tell that person his Taurus is "sub-standard" and force him to pay for a Mercedes? If not, why the hell is doing the exact same thing but with health insurance OK?

From his speech today, via Bryan Preston

When Obama came to that section of his speech when the line usually falls, he went with a new spin. If you’ve lost your healthcare thanks to his law, he wants you to know that you were just “under-insured.” Because he says so.

“One of the things health reform was designed to do was to help not only the uninsured but also the under-insured,” he said.

“If you had one of these substandard plans before the Affordable Care Act became law, and our really liked that plan, you are able to keep it. That’s what I said when I was running for office.”

“But ever since the law was passed, if insurers decided to cancel or downgrade these substandard plans, what we said, under the law, is you have got to replace them with quality, comprehensive coverage,” he said, “because, that, too, was a central premise of the Affordable Care Act from the very beginning.”

Update:  ugh

Screen shot 2013-10-30 at 9.12.14 AM

Update #2:  Yesterday I said the time seemed right for the Left to pick a meme to explain the insurance cancellations and then give the media its marching orders.  David Firestone of the NYT has gotten the memo

The so-called cancellation letters waved around at yesterday’s hearing were simply notices that policies would have to be upgraded or changed. Some of those old policies were so full of holes that they didn’t include hospitalization, or maternity care, or coverage of other serious conditions.

Republicans were apparently furious that government would dare intrude on an insurance company’s freedom to offer a terrible product to desperate people.

“Some people like to drive a Ford, not a Ferrari,” said Marsha Blackburn of Tennessee. “And some people like to drink out of a red Solo cup, not a crystal stem. You’re taking away their choice.”

Luckily, a comprehensive and affordable insurance policy is no longer a Ferrari; it is now a basic right. In the face of absurd comments and analogies like this one, Ms. Sebelius never lost her cool in three-and-a-half hours of testimony, perhaps because she knows that once the computer problems and the bellowing die down, the country will be far better off.

So you see the talking points as the media gets their orders.  1.  All policies that were cancelled were sub-standard.  2.  People will be better off with more expensive policies, even if they are too dumb to konw it.

My policy was perfectly fine.  I was not tricked.  I am willing to bet I am at least as smart as David Firestone.  I am positive I am smarter than Barrack Obama.  And yet my policy was cancelled.

If I Were a Billionaire: Coyote College

My daughter and I did the whole college visit thing last week -- 8 colleges in five days.  In doing so, I was struck by the fact that all these great schools we visited, with one exception, were founded by rich people no more recently than the 19th century.  Seriously, can you name a college top students are trying to get into that was founded since 1900?  I think Rice University in Houston was founded in the 20th century but it is still over 100 years old.

The one exception, by the way, was SCAD, an art school in Savannah, Georgia.  SCAD is new enough that it is still being run by its founder.  I am not sure I am totally comfortable in the value proposition of an expensive art school, but I will say that this was -- by far -- the most dynamic school we visited.

So here is what I would do:  Create a new not-for-profit university aimed at competing at the top levels, e.g. with the Ivy League.  I would find a nice bit of land for it in a good climate, avoiding big cities.  The Big Island of Hawaii would be a nice spot, though that may be too remote.   Scottsdale would not be a bad choice since its bad weather is during the summer out of the normal school year and land is relatively cheap.

Then, I would take the top academic kids, period.  No special breaks for athletes or tuba players.  It would have some reasonable school non-academic programs just to remain competitive for students - maybe some intramurals or club sports, but certainly no focus on powerhouse athletics.  We could set a pool of money aside to help fund clubs and let students drive and run most of the extra-curriculars, from singing groups to debate clubs.  If students are passionate enough to form and lead these activities, they would happen.

And now I need a reader promise here - if you are going to read the next sentence, you have to read the whole rest of the article before flying into any tizzies.

And for the most part we would scrap affirmative action and diversity goals.  We are going to take the best students.  This does not mean its pure SAT's - one can certainly look at a transcript and SAT in the context of the school kids went to, so that smart kids are not punished for going to a crap public high school.

