Low Oil Prices and Prosperity

I continue to see reports about how bad falling oil prices are for the economy -- most recently some layoffs in the steel industry were blamed on the looming drop (or crash) in oil drilling and exploration driven by substantially lower prices.

I find this exasperating, a classic seen-and-unseen type failure whose description goes back at least to the mid-19th century and Bastiat and essentially constituted most of Hazlitt's one lesson on economics.  Yes, very visibly, relatively high-paid steel and oil workers are going to lose their jobs.  They will have less money to spend.  The oil industry will have less capital spending.

But the world will pay over a trillion dollars less this year for oil than it did last year (if current prices hold).  That is a huge amount of money that can be spent on or invested in something else.  Instead of just getting oil with those trillion dollars, we will still have our oil and a trillion dollars left over to spend.   We may never know exactly who benefits, but those benefits are definitely there, somewhere.  Just because they cannot be seen or portrayed in short visual anecdotes on the network news does not mean they don't exist.

Ugh, this is just beyond frustrating.  I would have bet that at least with oil people would have understood the unseen benefit, since we get so much media reportage and general angst when gas prices go up that people would be thrilled at their going down.  But I guess not.

I explained in simple terms why the world, mathematically, HAS to be better off with lower oil prices here.

Before Michael Brown, Ferguson Police Did This

I had forgotten about this story and am surprised the media did not make this connection more often during the Michael Brown brouhaha:

Michael Daly at The Daily Beast has the flabbergasting story of Henry Davis, who was picked up by cops “for an outstanding warrant that proved to actually be for another man of the same surname, but a different middle name and Social Security number,” then beaten by several officers at the station. What happened next was truly surreal: while denying that Davis had been seriously hurt at all, though a CAT scan found he had suffered a concussion and a contemporaneous photo shows him bleeding heavily, four police officers sought to have him charged for property damage for getting blood on their uniforms. ...

The kicker: the police department was that of Ferguson, Missouri.

My Contributions to Social Science

It occurred to me that I have reached important insights into human behavior that it would be negligent of me to withhold from the world, so here they are:

The Cheerleader Effect:  The cheerleader effect describes a human perception issue where pictures of any woman in a group are often considered more attractive than a picture of that woman alone (this may apply to men as well, but I have always heard it referred to women).  Apparently women exploit this effect by posting pictures on dating sites that show them in groups of their friends rather than alone.  Anyway, I have developed two corollaries:

  • Polo Shirt Effect:  Polo shirts in a store appear more desirable when grouped with other similar shirts in an array of colors than when presented alone.  This effect is strong enough to trump the paradox of choice, where offering consumers more choices can tend to flummox them and cause them to buy less.  I believe arrays of multi-hued polo shirts presented together increase purchases of these shirts.
  • Christmas Tree Effect:  We almost never buy ornaments for our tree.  95% are individually ugly, but meaningful, constructions by our kids over the years.  The rest are what remain after breakage of some commercial ornaments we bought 20 years ago on deep discount in the after-Christmas sales.  But a tree constructed of these ornaments is beautiful.  So ornaments look far better when massed on a tree than they look individually.

Towards A Theory of Pedestrian Behavior:  One of the things I enjoy is urban running -- ie running through the streets of cities.  When we travel, this is one of my favorite ways to see cities, and it also helps me run further because I do not get bored.  But trying to run through sometimes crowded pedestrian areas can be frustrating, since one is trying to move faster than the crowd and the crowd typically does not expect a runner coming up behind them on the sidewalk.  As a result of many such runs, I have developed two laws of pedestrian behavior:

  1. Groups of pedestrians will expand to fill the width of the space allotted.  If the width changes, groups of pedestrians will respond very quickly and expand their group spacing to fill that width.  While this behavior is almost certainly natural, it is almost impossible to distinguish a group walking naturally from one purposefully trying to block passage by a faster pedestrian.  Corollary:  Groups too small to fill the width of a passage or sidewalk will weave.
  2. Groups of pedestrians, everything else being equal, will choose to pause and congregate at the bottleneck in any sidewalk, thus constricting an already narrow passage.  DisneyWorld is a great location for spotting this behavior.  Corollary:  A disproportionate number of people will choose to stop right at the exit door from an jetway when exiting an aircraft.

 

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."

