Posts tagged ‘sub’

I Thought This Was A Spoof At First: "Bitcoin's Problem with Women"

Felix Salmon, guest-blogging for Kevin Drum at Mother Jones, had a post yesterday titled "Bitcoin's Problem with Women."

Men make up an estimated 96% of the Bitcoin community, which means that if Bitcoin does end up succeeding, as its adherents think it will, and if the people who own Bitcoin see their holdings soar in value, then all of the profits will end up going to what Brett Scott calls the "crypto-patriarchy." Not many men, to be sure: as Charlie Stross says, the degree of inequality in the Bitcoin economy "is ghastly, and getting worse, to an extent that makes a sub-Saharan African kleptocracy look like a socialist utopia." But it's not many men, and effectively zero women.

I guess I don't get it.   Is this the result of some sort of active discrimination, or is it just one of those choices that tend to skew male or female (like the decision to become a lumberjack or a health care worker)?   I know most of the cryptography world is dominated by paranoid men, and many of these same folks were the early adopters of Bitcoin.

Beyond one lame anecdote (where one random guy at some Bitcoin function mistook a female VC for a girlfriend of the real VC), the author does not seem to present any evidence of systematic discrimination and exclusion.  Knowing some of these Bitcoin and cyptography people, though, many are from the family of guys who are socially inept and were shunned by girls in high school, so I would not be surprised if they are awkward around women.

If anything, much of his post seems actually be an exercise in gender stereotyping, arguing that men care about politics and ideology and women about community and practicality.  Seriously, under the guise of somehow defending the equality of women, he bares his gender assumptions:

If you talk about Bitcoin with the people who use it, the language they use is always about technology and finance. Bitcoiners tend to think in terms of how things work, rather than how they're used in the real world. Buying and selling Bitcoin is still much more difficult than it should be, despite many years of development, which implies that people aren’t concentrating enough on real-world ease-of-use....

That's a product design job, and frankly, it's a product design job well-suited for women who aren't approaching the problem while grinding the ideological axes so widely held inside the Bitcoin community. As one woman involved with Bitcoin put it to me, "Money is a political issue for Bitcoiners. It's a human issue for everybody else."...

Let's say you wanted to build a mobile savings app in sub-Saharan African. If you asked male Bitcoin developers to build such a thing for a target audience of young African girls, they might have talked about how to maximize the amount of money saved. But, working on the ground in South Africa, the Praekelt Foundation came from a different perspective. Apps like these aren't really about maximizing savings, so much as they're about empowerment. If you can build a product for girls that ratifies their identity and individuality and gives them self-esteem, then you're creating something much more valuable than a few dollars' worth of savings: you're keeping them in school, and you're keeping them healthy, and you're helping themto not get pregnant. That's the kind of way that cryptocurrencies could change the world. The problem is that the men in Popper's book just don't think that way.

But I digress.  The key point is this:  Bitcoin is a freaking open source, anonymous platform.  Anyone can work with it.  No one even has to know your gender (like the old internet joke about no one online knows you are a dog).

Throughout the piece he talks about the "Bitcoin community" as if it is some structured body, the membership in which is required to work with Bitcoin, like saying that one has to be a long-standing member in good standing of the Communist Party to join the Soviet Politboro.  But the Bitcoin community is no such thing.  A better definition of it is "people who happen to be working with Bitcoin today."  You no more need to be a member of the current bitcoin community, or even be known or liked by them, to create your business or service model in Bitcoin than you need to be pals with Tim Berners-Lee to be able to create an Internet company.

The whole point of why we wacky (male) libertarians get all excited about bitcoin is not that it somehow ends gender or racial or any other sort of discrimination, but that it helps makes all of these more irrelevant.  I won't pretend to read Salmon's mind, but if I had to guess, he is frustrated because he sees the capability of Bitcoin to help end discrimination.  If that is true, great.  But many of us assume that bad people with bad motives will always exist, so we seek out anonymous currencies and cryptography so we can live our lives without the permission or even knowledge of these people.

 

Why Prostitution Should Be Legal

Folks often use the abuses in the prostitution industry as evidence of why it should be illegal.  But these abuses are actually a result of the illegality.  Sex workers in illicit industries cannot use the police and legal system to address abuses without risking arrest.  Essentially, they are cut off from access to the legal system and its protections that we take for granted.

People act like the abuses are inherent to the fact that prostitution is a sex work industry, but here is an example of (legal) sex workers protecting themselves and addressing abuses through the legal system, just like all the rest of us do.  If prostitution were legal, then prostitutes could do the same.

Three Valley strip clubs are being sued by exotic dancers with the help of a Texas law firm over alleged unpaid tips and wages....

Hodges' firm and the strippers are suing to make the strippers official employees. Their new system would be similar to that of restaurant wait staff, who typically earn a sub-minimum salary (Arizona allows as low as $3 an hour for tipped employees) while pooling tips among their fellow workers. If no customers come in, the staff is still guaranteed to make at least minimum wage, plus time-and-a-half for any overtime worked.

I'm not a big fan of the premise of the lawsuit (trying to force businesses to change their employment model from dancers as independent contractors to dancers as employees) but it is their free access to the legal system that is the point here.  One could never imagine such a lawsuit with a group of prostitutes arguing that the people they worked for were not paying them fairly.

Explaining the Financial Crisis: Government Creation of a Financial Investment Mono-culture

Arnold Kling on the recent financial crisis:

1. The facts are that one can just as easily blame the financial crash on an attempted tightening of regulation. That is, in the process of trying to rein in bank risk-taking by adopting risk-based capital regulations, regulators gave preference to highly-rated mortgage-backed securities, which in turn led to the manufacturing of such securities out of sub-prime loans.

2. The global imbalances that many of us thought were a bigger risk factor than the housing bubble did not in fact blow up the way that we thought that they would. The housing bubble blew up instead.

What he is referring to is a redefinition by governments in the Basel accords of how capital levels at banks should be calculated when determining capital sufficiency.  I will oversimplify here, but basically it categorized some assets as "safe" and some as "risky".  Those that were risky had their value cut in half for purposes of capital calculations, while those that were "safe" had their value counted at 100%.  So if a bank invested a million dollars in safe assets, that would count as a million dollar towards its capital requirements, but would count only $500,000 towards those requirements if it were invested in risky assets.  As a result, a bank that needed a billion dollars in capital would need a billion of safe assets or two billion of risky assets.

Well, this obviously created a strong incentive for banks to invest in assets deemed by the government as "safe".  Which of course was the whole point -- if we are going to have taxpayer-backed deposit insurance and bank bailouts, the prices of that is getting into banks' shorts about the risks they are taking with their investments.  This is the attempted tightening of regulation to which Kling refers.  Regulators were trying for tougher, not weaker standards.

But any libertarian could tell you the problem that is coming here -- the regulatory effort was substituting the risk judgement of thousands or millions of people (individual bank and financial investors) for the risk judgement of a few regulators.  There is no guarantee, in fact no reason to believe, the judgement of these regulators is any better than the judgement of the banks.  Their incentives might be different, but there is also not any guarantee the regulators' incentives are better (the notion they are driven by the "public good" is a cozy myth that never actually occurs in reality).