Realize I say this with the expectation that the largest group of students who will be getting affirmative action over the next 20 years are... white males.

What?  How can this be?  Well it is already nearly true.  Sure, historically everyone has focused on reverse discrimination against white males when colleges were dealing with having twice as many men than women and they had few qualified black or hispanic candidates.  But my sense is that few white males any more lose their spot in college due to competition from under-qualified minority candidates.

That is because there is an enormous demographic shift going on in college.  In fact there are three:

  1. Girls rule high school and higher education.  Yes, I know that women steeped in "Failing at Fairness" will find this hard to believe, but undergraduates are something like 56% women nowadays.  As we toured Ivy League schools, we were on tours with about 6 prospective female students for every one guy.  Back when my son played high school basketball, on the walls of various high schools he played at were pictures of their honor societies.  Time and again I saw pictures of 20 girls and one or two forlorn boys.  If top schools want to keep their gender numbers even, then they are going to have to start affirmative action for boys, if they have not done so already (I suspect they have).
  2. Asians are being actively discriminated against.  Schools will never ever admit it, because they are getting sued by Asian prospective students (I know Princeton has been sued) but reverse discrimination against Asian students is becoming more and more intense.  The bar for Asia females already is way higher than the bar for white males in top schools, and it likely will only get worse
  3. Foreign students bring in the cash.  Ivy League schools have a ton of international students, which makes sense as they strive to be international institutions.  But one thing they will not tell you is that there is another reason for bringing in foreign students:  For most schools, their need-blind admissions policies and increasingly generous financial aid packages do not apply to foreign students, or apply on a much more limited basis.  The average tuition paid by international students is thus much higher.  I suspect, but cannot prove, that under the cover of diversity these schools are lowering their standards to bring in students who bring the cash.

So we scrap all this.  If the school ends up 80% Asian women, fine.  Every forum in one's life does not have to have perfect diversity (whatever the hell that is), and besides there are plenty of other market choices for students who are seeking different racial and ethnic mixes in their college experience.   We just want the best.  And whatever money we can raise, we make sure  a lot of it goes to financial aid rather than prettier buildings (have you seen what they are building at colleges these days?) so we can make sure the best can afford to attend.  Getting good faculty might be the challenge at first, but tenure tracks have dried up so many places that my gut feel is that there are plenty of great folks out there who can't get tenure where they are and would jump at a chance to move.  You won't have Paul Krugman or Bill McKibben type names at first, but is that so bad?

We know the business community hires from Ivy League schools in part because they can essentially outsource their applicant screening to the University admissions office.  So we will go them one better and really sell this.   Hire any of our graduates and you know you are getting someone hard-working and focused and very smart.

I don't know if it would work, but hell, I am a billionaire, what's the risk in trying?

Trading $1 in Debt for 85 cents of Economic Activity

UPDATE:  Mea culpa.  One point in the original post was dead wrong.  It is possible, contrary to what I wrote below, to get something like a 0.7%  difference in annual growth rates with the assumptions he has in the chart below (Drum still exaggerated when he called it 1%).  I don't know if the model is valid (I have little faith in any macro models) but I was wrong on this claim.  Using the 0.7% and working more carefully by quarter we get a cumulative GDP addition a bit lower than the cumulative debt addition.  There is still obviously a reasonable question even at a multiplier near 1 whether $1 of economic activity today is worth $1 of debt repayment plus interest in the future.  

I am not a believer, obviously, in cyclical tweaking of the economy by the Feds.  To my thinking, the last recession was caused by a massive government-driven mis-allocation of capital so further heavy-handed government allocation of capital seems like a poor solution.  But what really drives me crazy is that most folks on the Left will seductively argue that now is not the time to reduce debt levels, implying sometime in the future when the economy is better will be the appropriate time.  But when, in any expansion, have you heard anyone on the Left say, "hey, its time to reduce spending and cut debt because we need the fiscal flexibility next time the economy goes wrong."

I will leave the stuff in error below in the post because I don't think it is right to disappear mistakes.  For transparency, my spreadsheet reconstruction both confirming the 0.7% and with the updated numbers below is here:   reconstruction.xls.