I Believe the Trend Was Caused by All the Things I Believed Before I Investigated the Trend

This is so common that there ought to be a name for it (perhaps there is and I just don't know it):  Writer does a story or study on some trend, in this case the downfall of the enclosed shopping mall.  In each case, the writer discovers that such malls died because of ... all the things the writer already holds dear.  If the writer hates American consumerism, then the fall of such malls is a backlash against American consumerism.

It is interesting to note that all of the ideas quoted are demand-side explanations, e.g. why might consumers stop going to large enclosed malls.  And certainly I find the newer outdoor malls more congenial personally, but this can't be the only explanation.  Here in north Phoenix, I can see the dying enclosed Paradise Valley Mall out my window, but just a few miles away is the Scottsdale Fashion Square, a traditional mall that appears to be going great guns.  Ditto the Galleria in Houston.  Perhaps part of the answer is that enclosed malls were simply overbuilt and that people are willing to drive a bit to get to the best enclosed mall in town rather than a smaller version closer to their home (certainly Mall of America made a big bet on that effect).

But it also strikes me there are supply side considerations.  The mall out my window is a huge waste of space, surrounded by parking lots the size of a small county.  And it's just retail.  Modern outdoor malls allow developers to mix shopping, living, and office space in what looks to my eye to be a much denser development.  All these malls have stores on the ground floor with condos and offices up above.  To my not-real-estate-trained eye, this would seem to increase the potential rents in a given piece of land and provide some synergies among the local businesses (e.g. office workers and residents eat and shop in the mall shops).  In some sense it is a re-imagining of the downtown urban space in a suburban context.  This is ironic because it is something urban planners have been trying to force for decades and here comes the free market to do it on its own.

People also like going to newer facilities.  Just ask hotel owners.  If owners do not totally refresh a hotel every 20 years or so, people stop visiting and rates fall.  The same is true of gas stations and convenience stores.  When I worked at Exxon briefly, they said they budgeted to totally rebuild a gas station every 20 years.  So it is not impossible there is a big supply-side explanation here -- if people are reluctant to go to establishments over 20 years old, then visitation of enclosed malls should be collapsing right about now, 20 years after they stopped being built.  A shift in developer preferences could be a large element driving this behavior.  I don't insist that the supply side and real estate incentives are the only explanation, but I think they are a part of it.

Geeky Reflections -- Simulated Annealing

When I was an undergrad, my interest was in interfacing microcomputers with mechanical devices.  Most of what we did would be labelled "robotics" today, or at least proto-robotics (e.g. ripping the ultrasonic rangefinder out of a Polaroid camera, putting it on a stepper motor, and trying to paint a radar image of the room on a computer screen).

In doing this, we were playing around with S-100 bus computers (PC's were a bit in the future at that point) and I got interested in brute force approaches to solving the traveling salesman problem.  The way this is done is to establish some random points in x,y space and then connect them with a random path and measure the length of that path.  The initial random path is obviously going to be a terrible solution.  So you have the computer randomly flip flop two segments, and then you see if the resulting total distance is reduced.  If it is, then you keep the change and try another.

This will lead to a much shorter path, but often will not lead to the optimally shortest path.  The reason is that the result can get stuck in a local minimum that is not the optimum.  Essentially, to break out of this, you have to allow the solution to get worse first before it can get better.

The approach I was playing with was called simulated annealing.  Everything I said above is the same in this approach, but sometimes you let the program accept flip-flopped segments that yield a worse (ie longer) rather than better path.  The allowed amount worse is governed by a "temperature" that is slowly lowered.  Initially, at high temperatures, the solution can jump into most any solution, better or worse.  But as the "temperature" is lowered, the allowed amount of jumping into worse solutions is reduced.  Essentially, the system is much, much more likely than the previous approach to settle closer to the actual optimum.  This is roughly an analog of how annealing works in metals.  The code is ridiculously simple.   I don't remember it being much more than 100 lines in Pascal.

Anyway, if you lived through the above without falling asleep, the payoff is this site.  After 30 years of pretty much never thinking about simulated annealing again, I found Todd Schneider's blog which has a great visual overview of solving the travelling salesman problem with simulated annealing.  If you really want to visually see it work, go to the customizable examples at the bottom and set the iterations per map draw for about 100.  Then watch.  It really does look a bit like a large excited molecule slowly cooling.  Here is an example below but check out his site.

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Thanks for the Support of My Writing

Thanks mostly to y'all, my short story String Theory still sits in the top 25 (well, it is at exactly 25) of the Amazon Kindle science fiction and short story rankings.  One notch above John Scalzi, and just two notches below David Brin.  And one of the only entries at the top of the list that does not have a guy with ripped abs or two vampires making out on the cover.  Pretty cool.