Anyway, what assets did the regulators choose as "safe"?  Again, we will simplify, but basically sovereign debt and mortgages (including the least risky tranches of mortgage-backed debt).  So you are a bank president in this new regime.  You only have enough capital to meet government requirements if you get 100% credit for your investments, so it must be invested in "safe" assets.  What do you tell your investment staff?  You tell them to go invest the money in the "safe" asset that has the highest return.

And for most banks, this was mortgage-backed securities.  So, using the word Brad DeLong applied to deregulation, there was an "orgy" of buying of mortgage-backed securities.  There was simply enormous demand.  You hear stories about fraud and people cooking up all kinds of crazy mortgage products and trying to shove as many people as possible into mortgages, and here is one reason -- banks needed these things.  For the average investor, most of us stayed out.   In the 1980's, mortgage-backed securities were a pretty good investment for individuals looking for a bit more yield, but these changing regulations meant that banks needed these things, so the prices got bid up (and thus yields bid down) until they only made sense for the financial institutions that had to have them.

It was like suddenly passing a law saying that the only food people on government assistance could buy with their food stamps was oranges and orange derivatives (e.g. orange juice).  Grocery stores would instantly be out of oranges and orange juice.  People around the world would be scrambling to find ways to get more oranges to market.  Fortunes would be made by clever people who could find more oranges.  Fraud would likely occur as people watered down their orange derivatives or slipped in some Tang.  Those of us not on government assistance would stay away from oranges and eat other things, since oranges were now incredibly expensive and would only be bought at their current prices by folks forced to do so.  Eventually, things would settle down as everyone who could do so started to grow oranges. And all would be fine again, that is until there was a bad freeze and the orange crop failed.

Government regulation -- completely well-intentioned -- had created a mono-culture.  The diversity of investment choices that might be present when every bank was making its own asset risk decisions was replaced by a regime where just a few regulators picked and chose the assets.  And like any biological mono-culture, the ecosystem might be stronger for a while if those choices were good ones, but it made the whole system vulnerable to anything that might undermine mortgages.  When the housing market got sick (and as Kling says government regulation had some blame there as well), the system was suddenly incredibly vulnerable because it was over-invested in this one type of asset.  The US banking industry was a mono-culture through which a new disease ravaged the population.

Postscript:  So with this experience in hand, banks moved out of mortage-backed securities and into the last "safe" asset, sovereign debt.  And again, bank presidents told their folks to get the best possible yield in "safe" assets.  So banks loaded up on sovereign debt, in particular increasing the demand for higher-yield debt from places like, say, Greece.  Which helps to explain why the market still keeps buying up PIIGS debt when any rational person would consider these countries close to default.  So these countries continue their deficit spending without any market check, because financial institutions keep buying this stuff because it is all they can buy.  Which is where we are today, with a new monoculture of government debt, which government officials swear is the last "safe" asset.  Stay tuned....

Postscript #2:  Every failure and crisis does not have to be due to fraud and/or gross negligence.  Certainly we had fraud and gross negligence, both by private and public parties.  But I am reminded of a quote which I use all the time but to this day I still do not know if it is real.  In the great mini-series "From the Earth to the Moon", the actor playing astronaut Frank Borman says to a Congressional investigation, vis a vis the fatal Apollo 1 fire, that it was "a failure of imagination."  Engineers hadn't even considered the possibility of this kind of failure on the ground.

In the same way, for all the regulatory and private foibles associated with the 2008/9 financial crisis, there was also a failure of imagination.  There were people who thought housing was a bubble.  There were people who thought financial institutions were taking too much risk.  There were people who thought mortgage lending standards were too lax.  But with few exceptions, nobody from progressive Marxists to libertarian anarcho-capitalists, from regulators to bank risk managers, really believed there was substantial risk in the AAA tranches of mortgage securities.  Hopefully we know better now but I doubt it.

Update#1:  The LA Times attributes "failure of imagination" as a real quote from Borman.  Good, I love that quote.  When I was an engineer investigating actual failures of various sorts (in an oil refinery), the vast majority were human errors in procedure or the result of doing things unsafely that we really knew in advance to be unsafe.  But the biggest fire we had when I was there was truly a failure of imagination.  I won't go into it, but it resulted from a metallurgical failure that in turn resulted form a set of conditions that we never dreamed could have existed.

By the way, this is really off topic, but the current state of tort law has really killed quality safety discussion in companies of just this sort of thing.  Every company should be asking itself all the time, "is this unsafe?"  or "under what conditions might this be unsafe" or "what might happen if..."   Unfortunately, honest discussions of possible safety issues often end up as plaintiff's evidence in trials.  The attorney will say "the company KNEW it was unsafe and didn't do anything about it", often distorting what are honest and healthy internal discussions on safety that we should want occurring into evidence of evil malfeasance.  So companies now show employees videos like one I remember called, I kid you not, "don't write it down."

It May Be Hard to Go Back To Full-Time Work

Back in April of 2013 I wrote about how Obamacare was increasing incentives for offering part-time rather than full-time work.   I warned at the time that once employers got used to scheduling based on part-time shifts, they might never want to go back because it could actually be cheaper and easier than using full-time workers

The service industry generally does not operate 8 hours a day, 5 days a week, so its labor needs do not match traditional full-time shifts.  Those of us who run service companies already have to piece together multiple employees and shifts to cover our operating hours.  In this environment, there is no reason one can’t stitch together employees making 29 hours a week (that don’t have to be given expensive health care policies) nearly as easily as one can stitch together 40 hours a week employees.   In fact, it can be easier — a store that needs to cover 10AM to 9PM can cover with two 5.5 hour a day employees.   If they work 5 days a week, that is 27.5 hours a week, safely part-time.  Three people working such hours with staggered days off can cover the store’s hours for 7 days.

Based on the numbers above, a store might actually prefer to only have sub-30 hour shifts, but may have, until recently, provided full-time 40 hours work because good employees expect it and other employers were offering it.  In other words, they had to offer full-time work because competition in the labor market demanded it.  But if everyone in the service business stops offering full-time work, the competitive pressure to offer anything but part-time jobs will be gone.  The service business may never go back.

The future American service worker will likely be faced with stitching together multiple part-time shifts.  Companies may partner to coordinate shifts so that workers split time between the companies, and third-party clearing houses may emerge in a new value-added role of helping employers and employees stitch together part-time shifts.

Today Virginia Postrel sees this effect in action

The worst thing about being on jury duty isn’t actually serving on a jury. It’s having to check in every day -- possibly several times a day, depending on your local system -- to see whether you’ll be needed. You can’t plan either your work or your personal life. Your schedule is unpredictable and completely out of your control.

For many part-time workers in the post-crash economy, life has become like endless jury duty. Scheduling software now lets employers constantly optimize who’s working, better balancing labor costs and likely demand. The process demands enormous flexibilityfrom part-time workers, sometimes requiring them to be on call all the time without knowing when they’ll work or how much they’ll earn. That puts the kibosh on the age-old strategy of working two or more part-time jobs to make ends meet. As my colleague Megan McArdle writes, “No matter how hard you are willing to work, stringing together anything approaching a minimum income becomes impossible.”

Tracking Changes in Those With Health Insurance

RAND has a study out on changes in people's sources for health insurance.  Once you get the hang of reading it, this is a great table:

click to enlarge

 

This is how to read it -- of the 40.7 million uninsured in September of 2013, 26.2 million remained uninsured, 7.2 million got new employer health insurance (ESI) , 3.6 million joined medicaid, etc.  But then some new uninsured were added back so the new total uninsured is 31.4 million.