 

Kevin Drum is flogging the austerity horse again

I see that Macroecomic Advisors has produced a comprehensive estimate of the total effect of bad fiscal policies. Their conclusion: austerity policies since the start of 2011 have cut GDP growth by about 1 percentage point per year.

Something seemed odd to me -- when I opened up the linked study, it said the "lost" government discretionary spending is about 2% of GDP.  Is Drum really arguing that we should be spending 2% of GDP to increase GDP by 1%?

Of course, the math does not work quite this way given compounding and such, but it did cause me to check things out.  The first thing I learned is that Drum partook of some creative rounding.  The study actually said reductions in discretionary spending as a percent of GDP reduced GDP growth rates since the beginning of 2011 by 0.7% a year, not 1% (the study does mention a 1% number but this includes other effects as well).

But it is weirder than that, because here is the chart in the study that is supposed to support the 0.7% number:

click to enlarge

Note that in the quarterly data, only 2 quarters appear to show a 0.7% difference and all the others are less.  I understand that compounding can do weird things, but how can the string of numbers represented by the green bars net to 0.7%?  What it looks like they did is just read off the last bar, which would be appropriate if they were doing some sort of cumulative model, but that is not how the chart is built.  If we interpolate actual values and are relatively careful about getting the compounding right, the difference is actually about 0.45%.  So now we are down to less than half the number Drum quoted see update above (I sent an email to the study author for clarification but have not heard back.  Update:  he was nice enough to send me a quick email).

So let's accept this 0.45% 0.7% number for a moment.  If GDP started somewhere around 16 trillion in 2010, if we apply a 0.45% the quarterly growth numbers from his chart, we get an incremental economic activity from 2011 through 2013:Q2 of about $333 billion.

So now look at the spending side.  The source says that discretionary spending fell by about 2% of GDP over this period.  From the graph above, it seems to bite pretty early, but we will assume it fell 1/12 of this 2% figure each quarter, so that by the end of 2013 or beginning of 2014 we get a fall in spending by 2% of GDP.  Cumulatively, this would be a reduction in spending over the 2.5 years vs. some "non-austere" benchmark of $388 billion.

Thus, in exchange for running up $677 billion $388 billion in additional debt, we would have had $445 billion $333 billion in incremental economic activity.  A couple of reactions:

  1. Having the government borrow money and spend it definitely increases near-term GDP.  No one disputes that.  It is not even in question.  Those of us who favor reigning in government spending acknowledge this.  The question is, at what cost in terms of future obligations.  In fact, this very study Drum is quoting says

    Economists agree that failure to shrink prospective deficits and debt will bestow significant economic consequences and risks on future generations. Federal deficits drive up interest rates, “crowding out” private investment. If government borrowing supports consumption (e.g., through Social Security and major health programs) rather than public investment, the nation’s overall capital stock declines, undermining our standard of living. The process is slow but the eventual impact is large.2 In addition, accumulating debt raises the risk of a fiscal crisis. No one can say when this might occur but, unlike crowding out, a debt crisis could develop unexpectedly once debt reached high levels.

    High deficits and debt also undermine the efficacy of macroeconomic policies and reduce policymakers’ flexibility to respond to unexpected events. For example, in a recession, it would be harder to provide fiscal stimulus if deficits and debt already were high. Furthermore, fiscal stimulus might be less effective then. Additional deficit spending could be seen as pushing the nation closer to crisis, thereby forcing up interest rates and undercutting the effects of the stimulus. With fiscal policy hamstrung, the burden of counter-cyclical policy is thrust on the Federal Open Market Committee (FOMC) but, particularly in a low interest-rate environment, the FOMC may be unable (or unwilling) to provide additional monetary
    stimulus.

  2. I guess we have pretty much given up on the >1 multiplier, huh?  Beggaring our children for incremental economic growth today is a risky enough strategy, but particularly so with the implied .66 .85 multiplier here.

This is not the first time Drum has taken, uh, creative data approaches to cry "austerity" during a mad spending spree.