And The Highest-Paid US Government Employee is....

...Probably Nick Saban, coach of the University of Alabama football team at around $7 million a year.  But Jim Harbaugh, recently hired by the University of Michigan for a $5 million base salary, apparently has incentives that can take that up to $9 million a year.

Apologists will argue that this is all OK and shouldn't worry taxpayers at all because these guys are paid out of the college athletic budget which is generated from sports revenue rather than taxes.  Hmm.  Any state parks agency probably generates millions or tens of millions each year in user fees.  Should we be OK with the state employee who runs those agencies making $5 million because it comes out of user fees rather than taxes?  Money is fungible.  $5 million more spent on a football coach is $5 million less that can fund other University services.

(PS - in the US Today ranking of college football coach salaries, 19 of 20 are at public institutions).

What is Normal?

I titled my very first climate video "What is Normal," alluding to the fact that climate doomsayers argue that we have shifted aspects of the climate (temperature, hurricanes, etc.) from "normal" without us even having enough historical perspective to say what "normal" is.

A more sophisticated way to restate this same point would be to say that natural phenomenon tend to show various periodicities, and without observing nature through the whole of these cycles, it is easy to mistake short term cyclical variations for long-term trends.

A paper in the journal Water Resources Research makes just this point using over 200 years of precipitation data:

We analyze long-term fluctuations of rainfall extremes in 268 years of daily observations (Padova, Italy, 1725-2006), to our knowledge the longest existing instrumental time series of its kind. We identify multidecadal oscillations in extremes estimated by fitting the GEV distribution, with approximate periodicities of about 17-21 years, 30-38 years, 49-68 years, 85-94 years, and 145-172 years. The amplitudes of these oscillations far exceed the changes associated with the observed trend in intensity. This finding implies that, even if climatic trends are absent or negligible, rainfall and its extremes exhibit an apparent non-stationarity if analyzed over time intervals shorter than the longest periodicity in the data (about 170 years for the case analyzed here). These results suggest that, because long-term periodicities may likely be present elsewhere, in the absence of observational time series with length comparable to such periodicities (possibly exceeding one century), past observations cannot be considered to be representative of future extremes. We also find that observed fluctuations in extreme events in Padova are linked to the North Atlantic Oscillation: increases in the NAO Index are on average associated with an intensification of daily extreme rainfall events. This link with the NAO global pattern is highly suggestive of implications of general relevance: long-term fluctuations in rainfall extremes connected with large-scale oscillating atmospheric patterns are likely to be widely present, and undermine the very basic idea of using a single stationary distribution to infer future extremes from past observations.

Trying to work with data series that are too short is simply a fact of life -- everyone in climate would love a 1000-year detailed data set, but we don't have it.  We use what we have, but it is important to understand the limitations.  There is less excuse for the media that likes to use single data points, e.g. one storm, to "prove" long term climate trends.

A good example of why this is relevant is the global temperature trend.  This chart is a year or so old and has not been updated in that time, but it shows the global temperature trend using the most popular surface temperature data set.  The global warming movement really got fired up around 1998, at the end of the twenty year temperature trend circled in red.

click to enlarge

 

They then took the trends from these 20 years and extrapolated them into the future:

click to enlarge

But what if that 20 years was merely the upward leg of a 40-60 year cyclic variation?  Ignoring the cyclic functions would cause one to overestimate the long term trend.  This is exactly what climate models do, ignoring important cyclic functions like the AMO and PDO.

In fact, you can get a very good fit with actual temperature by modeling them as three functions:  A 63-year sine wave, a 0.4C per century long-term linear trend  (e.g. recovery from the little ice age) and a new trend starting in 1945 of an additional 0.35C, possibly from manmade CO2.Slide52

In this case, a long-term trend still appears to exist but it is exaggerated by only trying to measure it in the upward part of the cycle (e.g. from 1978-1998).

 

Krugman on the Minimum Wage

Via Don Boudreaux:

Bluecravat found something telling that I missed a few months ago, namely, Paul Krugman explaining back in August that one potential cause of the high unemployment rate in France is that country’s “high minimum wage.”  As Bluecravat exclaims after quoting from Krugman’s August post: “Excuse me?  What was that?  Minimum wage levels impact employment?”