One of the first things to notice is the marketplace number of 3.9 million is well below the Administration's claim of 7.1 million.  The Administration's number is not even within the error bar here, so one needs to be skeptical, if he was not already, of Administration sign-up figures.

We also can notice that the individual marketplace seemed to have shrunk from 9.4 million to 7.8 million.  No huge surprise, with all the cancellations that made the news last year.

The really interesting question, of course, is what happened to the uninsured.  We can use this table to look at net changes (millions of people).

2013 Uninsured 40.7
     To Employer -5.1
     To Medicaid -2.6
     To Individual +0.2
     To Exchange -1.4
     To Other -0.3
2014 Uninsured 31.4

To make sure everyone understands the math, 7.2 million left the ranks of the uninsured to get an employer policy, but 2.1 million previously insured by employers became uninsured.  The net is -5.1 million as shown.  All the other numbers are calculated the same way.

I have always had serious questions about the value of the Medicaid signups during this period.   Medicaid is not a limited enrollment product.  You can sign up bleeding on a gurney being rolled into the operating room, and in fact many do -- Hospitals are very good at enrolling people into Medicare as they walk in.  So it was really a misnomer in the first place that someone eligible for Medicaid is "uninsured" -- they are in fact insured, they just have not done the paperwork.  The Medicaid expansion in the PPACA probably helped, but many states that did not expand Medicaid had a lot of signups as well.

The exchange seems to have done little to affect the uninsured.  Net of the reductions in individual insurance presumably driven also by the PPACA, the exchanges reduced the uninsured by 1.2 million.

The really interesting number everyone is  looking at is the huge number of the insured that gained employer coverage.  Three quarters of the non-Medicare related reduction in uninsured (since I don't consider a lot of the Medicare signups a real reduction) were from people going onto employer plans.

Kevin Drum quotes Andrea Mcintyre as saying

If it’s correct, it was probably motivated multiple factors—I hate the word “synergy” on principle, but it comes to mind. The economy has been improving, so some of the previously unemployed have secured jobs with benefits. But CBO built in expectations about economic recovery, so I don’t think it’s quite right to try pinning all (or even most?) of the 8.2 million on that. The individual mandate, while weak in its first year, might be a stronger stick than we expected, nudging people to take their health benefits where they’d previously been opting out. Employers could be helping this move this trend along; the University of Michigan, for example, eliminated “opt out dollars” in 2014 (cash compensation for employees who declined coverage).

Drum add triumphantly

If this finding is confirmed, it's a genuine shocker. Although CBO projected that ESI would stay steady, there's been a lot of chatter about the likelihood of employers dropping coverage thanks to Obamacare. But that sure doesn't seem to have happened. So in addition to the usual sources of coverage—Medicaid, exchanges, sub-26ers—it looks like Obamacare has yet another big success story to tell, one that was almost completely unexpected.

Uh, maybe.  The employer insurance changes could also be an artifact of normal churn and of the odd study period.   The study period is only about half a year.  If there were annual patterns, ie with people losing employer health care early in the year and then gaining it at the end of the year, then only the gains would show up in the study and not the losses.  In fact, there is some reason to believe this is the case, as most corporations have open enrollment periods at the end of the calendar year.

But there is a more interesting issue here.  Folks arguing for Obamacare in the first place sold it by implying that most all the uninsured were uninsured because they could not afford coverage or did not have access.  Now it turns out a large block of the uninsured actually did have access and could afford it, they just chose not to buy it, for whatever reason.  Was this really what it was all about from the very beginning, forcing people to buy a product that they could afford but did not want?

A Question I Have Been Asking For Years -- Effect of Passthrough Entities on Income Equality Numbers

Greg Mankiw wonders how much the growth of pass-through corporations like sub-chapter S corps are skewing income trends, particularly for the highest earners.   With a C-corp, an owner only recognizes corporate income when it is passed through as dividends or when they sell the company.  With an S-Corp or LLC, there are no corporate taxes and corporate income is declared in that year, in full, on one's individual 1040.  I asked about this as far back as 2006 and 2007.

cbo pass through entities

Insurance Companies Got Thrown Under the Bus Today. And They Know It.

Well, so much for the implicit gag order Obama has had on the insurance companies.  Bet we will find out a lot more interesting details about the exchange rollouts now.

[T]he White House has its own idea to stop the bleeding: Allow insurers to renew existing plans in 2014 (which means they could continue into 2015) while forcing them to send Landrieu-like letters explaining why their plans don’t conform to the Affordable Care Act’s standards.

This doesn’t really ensure anyone can actually keep their plan — which means it also doesn’t affect premiums in the exchanges. But it makes it easier for Democrats to blame insurers for canceling these plans. And it perhaps makes it easier for the White House to stop congressional Democrats from signing onto something like Landrieu or Udall.

The insurance industry is furious. They’ve been working with the White House to get HealthCare.Gov up and running and they’ve been devoting countless man hours to dealing with the problems and they’ve been taking the heat from their customers over canceled plans, and now the Obama administration wants to make them into a scapegoat.

“This doesn’t change anything other than force insurers to be the political flack jackets for the administration,” an insurance industry insider told Evan McMorris-Santoro. “So now, when we don’t offer these policies, the White House can say it’s the insurers doing this and not being flexible.”

This is like telling GE to reintroduce 100 watt lightbulbs on thirty days notice, and then blaming them if they don't do it.  Or as I tweeted earlier,

 Update:  Left rallying around Obama, spreading the word that cancellations are all the insurance companies' fault.  I am SO glad I am not affiliated with a political party such that I would feel the need to embarrass myself to support some flailing politician on my team.

The Left has been calling cancelled policies "sub-standard" for months now.  For three years Obama's own folks were estimating that over half of individual policies would have to be cancelled due to the law, and in fact they purposely wrote the regulations narrower to invalidate the maximum number of policies.  But now cancellations are the insurance companies' fault??

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.

Who the HELL is Jay Carney to Tell Me My Health Insurance Policy is "Sub-Standard"?

Via Bloomberg

The health-care law eliminates “substandard policies that don’t provide minimum services,” said Jay Carney, a White House spokesman, in response to the cancellations. The “80-plus percent” of Americans with employer plans or covered by government programs are unaffected.

I chose my policy very carefully, and don't think it is "sub-standard" because it does not include pediatric dental care for two people in their fifties.  This is the worst consumer dis-empowerment that I can remember in my lifetime.

And I totally agree with this

Now an effective levy of several thousand dollars on the small fraction of middle class Americans who buy on the individual market is not history’s great injustice. But neither does it seem like the soundest or most politically stable public policy arrangement. And to dig back into the position where I do strong disagree with Cohn’s perspective, what makes this setup potentially more perverse is that it raises rates most sharply on precisely those Americans who up until now were doing roughly what we should want more health insurance purchasers to do: Economizing, comparison shopping, avoiding paying for coverage they don’t need, and buying a level of insurance that covers them in the event of a true disaster while giving them a reason not to overspend on everyday health expenses.