Of course, it could be that France’s minimum wage is too high compared to the one that Krugman advocates for the U.S.  Krugman supports Pres. Obama’s call for a $10.10 hourly minimum wage.  So how does the employment-discouraging minimum wage in France compare to the allegedly prosperity-enhancing, non-employment-discouraging minimum wage that Krugman, Obama, et al., support for the U.S.?  According to Bluecravat, France’s current minimum wage, when adjusted for purchasing-power parity, is $9.30 per hour, a rate that is lower than the minimum-wage rate advocated by Krugman, Obama, et al.

The minimum wage is terrible anti-poverty policy.  The thing to remember is that A. The majority of minimum wage earners are not poor (or in the poorest 20%); and B.  The majority of the poor don't earn minimum wage.  In most cases, the poor are poor because they don't get enough hours or don't have a job at all, a situation that will only be made worse with a higher minimum wage.

Wrong Way Corrigan

I missed it, but Dan Mitchell had a good article starting from my post on Kevin Drum's unintentionally anti-Keynesian chart pair.

Readers will know from my "trend that is not a trend" series how fascinated I am by how often data referenced in the media tells exactly the opposite story as the one claimed.

Last Chance to Get My New Short Story Free on Kindle

My new short story "String Theory" is free for another 24 hours.  After that, you will have to sell some of your gold bullion and pony up $0.99.  By waiting until the last minute, you get the advantage of obtaining an updated version of the story without a typo on page one (yes, a leopard does not really change his spots in a different medium).

You can get it on Kindle here.

And my novel BMOC is still available on Kindle and as an actual dead-tree book.

 

Media Notices America's Grievous Shortage of Laws

Noting that the United States is currently experiencing a drastic shortage of laws, America's media (example, but many others) have finally begun to chastise the recent Congress for being, as described by the Huffington Post,  "pretty close" to "the least productive ever."  Like fishes cast ashore flopping on the beach dying for lack of oxygen, Americans are desperately begging for more laws and for more things to be made a criminal offense, and Congress is shamefully ignoring them.

Said one man interviewed on the streets of New York, "there are barely 4000 criminal offenses outlined in the Federal code.  No wonder we have so much anarchy.  We need a lot more crimes and Congress is not cooperating."

A local business woman echoed these thoughts: "With only 80,000 pages in the Federal Register, I often don't know what I should be doing.  Sometimes I go a quarter of an hour in my business making decisions for which there is absolutely no Federal guidance.  It's criminal Congress is shirking its responsibility to tell me what to do."

Said everyone, "there ought to be a law..."

My Latest Short Story Free this Week on Amazon Kindle

My latest short story is listed at $0.99 on Kindle (the cheapest one can list something for) but is available for free through December 24.  It's called String Theory and is the result of a fun discussion my daughter and I had combined with a long, boring airplane ride.

And my novel BMOC is still available on Kindle and as an actual dead-tree book. [link fixed]

I keep saying the new novel is coming soon, but it is coming soon if I can get my act together and polish a few things.

Update:  #16 #2 for Kindle reads under 45 minutes in the Science Fiction & Fantasy section.  LOL.  If we could just segment it a bit finer, I might make #1.

State Science Institute Issues Report on Rearden Metal, err, Fracking

The similarity between the the text of the recent NY report on fracking and the fictional state attack on Rearden Metal in Atlas Shrugged is just amazing.

Here is the cowardly State Science Institute report on Rearden Metal from Atlas Shrugged, where a state agency attempts to use vague concerns of unproven potential issues to ban the product for what are essentially political reasons (well-connected incumbents in the industry don't want this sort of competition).  From page 173 of the Kindle version:

[Eddie] pointed to the newspaper he had left on her desk. “They [the State Science Institute, in their report on Rearden Metal] haven’t said that Rearden Metal is bad. They haven’t said that it’s unsafe. What they’ve done is . . .” His hands spread and dropped in a gesture of futility. [Dagny] saw at a glance what they had done.

She saw the sentences: “It may be possible that after a period of heavy usage, a sudden fissure may appear, though the length of this period cannot be predicted. . . . The possibility of a molecular reaction, at present unknown, cannot be entirely discounted. . . . Although the tensile strength of the metal is obviously demonstrable, certain questions in regard to its behavior under unusual stress are not to be ruled out. . . . Although there is no evidence to support the contention that the use of the metal should be prohibited, a further study of its properties would be of value.”