If we want health inflation to stay low and health care costs to be less of an anchor on advancement, we should want more Americans making $50,000 or $60,000 or $70,000 to spend less upfront on health insurance, rather than using regulatory pressure to induce them to spend more. And seen in that light, the potential problem with Obamacare’s regulation-driven “rate shock” isn’t that it doesn’t let everyone keep their pre-existing plans. It’s that it cancels plans, and raises rates, for people who were doing their part to keep all of our costs low.

With my high deductibles, I am actually out shopping every day on health care prices and I can tell you from my experience that if everyone did so, we would see a reversal of health care inflation.  More here

Two DVD Reviews of Poorly Rated Movies That Had Some Redeeming Characteristics

I had pretty good experiences this week with not one but two movies rated 6 and under (which is pretty low) on IMDB

Atlas Shrugged, Part II:  A mixed bag, but generally better than the first.  The first episode had incredibly lush, beautiful settings, particularly for a low budget indie movie.  But the acting was stilted and sub-par.  Or perhaps the directing was sub par, with poor timing in the editing and dialog.  Whatever.  It was not always easy to watch.

The second movie is not as visually interesting, but it tossed out most of the actors from the first movie (a nearly unprecedented step for a sequel) and started over.  As a result, the actors were much better.  Though I perhaps could wish Dagny was younger and a bit hotter, she and the actor who played Rearden really did a much better job (though there is very little romantic spark between them).  And, as a first in any Ayn Rand movie I have ever seen, there were actually protagonists I might hang out with in a bar.

The one failure of both movies is that, perhaps in my own unique interpretation of Atlas Shrugged, I have always viewed the world at large, and its pain and downfall, as the real protagonist of the book.  We won't get into the well-discussed flatness of Rand's characters, but what she does really well -- in fact the whole point of the book to me -- is tracing socialism to its logical ends.  For me, the climactic moment of the book is Jeff Allen's story of the fate of 20th Century Motors.  Little of this world-wilting-under-creeping-socialism really comes out well in the movie -- its more about Hank and Dagny being harassed personally.  Also, the movie makes the mistake of trying to touch many bases in the book but ends up giving them short shrift - e.g. Jeff Allen's story, D'Anconia's great money speech, Reardon's trial, etc.

I would rate this as worth seeing for the Ayn Rand fan - it falls short but certainly does not induce any cringes  (if only one could say that about the Star Wars prequels).

Lockout:  This is a remake of "Escape from New York", with a space prison substituting for Manhattan and the President's daughter standing in for the President.  The movie lacks the basic awesomeness of converting Manhattan to a prison.  In fact, only one thing in the whole movie works, and that is the protagonist played by Guy Pierce (who also starred in two of my favorite movies, LA Confidential and Memento).

The movie is a total loss when he is not on screen.  The basic plot is stupid, the supporting characters are predictable and irritating, the physics are absurd, and the special effects are weak.  The movie is full of action movie cliche's -- the hero throwing out humorous quips (ala Die Hard or any Governator movie), the unlikely buddy angle, the reluctant romantic plot.  But Pierce is very funny, and is thoroughly entertaining when onscreen.  I think he does the best  job at playing the wisecracking, cynical hero that I have seen in years.

Re-Inflating the Bubble

We all know from progressive and Democratic writers the the Community Reinvestment Act and other efforts to offer cheap home loans to people without good credit had nothing to do with the mortgage industry offering too many loans to people without good credit.

So we should not be in the least bit worried that the Obama Administration is calling for more mortgages to be given to people with weaker credit, while sub-prime auto loans are simply booming.  Because we have learned from Iceland and Greece and Cyprus that the best way to deal with a debt crisis is by encouraging consumers to take on more debt, and the best way to respond to an asset bubble is to try to re inflate the bubble.

All of this, of course, is simply crazy talk.  The people who are involved HAVE to know this won't end well, because the most recent example of this leading to disaster is only 4 years old.  Hell, the people doing this were in office when this same approach fell apart last time.  But politicians refuse to face some pain now to avoid huge pain in the future - for politicians, the discount rate on pain is infinite.

Arrogance and Coercion

Years ago I had an argument with my mother-in-law, who is a classic Massachusetts liberal  (by the way, we get along fine -- I have no tolerance for the notion that one can't be friends with someone who has a different set of politics).  The argument was very clarifying for me and centered around the notion of coercion.

I can't entirely remember what the argument was about, but I think it was over government-mandated retirement programs.  Should the government be forcing one to save, and if so, should the government do the investment of those savings (ie as they do in Social Security) even if this means substantially lower returns on investment?

The interesting part was we both used the word "arrogant."  I said it was arrogant for a few people in government to assume they could make better decisions for individuals.  She said it was arrogant for me to assume that all those individuals out there had the same training and capability that I had to be able to make good decisions for themselves.

And at the end of the day, that is essentially the two sides of the argument over government paternalism boiled down to its core.  I thought coercion was immoral, she thought letting unprepared people make sub-optimal decisions for themselves when other people know better is immoral.  As with most of my one on one arguments I have with people, I left it at that.  When I argue face to face with real people, I have long ago given up trying to change their minds and generally settle for being clear where our premises diverge.

I am reminded of all this reading Bruce McQuain's take on Sarah Conly's most recent attempt to justify coercive paternalism (the latter is not an unfair title I have saddled her with -- it's from her last book).  Reading this I had a couple of other specific thoughts

  1. I am amazed how much Conly and folks like her can write this stuff without addressing the fundamental contradiction at its core -- if we are so bad making decisions for ourselves, why do we think the same human beings suddenly become good at it when they join government?  She would argue, I guess, that there are a subset of super-humans who are able to do what most of us can't, but how in a democracy do we thinking-impaired people know to vote for one of the supermen?  Or if you throw our democracy, what system has ever existed that selected for leaders who make good decisions for the peasants vs., say, selected for people who were good generals. 
  2. Is there any difference between Conly's coercive paternalism and Kipling's white man's burden?  Other than the fact that the supermen and the mass of sub-optimizing schlubs are not differentiated by race?  It's fascinating to see Progressives who are traditionally energized by hatred of colonialism rejuvinating one of imperialism's core philosophical justifications.

Auto Bailouts and the Rule of Law

Todd Zwicki has a great article on the auto bailouts.  Here is a brief excerpt of a long and very comprehensive article.

Of the two proceedings, Chrysler's was clearly the more egregious. In the years leading up to the economic crisis, Chrysler had been unable to acquire routine financing and so had been forced to turn to so-called secured debt in order to fund its operations. Secured debt takes first priority in payment; it is also typically preserved during bankruptcy under what is referred to as the "absolute priority" rule — since the lender of secured debt offers a loan to a troubled borrower only because he is guaranteed first repayment when the loan is up. In the Chrysler case, however, creditors who held the company's secured bonds were steamrolled into accepting 29 cents on the dollar for their loans. Meanwhile, the underfunded pension plans of the United Auto Workers — unsecured creditors, but possessed of better political connections — received more than 40 cents on the dollar.

Moreover, in a typical bankruptcy case in which a secured creditor is not paid in full, he is entitled to a "deficiency claim" — the terms of which keep the bankrupt company liable for a portion of the unpaid debt. In both the Chrysler and GM bankruptcies, however, no deficiency claims were awarded to the wronged creditors. Were bankruptcy experts to comb through American history, they would be hard-pressed to identify any bankruptcy case with similar terms.

To make matters worse, both bankruptcies were orchestrated as so-called "section 363" sales. This meant that essentially all the assets of "old Chrysler" were sold to "new Chrysler" (and "old GM" to "new GM"), and were pushed through in a rush. These sales violated the longstanding bankruptcy principle that an asset sale should not be functionally equivalent to a plan of re-organization for an entire company — what bankruptcy lawyers call a "sub rosa plan." The reason is that the re-organization process offers all creditors the right to vote on the proposed plan as well as a chance to offer competing re-organization plans, while an asset sale can be carried out without such a vote.

In the cases of GM and Chrysler, however, the government essentially pushed through a re-organization disguised as a sale, and so denied the creditors their rights. As the University of Pennsylvania's David Skeel observed last year, "selling" an entire company of GM or Chrysler's size and complexity in this manner was unprecedented. Even on a smaller scale, it would have been highly irregular: While rush bankruptcy sales of much smaller companies were once common, the bankruptcy laws were overhauled in 1978 precisely to eliminate this practice.

At first, the fact that the companies' creditors (and especially Chrysler's creditors, who were so badly mistreated) put up with such terms and waived their property rights seems astonishing. But it becomes less so — and sheds more light on how this entire process imperils the rule of law — when one considers the enormous leverage the federal government had over most of these creditors. Many of Chrysler's secured-bond holders were large financial institutions — several of which had previously been saved from failure by TARP. Though there is no explicit evidence that support from TARP funds bought these bond holders' acquiescence in the Chrysler case, their silence in the face of a massive financial haircut is otherwise very difficult to explain.

Indeed, those secured-bond holders who were not supported by TARP did not go nearly as quietly.

The Seen and Unseen: Passenger Rail Edition

We have all heard environmentalists and other American intellectual snobs lamenting that we just are not as smart as Europeans because we have so much less passenger rail.  But because freight and high-speed passenger rail service does not coexist well on the same tracks, urging more passenger rail on the US rail net is effectively asking for more freight to be dumped onto the highways.

Megan McArdle writes:

Moving freight by rail rather than by truck is an enormous carbon saving; one locomotive can haul as much as hundreds of trucks.  It also reduces highway congestion.  Unfortunately, it's hard for passengers and freight to share tracks.  In part, it's difficult simply because it's expensive to upgrade track to handle passenger speeds, but also because freight moves much more slowly, and on an irregular schedule.
I might well argue that if we were simply trying to maximize environmental benefit, we'd ignore passenger rail, and focus on upgrading our freight systems, which sorely need it.  Moreover, these upgrades could largely be made without the massive procedural obstacles that block new high speed rail lines.

But freight rail is not sexy.  It does not excite donors, and it does not excite most of the voters who are motivated by high speed rail.  Politicians win votes by delivering (or at least promising) highly visible improvements; not by silently enhancing the movement of goods from port to Wal-Mart.

I am not sure politicians really have to do anything other stay out of the way (we already have among the cheapest rail rates in the world, 1/2 of China's and 1/8 of Germany's).  The numbers on freight movement are pretty dramatic:

See the percentage of goods moved by freight, which is dramatically higher for the US.  The end result is we have a LOT less freight on our roads than the EU or Japan, and might have even less if US maritime laws had not done so much to kill coastal shipping.
This is the great unseen in all these "sophisticated" conversations about Europe.  These Euro-philes are so much smarter than the rest of us that they manage to ignore the most important part of the equation  (largely because it is unseen and not sexy).  In fact, the US has the best rail system in the world, and in fact the governments of Europe and Japan have likely sub-optimized their rail systems by forcing their focus towards passengers rather than freight.
I will leave the last word to the Anti-Planner:

Europe has decided to run its rail system primarily for passengers, while America's system is run mainly for freight. Europe's rail system has about 6 percent of the passenger travel market, while autos have about 78 percent. Meanwhile, 75 percent of European freight goes by highway. Here in the U.S., highway's share of freight travel is only 29 percent, while the auto's share of passenger travel is about 82 percent. So trains get 4 percent of potential auto users in Europe out of their cars, but leave almost three times as much freight on the highway.

False Dichotomy

False dichotomy, via Mother Jones:

Faced with a world that can support either a lot of us consuming a lot less or far fewer of us consuming more, we're deadlocked: individuals, governments, the media, scientists, environmentalists, economists, human rights workers, liberals, conservatives, business and religious leaders. On the supremely divisive question of the ideal size of the human family, we're amazingly united in a pact of silence.

My guess is that the authoritarians at Mother Jones don't particularly care which is the outcome, so long as they get to wield the coercive power to make the choice for us.  Thank God these guys didn't run things in 1900.  Or 1800.  Or 1700.  Or 1600.  Or 1500.  Given their belief in zero sum choices and their complete lack of confidence in the power of the human mind to innovate, who knows what kind of sub-optimal world we would have been locked into?

The Technocratic Standard-Setting Urge

The Thin Green Line writes:

But other problems have such a straightforward solution the only question is, why haven't we implemented it already?So it is with the phone charger (H/T Mother Jones). How many old ones do you have kicking around in a drawer? If you're loyal to a particular phone, you may even have several identical chargers. Because they're electronic, you're also burdened with disposing of them properly lest they leach their toxins into some poor, unsuspecting landfill.

Not only that but chargers use a good bit more electricity than they need to and are vampires"”meaning they continue to draw power even when they're not, you know, charging.

Now imagine a world where not only did phone chargers use less energy, but they were universal, meaning any charger fit any phone. That would mean about 600 million fewer chargers each year stashed in drawers around the world and reduce greenhouse gas emissions by 15 to 24 million tons a year"”not even to mention e-waste.

The UN's International Telecommunication Union has approved this universal dreamboat of a charger. It will use half as much energy on standby. Samsung, Nokia and Motorola have already agreed to use it. Of course, they're hemorrhaging business to BlackBerry and Apple...no word yet from those guys.

I wrote:

There are at least two problems with this.  The first is that consumers are all different.   A lot of cell phones (and other devices like my kindle) are standardizing on a mini-USB connection.  Should I use the UN's solution, which is likely inferior?  Why?  Most of the time I don't even travel with a charger, I plug the mini-USB into my computer to charge.  That way I only have 1 charger on the road, for my computer.  You want me to carry 2, in the name of having fewer chargers?   You might say, "well, I hadn't thought of this situation," and I would say, "that's the point - you can't, there are 6 billion of us individuals out there."

The second problem is innovation.  Who says that innovation won't demand a different type of connection in 2 years?  Do you really want your technology gated to some working group at the UN?  Go back in time and imagine the government locking in a standard on something.  We still would have 801.11a wireless only, or cars would still all have crank starts (but they would all turn the same direction!) or cars would all have the same size wheels.  If the UN had invented something 3 years ago, it would have been power only and not data.  Today, most cell phones have power connections and connectors that double as data ports.

There is always a technocratic urge in messy changing technology markets to swoop in and mandate a standard from above, even while the technology is still evolving.  The problem is that neither you nor anyone else knows everything.  Hayek described this information problem well but you make it abundantly clear on this site you have no familiarity with Hayek.  You extrapolate what seems to be a good solution from your narrow knowledge, but cause many of us to sub-optimize because you did not anticipate how I use my charger or what technology some cell phone manufacturer today may be developing that requires a different kind of charger standard.