“We can’t fight it. It can’t be answered,” Eddie was saying slowly. “We can’t demand a retraction. We can’t show them our tests or prove anything. They’ve said nothing. They haven’t said a thing that could be refuted and embarrass them professionally. It’s the job of a coward.

From the recent study used by the State of New York to ban fracking (a process that has been used in the oil field for 60 years or so)

Based on this review, it is apparent that the science surrounding HVHF [high volume hydraulic fracturing] activity is limited, only just beginning to emerge, and largely suggests only hypotheses about potential public health impacts that need further evaluation....

...the overall weight of the evidence from the cumulative body of information contained in this Public Health Review demonstrates that there are significant uncertainties about the kinds of adverse health outcomes that may be associated with HVHF, the likelihood of the occurrence of adverse health outcomes, and the effectiveness of some of the mitigation measures in reducing or preventing environmental impacts which could adversely affect public health. Until the science provides sufficient information to determine the level of risk to public health from HVHF to all New Yorkers and whether the risks can be adequately managed, DOH recommends that HVHF should not proceed in New York State....

The actual degree and extent of these environmental impacts, as well as the extent to which they might contribute to adverse public health impacts are largely unknown. Nevertheless, the existing studies raise substantial questions about whether the public health risks of HVHF activities are sufficiently understood so that they can be adequately managed.

Why is it the Left readily applies the (silly) precautionary principle to every new beneficial technology or business model but never applies it to sweeping authoritarian legislation (e.g. Obamacare)?

US to Normalize with Cuba -- Limiting Free Interchange with Authoritarian Regimes Only Benefits Their Leaders

I certainly am no Castro apologist, but it strikes me that 50+ years of embargoes and pointless travel restrictions have not brought his regime to heal.  So it is past time to recognize this and perhaps try something else.  So kudos to President Obama for doing something that apparently only a lame duck President who no longer has to worry about winning the Florida electoral votes can do, he is going to normalize relations with Cuba.

This should be good news for anyone who opposes the Cuban regime and its oppression. Time and again over the last 50 years, we have seen cultural and economic interchange fell more authoritarian governments than any amount of military action.  When we cut off free exchange with authoritarian regimes, we are doing their leaders a favor.

Life in the Anti-Trust World

Today Apple Computer won the class-action anti-trust case filed against them.  The plaintiffs were seeking a billion dollars in damages (after tripling) for a DRM system (Fairplay) that does not exist any more used on a device (the iPod) that Apple has pretty much phased out.  These products were such a threat to the survival of competitors that they don't even exist any more.  This is not atypical of how anti-trust often plays out in the marketplace, particularly in the technology sphere.  Any day now I will be filing my lawsuit against Commodore for suppressing competition in the home computer market.

Making Everyone a Criminal

From Atlas Shrugged:

Dr. Ferris smiled. . . . . ."We've waited a long time to get something on you. You honest men are such a problem and such a headache. But we knew you'd slip sooner or later - and this is just what we wanted."

[Hank Reardon:]  "You seem to be pleased about it."

"Don't I have good reason to be?"

"But, after all, I did break one of your laws."

"Well, what do you think they're for?"

Dr. Ferris did not notice the sudden look on Rearden's face, the look of a man hit by the first vision of that which he had sought to see. Dr. Ferris was past the stage of seeing; he was intent upon delivering the last blows to an animal caught in a trap.

"Did you really think that we want those laws to be observed?" said Dr. Ferris. "We want them broken. You'd better get it straight that it's not a bunch of boy scouts you're up against - then you'll know that this is not the age for beautiful gestures. We're after power and we mean it. You fellows were pikers, but we know the real trick, and you'd better get wise to it. There's no way to rule innocent men. The only power any government has is the power to crack down on criminals. Well, when there aren't enough criminals, one makes them. One declares so many things to be a crime that it becomes impossible for men to live without breaking laws. Who wants a nation of law-abiding citizens? What's there in that for anyone? But just pass the kind of laws that can neither be observed nor enforced nor objectively interpreted - and you create a nation of law-breakers - and then you cash in on guilt. Now, that's the system, Mr. Rearden, that's the game, and once you understand it, you'll be much easier to deal with."

Here is the same thing, Obama Administration style

Major U.S. corporations have broadly supported President Barack Obama's healthcare reform despite concerns over several of its elements, largely because it included provisions encouraging the wellness programs.