Raising Car Prices for the Poor

I had read a couple of articles positing that by destroying low value cars in the "cash for clunkers program,"  the government was hurting the poor by removing the supply of sub-$5000 used cars from the market.  But what I did not realize is that this program further requires that the engines themselves be rendered useless, so that they cannot be used for parts or rebuilt replacement engines.

The automotive death sentences are meant to ensure that gas-guzzling old models make no return to the road. As sodium silicate disables an entire generation of junkyard-bound cars, the price of used engines will likely skyrocket, predicts Michael Wilson, executive vice president of the Automotive Recyclers Association. "It's the law of supply and demand."

Good plan.  The Journal has a good article about how this sodium silicate process was selected to destroy cars.  I am left wondering if engine parts can even be recycled economically for their metal after the treatment.

The Emerging Corporate State

I very seldom include really long excerpts from articles, but this is perhaps the most telling article I have read to really give you a feel for what the new government ownership of the automakers really means.

It sounds crazy: Just a week after the White House scolded Chrysler LLC for relying too much on gas guzzlers, the company is heading to a marquee auto show Wednesday to unveil a new SUV.

Chrysler insists the Jeep Grand Cherokee, which clocks in at 20 mpg in its two-wheel-drive version and 19 in four-wheel-drive, is a crowd favorite and a crucial part of its lineup.

"This is a very important vehicle for us. It's one of the primary legs of the Chrysler stool," Chrysler spokesman Rick Deneau said. "Customers have told us they want this vehicle and that it's the right size."...

The White House slammed Chrysler for having a product lineup so heavily weighted with trucks and SUVs. It added that the automaker does not have enough products in the pipeline to meet an expected increase in demand for small cars.

But Chrysler is standing by the Grand Cherokee. It's profitable, recognizable and the No. 2-selling vehicle in the Jeep lineup. Grand Cherokee sales fell by almost half during the first three months of the year, but its market share has remained steady, according to Autodata Corp....

Karl Brauer, editor in chief of the automotive Web site Edmunds.com, said it may be hard for Chrysler to please both the government, which is demanding greater fuel efficiency from the Big Three, and its customers, many of whom still demand big cars.

"It would be far more foolish for Chrysler to abandon its core competencies in the Jeep brand lineup than it is to come out with a new" Grand Cherokee, Brauer said.

I hardly know where to start with this.  Some thoughts:

  • As expected, the administration does not really care about the near-term recovery of GM and Chrysler, or, if they care, they are totally ignorant as to the realities of the US car market and the sources of Chrysler's profitability.   They care about enforcing a particular political agenda that has little to do with, and may actually conflict with, the health of the company.
  • We have hit a new low when the President of the United States has a strong opinion on and reaction to what car a private company chooses to feature at an auto show.
  • We REALLY have hit a new low when my newspaper thinks its "crazy" that a private company would follow its own marketing intuition rather than the dictates of the US President as to what car they should feature at an auto show.  The AZ Republic just assumes the company should do whatever Obama tells them to.
  • "Expected increase in demand for small cars"  -- Expected, by whom?  Hybrids are currently losing market share.
  • It takes years to develop a new car, so this particular variation of the Cherokee has been in the pipeline for a while, and millions of dollars have likely been invested in it.  And the product line makes money, unlike many other Chrysler cars.  But the Administration wants them NOT to sell it?  It takes years to change a company's auto portfolio, but Obama is going to throw a hissy fit because they have not done it in two months?  Don't they know who he is?
  • The article even gives the data one needs to understand why buyers don't share Obama's need to downsize their car.  Based on numbers in the article, this SUV uses $235 more gas a year than the Camry (which I guess is a more politically correct car choice).  That is $19.60 a month.  Assuming a car payment of $450 per month, that is about 4% of the car payment.  In other words, the difference in gas use is a TRIVIAL expense for the person who can afford to buy the car in the first place.  Over 5 years, the cumulative extra gas to fuel the SUV costs about the same as the 16" alloy wheel option on the Camry.

Every day, I have an increasing sense that we are creating a dictatorship run by a grad school public policy seminar.

I am sure that Obama really believes, in his heart, that Americans really want smaller cars rather than SUVs.  So what?  By acting on his own preferences, he is breaking what I call marketing rule #1:  Never assume ones own personal preferences are shared by the marketplace.

I wrote the following in the comments to this post where a good Bay Area greenie had expressed similar views (that automakers are hurting because they are producing the wrong cars that Americans don't want):

I have been a marketer all my life. As such, one of the first rules of survival I learned was to never overlay my own personal preferences on the marketplace. GM has had this problem for years, with insular design teams locked in some weird 1970s design world.

But you and others are simply repeating the mistake, with a different set of perspectives -- you assume your personal preferences in cars represent that of the majority of buyers, and you wish to use the fiat power of government to enforce those preferences. It is a recipe for fiscal disaster. I promise you what people buy, for example, in rural Arizona is not the same thing that people buy in SF, no matter how much those on the coasts want to forget that flyover country exists.

I actually think there is decent evidence that a lot of people do want what GM is offering, given their market share. Why do people always say they make cars that no one wants to buy, when they sell 10 million of them each year? I will confess the GM product line does nothing for me, but so what? Others seem to like it, and, unlike many, I don't look down my nose at them for doing so.

The problem is not necessarily their product line, but their cost position. The average price of new cars has not risen for 15 years. Much like in computers, consumers now expect ever better cars for the same or lower price each year. GM is still producing cars with a mindset built in an era of a three-company domestic monopoly, where 4% annual price increases were routine. Their competition is producing like they are Dell or Toshiba, recognizing that they are never going to get price increases and ruthlessly driving down costs.

Update: This is relevent, even if not directed specifically at autos:

Er, industry also knew how to make low-flow toilets, which is why every toilet in my recently renovated rental house clogs at least once a week.  They knew how to make more energy efficient dryers, which is why even on high, I have to run every load through the dryer in said house twice.  And they knew how to make inexpensive compact flourescent bulbs, which is why my head hurts from the glare emitting from my bedroom lamp.    They also knew how to make asthma inhalers without CFCs, which is why I am hoarding old albuterol inhalers that, unlike the new ones, a) significantly improve my breathing and b) do not make me gag.  Etc.

In fact, when I look back at almost every "environmentally friendly" alternative product I've seen being widely touted as a cost-free way to lower our footprint, held back only by the indecent vermin at "industry" who don't care about the environment, I notice a common theme: the replacement good has really really sucked compared to the old, inefficient version.  In some cases, the problem could be overcome by buying a top-of-the-line model that costs, at the very least, several times what the basic models do.  In other cases, as with my asthma inhalers, we were just stuck.

Often "industry reluctance" to offer green products is actually industry understanding of customer reluctance to buy them.

Whither the Volt

Via Jim Kingsdale:

Since PHEV's [plugin hybrid electric vehicles] can have so much impact on both the energy investment outlook and national security, I follow with some interest the news about their likely availability.  Recently a picture is starting to emerge.  It is not positive for American car companies, of which G.M.'s Volt is the poster child.  This is not totally surprising given G.M.'s proven history of incompetence.

We know that the Volt's battery is so expensive that G.M. proposes to sell the car for $40,000 - a price that would eliminate most buyers.  And even with such a high price G.M. promises they would lose money on every vehicle.  So, as I've previously written, the Volt may well be more of a political strategy for G.M. than a likely transportation solution.   Now a new study by Carnegie Mellon University says the design of the Volt's propulsion system is inherently sub-optimal and uneconomical - "not cost effective in any scenario" in the words of the study.

The reason is quite obvious once you think about it.  G.M. designed the Volt battery to go 40 miles on a charge because, they "reasoned", some 90% of all drivers go no more than 40 miles in a day.  What Carnegie Mellon points out is that the average driver goes less than 20 miles in a day.  Therefore the Volt's battery is twice as large as necessary for some 50% of drivers .  Since battery weight and cost are the prime determinants of a PHEV's cost-effectiveness, the Volt battery is about twice as large as is economically practical for most drivers.

Here's how the report put it: "The Carnegie Mellon study, conducted by engineers from three different departments, constructed computer simulation models to determine the impact of additional batteries on fuel consumption and cost and greenhouse gas emissions over a range of charging frequencies.  It found that small-capacity plug-ins that get less than 20 miles per charge are more efficient than conventional hybrids. And it said that large capacity hybrids like the Volt that go 40 miles or further on a charge are never cost-effective, because the batteries cost and weigh too much.  A car with the Volt's range, according to the study, would also be extremely uneconomical traveling fewer miles as it hauls around battery capacity it doesn't need."

So much for the Volt.  Ciao - and lets hope the U.S. govt. is smart enough not to fall for the Volt's fools-gold as an excuse to keep G.M., a chronically mismanaged company, from enjoying the cleansing benefits of bankruptcy.  Among which benefits might be new management.

A Last Case for Payday Loans

Well, we have upheld the ban on payday loans here in Arizona.

The payday-loan industry, which flourished this past decade on Arizonans' almost-insatiable need for quick, short-term loans regardless of their high interest rates, may have to close down in Arizona unless state lawmakers can be persuaded to ignore voters' wishes.

Voters last week overwhelmingly rejected Proposition 200, a ballot initiative financed and written by the loan companies to allow them to continue charging high interest rates on small loans. That decision placed Arizona among a growing number of states that have effectively shut down the payday lenders.

So, payday loans from company A to person B are really popular with both A & B, and the industry has "flourished."  But persons C, who don't participate in this market, have decided that, for their own good, A & B need to stop engaging in this behavior.  One such third party explains it this way:

Sen. Debbie McCune Davis, D-Phoenix, opposed Prop. 200 and has steadfastly fought payday lenders. She sees no need to let payday lenders continue to charge higher interest rates than other lenders.

Her and voter's actions have effectively limited payday loan companies to charging total interest and fees equivalent to no more than 36% annual interest.  OK, you say, this seems like a really high rate.  That should be enough, right?  Well, the problem comes with fixed costs and loan size.  Lets look at an example.

A typical payday loan size and term is about $400 for 18 days (pdf).  A typical fee for such a loan is $50, which includes both fixed costs and interest.  Wow, annualized that is 250%.  Usurious!  So would you personally go out and get a payday loan?  No way! And that is why voters vote to ban them - they are not good for me personally, so they must not be good for anyone else.

But here is the problem.  How do you maintain a storefront and trained people and all the documentation and collection apparatus for less than $50?  The same loan at 36% would allow a fee of only $7.20.  That barely even covers paying someone to originate the loan at the counter, much less pay interest and a risk premium.

Try going to the bank and getting a home loan or some other type of loan for only a $50 fee.  Granted those loans are more complicated, but in turn you will likely get charged hundred and probably thousands of dollars in fees.  There is a large fixed cost component to the act of lending which we tend to ignore on larger loans, but is there none-the-less.  In fact, just try to go to a bank and get a loan for $400 at all.  They don't make them, outside of the credit card industry, which solves this problem in part through economies of scale and in part through cost-shifting costs to merchants, options not really available to payday loan companies.

And so far, we are only talking about fixed costs, not the underwriting risk of extending loans to about any person who wanders in the door and can sign his/her name.  Anyone remember sub-prime mortgages?  Maybe there is a justification for large risk premiums, after all, on loans to under-qualified borrowers.  Particularly when you consider that most payday loan customers could not qualify even for a sub-prime mortgage.

The best equivalent to a payday loan offered by banks is overdraft protection, where the bank will go ahead and pay out on checks where there are insufficient funds, though they will charge a $20-$30 fee per check paid.  As you can see, these fees are very similar in magnitude to those charged by payday loan companies, particularly when you consider that these fees are generally charged on checks that average about $150.  Also, folks who get one overdraft fee usually get several in a row.  People are willing to pay these fees because they are in fact lower than the fees of actually having a check bounce, which can incur similar fees from merchants as well as hurting one's credit.

So, you just had to write three checks to get the power and water and telephone turned on, and you are pretty sure the money is not there in your checking account.  You are facing $80 in bounced-check (NSF) fees or overdraft fees.  Now might you consider a $400 loan for a $50 fee?  Well, probably the answer is still no, you would put it on your credit cards.  But everyone doesn't have credit cards, or doesn't qualify for them, or don't have a lifestyle that allows for them.  Where do they go, short of Tony Soprano?

Update: A reader sent me a link to this report, comparing payday loan rates to overdraft protection, and finding them of similar magnitude.  The author calculates an average $28.61 overdraft fee on an average $155 bounced check yields an APR of 478%.  There is a fixed cost to lending, and small very short term loans cost a lot of money, no matter how you get them.

I will remind folks not to be fooled by 18% or 23% rates on credit cards and set that as the market rate for small loans.  First, this misses annual fees for the cards.  But more importantly, it misses merchant fees.  Merchants pay between 2.5% and 3.5% of everything you charge to the credit card companies.  This helps to subsidize rates and, particularly, subsidize the fixed costs of small lending transactions.

From the Guy Who Really Deserved His Peace Prize

Last year, Al Gore won the Nobel Peace Prize for proposing world-wide government actions that will prevent a billion of more people form escaping poverty.  But, once upon a time, Norman Borlaug won a Peace Prize for actually helping the poor help themselves.  Here is what he is saying today.  Folks from the EU to Bono to Al Gore are standing in the way, again, of people feeding themselves by aggressively applying the technology we take for granted in America:

Yields can still be increased by 50-100% in much of the Indian sub-Continent,
Latin America, the former USSR and Eastern Europe, and by 100-200% in much of
sub-Saharan Africa, providing political stability is maintained, bureaucracies
that destroys entrepreneurial initiative are reigned in, and their researchers
and extension workers devote more energy to putting science and technology to
work at the farm level....

I now say that the world has the technology - either available or
well-advanced in the research pipeline - to feed a population of 10 billion
people. The more pertinent question today is whether farmers and ranchers will
be permitted to use this new technology. Extremists in the environmental
movement from the rich nations seem to be doing everything they can to stop
scientific progress in its tracks. Small, but vociferous and highly effective
and well-funded, anti-science and technology groups are slowing the application
of new technology, whether it be developed from biotechnology or more
conventional methods of agricultural science. I am particularly alarmed by those
who seek to deny small-scale farmers of the Third World -and especially those in
sub-Saharan Africa - access to the improved seeds, fertilizers, and crop
protection chemicals that have allowed the affluent nations the luxury of
plentiful and inexpensive foodstuffs which, in turn, has accelerated their
economic development.