The programs aim to control healthcare costs by reducing smoking, obesity, hypertension and other risk factors that can lead to expensive illnesses. A bipartisan provision in the 2010 healthcare reform law allows employers to reward workers who participate and penalize those who don't.

But recent lawsuits filed by the administration's Equal Employment Opportunity Commission (EEOC), challenging the programs at Honeywell International and two smaller companies, have thrown the future of that part of Obamacare into doubt.

The lawsuits infuriated some large employers so much that they are considering aligning themselves with Obama's opponents, according to people familiar with the executives' thinking.

"The fact that the EEOC sued is shocking to our members," said Maria Ghazal, vice-president and counsel at the Business Roundtable, a group of chief executives of more than 200 large U.S. corporations. "They don't understand why a plan in compliance with the ACA (Affordable Care Act) is the target of a lawsuit," she said. "This is a major issue to our members."

At the exact same moment, one branch of the Administration is encouraging an activity that another branch is working to criminalize.

Letter to Nitin Nohria, Dean of the Harvard Business School

I wrote Dean Nohria in response to this story

Ben Edelman is an associate professor at Harvard Business School, where he teaches in the Negotiation, Organizations & Markets unit.

Ran Duan manages The Baldwin Bar, located inside the Woburn location of Sichuan Garden, a Chinese restaurant founded by his parents.

Last week, Edelman ordered what he thought was $53.35 worth of Chinese food from Sichuan Garden’s Brookline Village location.

Edelman soon came to the horrifying realization that he had been overcharged. By a total of $4.

If you’ve ever wondered what happens when a Harvard Business School professor thinks a family-run Chinese restaurant screwed him out of $4, you’re about to find out.

(Hint: It involves invocation of the Massachusetts Consumer Protection Statute and multiple threats of legal action.)

Here was the letter I sent, which was significantly more mature in tone for having waited 24 hours before writing it

My wife and I are both HBS '89 grads.  We own and actively manage a small to medium size service business.  I was encouraged at our last reunion to hear a lot of the effort HBS seems to be placing on small business and entrepreneurship.

However, I was horrified to see an HBS professor (prof Edelman) in the news harassing a small business over a small mistake on its web site.  I don't typically get worked up about Harvard grads acting out, but in this particular case his actions are absolutely at the core of what is making the operation of a small business increasingly impossible in this country.

Small businesses face huge and growing compliance risks from almost every direction -- labor law, safety rules, environmental rules, consumer protection laws, bounty programs like California prop 65, etc.  What all these have in common is that they impose huge penalties for tiny mistakes, mistakes that can be avoided only by the application of enormous numbers of labor hours in compliance activities.   These compliance costs are relatively easy for large companies to bear, but back-breaking for small companies.

So it is infuriating to see an HBS professor attempting to impose yet another large cost on a small business for a tiny mistake, particularly when the proprietor's response was handled so well.  Seriously, as an aside, I took service management from Ben Shapiro back in the day and I could easily see the restaurateur involved being featured positively in a case study.  He does all the same things I learned at HBS --  reading every customer comment personally, responding personally to complaints, bending over backwards to offer more than needed in order to save the relationship with the customer.

As for the restaurateur's web site mistake -- even in a larger, multi-site company, I as owner do all my own web work.  Just as I do a million other things to keep things running.  And it is hard, in fact virtually impossible, to keep all of our web sites up to date.  Which is why Professor Edelman's response just demonstrates to me that for all HBS talks about entrepreneurship, the faculty at HBS is still more attuned to large corporations and how they operate with their enormous staff resources rather than to small businesses.

Large corporations are crushing smaller ones in industry after industry because of the economy of scale they have in managing such compliance issues.  If the HBS faculty were truly committed to entrepreneurship, it should be thinking about how technology and process can be harnessed by smaller businesses to reduce the relative costs of these activities. How, for example, can I keep up with 150+ locations that each need a web presence when my sales per site are so much less than that of a larger corporation?  This is not impossible -- I have learned some tools and techniques over time -- and we should be teaching and expanding these, rather than spending time raising the cost of compliance for small business.

Why Do Climate Change Claims Consistently Get a Fact-Checker Pass?

It is almost impossible to read a media story any more about severe weather events without seeing some blurb about such and such event being the result of manmade climate change.  I hear writers all the time saying that it is exhausting to run the gauntlet of major media fact checkers, so why do they all get a pass on these weather statements?  Even the IPCC, which we skeptics think is exaggerating manmade climate change effects, refused to link current severe weather events with manmade CO2.