McCain Believes in Nothing

I am increasingly convinced that John McCain believes in nothing, or at least believes in nothing strong enough that he can't turn a 180 on the issue if the polling numbers move the meter hard enough

The plan would retire old
loans that homeowners no longer can pay and replace them with less
expensive, 30-year, fixed-rate mortgages that are federally guaranteed.
McCain said families would gain "the opportunity to trade a burdensome
mortgage for a manageable loan that reflects the market value of their
home."

In line with
his concern about bailing out speculators, McCain's proposal would
apply only to homeowners who took out sub-prime mortgages after 2005
for homes that are their main residence. They would need to have proved
they were credit-worthy at the time of the loan.

I hope everyone else is enjoying the notion of "sub-prime mortgages" where the borrowers were "credit-worthy at the time of the loan." 

Congress: We Can't Stop Ourselves From Doing Harm

From the Washington Post, via Tom Nelson, comes a nice summary of the consequences of Congress's addiction to ethanol mandates and subsidies.  The last sentence in particular is one I have warned about for a while on this issue.

To be sure, some farmers in these countries benefit from higher prices.
But many poor countries -- including most in sub-Saharan Africa -- are
net grain importers, says the International Food Policy Research
Institute, a Washington-based think tank. In some of these countries, the poorest of the poor spend 70 percent or more of their budgets on food.
About a third of the population of sub-Saharan Africa is
undernourished, according to the Food and Agriculture Organization of
the United Nations. That proportion has barely changed since the early
1990s. High food prices make gains harder.
...
It's
the extra demand for grains to make biofuels, spurred heavily in the
United States by government tax subsidies and fuel mandates, that has
pushed prices dramatically higher
. The Economist rightly calls
these U.S. government subsidies "reckless." Since 2000, the share of
the U.S. corn crop devoted to ethanol production has increased from
about 6 percent to about 25 percent -- and is still headed up.
...
This
is not a case of unintended consequences. A new generation of
"cellulosic" fuels (made from grasses, crop residue or wood chips)
might deliver benefits, but the adverse effects of corn-based ethanol
were widely anticipated. Government subsidies reflect the careless and
cynical manipulation of worthy public goals for selfish ends. That the
new farm bill may expand the ethanol mandates confirms an old lesson:
Having embraced a giveaway, politicians cannot stop it, no matter how
dubious.

Capitalism Rorschach Test

The current failures in the subprime mortgage market, both of borrowers and lenders, has become one of those classic Rorschach tests where people self-identify by what description they apply to the market fallout.  Views on capitalism, free interchange, and individual responsibility are all tied up in the choice between:

  1. Businesses recognized an opportunity to expand the mortgage market by offering mortgages to poorer, riskier borrowers and managing the risk by securitizing these loans and reselling them in the increasingly robust institutional market for such loan packages.  While certainly in it for the profit, this move was consistent with the long-term trend in the US to wider home ownership.  It turned out, however, that almost everyone involved were working off some poor assumptions.  Borrowers over-estimated their ability to pay and counted too much on the continued upward trajectory of real estate values.  Lenders made a number of bad credit decisions, something not wholly surprising in a new market.  And institutions and other investors under-estimated the risk in these packages, particularly the systematic risk associated with falling housing prices.   The sub-prime market will likely re-emerge, but with everyone smarter the next time around.  Huge losses give lenders and institutions all the incentive they need to change their behavior in the future.
    -- OR --
  2. Unscrupulous lenders created the sub-prime market as a way to make a quick buck off of naive and inexperienced borrowers.  They tricked these borrowers into taking on more debt than they could handle in order to get large up-front fees.  Institutions were not arms-length investors, but were explicitly knowledgeable and "in on" this con.  Their goal was to sell worthless bonds to unsuspecting investors.  The fact that the lenders and institutions are taking the biggest losses in the market collapse is not a sign that they are innocent, but that the market fell apart faster than they expected, so they had not had the chance to unload the securities on duped individual investors.  Without regulation, lenders and institutions will continue committing these same crimes and poor people have proven that they need outside help to make good decisions with their money.  Congress needs to step in and prevent poorer borrowers from being offered mortgages in the future, and institutional investors need to be held financially accountable when borrowers take on more debt than they can handle.

Update:  There are several comments that say "can't it be both?"  Surely there can be simultaneous examples of both in the same market, but, as an example, proponents of #2 talk as if theirs is the dominant explanation, and are proposing legislation on that basis. 

Recognize that you have to really believe #2 all the way to even consider some of the draconian measures that Congress is entertaining.  There is legislation that is being seriously considered at this moment
that will fundamentally change the entire mortgage market, not just the
sub-prime piece, for the worse.  In particular, Congress is considering making financial institutions that invest in securitized batches of mortgages liable for any illegal lending practices of the originator.  This will effectively kill the securitization process.  Many of you younger folks won't know what that means, but in effect it will send us back to the mortgage process of the 1970's, which I promise you really, really sucked.  This will make it much harder for everyone to get mortgages.  Since securitization, there are an order of magnitude more mortgage competitors, the mortgage approval and application process take about 1% of the time it used to, rates are lower, and there is much more flexibility in mortgage design. 

A Nation of Slaveholders

With the northern victory in the Civil War, and the subsequent passage of the 13th amendment, slavery was formally ended in this country.  Specifically, the 13th amendment stated:

Neither slavery nor involuntary servitude, except as a punishment for
crime whereof the party shall have been duly convicted, shall exist
within the United States, or any place subject to their jurisdiction.

Unfortunately, over a century later, slavery has returned to the United States.  Today, through the exercise of political power and the redistribution of wealth that should never have been Constitutional, 55% of Americans hold the other 45% in bondage, living off the product of their efforts just as surely as the white plantation owners of the Old South lived off the sweat of their African slaves.  The basis for this new servitude, however,  is not race, or religion, or national origin, but productivity. (via TJIC)

From the Christian Science Monitor:

Slightly over half of all Americans - 52.6 percent - now receive
significant income from government programs, according to an analysis
by Gary Shilling, an economist in Springfield, N.J. That's up from 49.4
percent in 2000 and far above the 28.3 percent of Americans in 1950. If
the trend continues, the percentage could rise within ten years to pass
55 percent, where it stood in 1980 on the eve of President's Reagan's
move to scale back the size of government.

Meanwhile, Ari Fleischer writes in today's WSJ (sub req) that the
top 1% of income earners pay 37% of total income taxes, the top 10% of
income earners pay 71% of total income taxes, and the top 40% of income
earners pay 99% of total income taxes.

The latter analysis is a bit off because it does not include payroll taxes, but if you include these taxes you still have under 50% of Americans paying virtually all the taxes (table at top of this page includes payroll taxes

The second greatest failing of the Constitution as originally drafted (the first being legality of slavery) is the lack of clear protections for property and commerce.  As a result, the only protection we have against full confiscation of everything we own is the whim of the electorate.  Now that a clear majority of voters are on the receiving end of money confiscated from a minority of voters, how good is this last protection? 

We have become a nation of slaveholders, with the majority holding the productive minority in bondage.  Inserting government in the middle of this process as an agent, so the recipients of this slave labor don't have to get their own hands dirty, does not change the nature of the relationship one bit.  It just pretties things up for our conscience.

Update:  Is the word "slavery" over the top?  Maybe, and I guess I could be accused of trivializing the true horrors of African slavery in the 19th century.  So substitute the word "serfdom" for "slavery".