The California drought brings yet another tired example of this.  I think pretty much everyone in the media has operated from the assumption that the current CA drought is 1. unprecedented and 2. man-made. The problem is that neither are true.  Skeptics have been saying this for months, pointing to 100-year California drought data and pointing to at 2-3 other events in the pre-manmade-CO2 era that were at least as severed.  But now the NOAA has come forward and said roughly the same thing:

Natural weather patterns, not man-made global warming, are causing the historic drought parching California, says a study out Monday from federal scientists.

"It's important to note that California's drought, while extreme, is not an uncommon occurrence for the state," said Richard Seager, the report's lead author and professor with Columbia University's Lamont Doherty Earth Observatory. The report was sponsored by the National Oceanic and Atmospheric Administration. The report did not appear in a peer-reviewed journal but was reviewed by other NOAA scientists.

"In fact, multiyear droughts appear regularly in the state's climate record, and it's a safe bet that a similar event will happen again," he said.

The persistent weather pattern over the past several years has featured a warm, dry ridge of high pressure over the eastern north Pacific Ocean and western North America. Such high-pressure ridges prevent clouds from forming and precipitation from falling.

The study notes that this ridge — which has resulted in decreased rain and snowfall since 2011 — is almost opposite to what computer models predict would result from human-caused climate change.

There is an argument to be made that this drought was made worse by the fact that the low precipitation was mated with higher-than average temperatures that might be partially attributable to man-made climate change.  One can see this in the Palmer drought severity index, which looks at more factors than just precipitation.  While the last 3 years was not the lowest for rainfall in CA over the last 100, I believe the Palmer index was the lowest for the last 3 years of any period in the last 100+ years.  The report did not address this warming or attempt to attribute some portion of it to man, but it is worth noting that temperatures this year in CA were, like the drought, not unprecedented, particularly in rural areas (urban areas are going to be warmer than 50 years ago due to increasing urban heat island effect, which is certainly manmade but has nothing to do with CO2.)

Update:  By the way, note the article is careful to give several paragraphs after this bit to opponents who disagree with the findings.  Perfectly fine.  But note that this is the courtesy that is increasingly denied to skeptics when the roles are reversed.  Maybe I should emulate climate alarmists and be shouting "false balance!  the science is settled!"

If You Like Your Health Plan...

We received a letter from Blue Cross / Blue Shield of AZ saying we could keep our plan, but the cost goes from about $579 a month to $739 a month in January of 2015 (a 27.6% increase).  Note that this is for a pretty high deductible health plan, something like $5000.  We wrote to our broker to explore options.  We got this response:

Crazy as this latest BC [Blue Cross] rate increase is it is a lot better than Obamacare.  I ran the same plan under the Affordable Care Act with BC and the rate for 1/1/15 would be $963.70 a month and if you went to the $6300 deductible plan the rate would still be $914 a month.  So I guess we are all lucky to be out of ACA until we are forced into it.  Now there is one variable that could lower your cost and that is if your household income in 2015 will be under $92k you could go into the Marketplace for premium assistance from our wonderful Federal government. If it is going to be higher than that be grateful you are where you are!

As predicted in advance, Obamacare and the exchange are not about saving money.  The only people who are saving money are those getting taxpayer subsidies in the exchange.

Trend That is Not A Trend: Sexual Assaults on Campus

In response to the twin notions that sexual assaults are a) increasing and b) particularly prevalent on college campuses where a "rape culture" supposedly exists, comes this recent report from the DOJ on sexual assault prevalence among college aged women.

sexual-assault

 

Update:  For a university the size of UVA (20,000 students, presumably 10,000 women) these data imply about 200 of the current students will be sexually assaulted over their four years.  This is a depressingly large number, and makes one wonder with this many examples to choose from how Rolling Stone managed to find one case that was so obviously heavily embellished (at a minimum) or fraudulent.  200 is, however, an order of magnitude smaller than the 2000 that would be predicted by the "1 in 5" number which is repeated so uncritically by public figures.

As to the declining trend, I understand the issue of under-reporting, though most folks in the know seem to think this type of study (which includes unreported cases) is more accurate than reported crime figures.  But for under-reporting to affect the trend (rather than the absolute numbers) one would have to argue that the reporting percentage is declining, something for which I have never seen evidence and which is a proposition that defies common sense.  Over the last decades, sexual assault victims have gone from being shamed to being protected to being put on a pedestal (given our current fetishization of victimization).  It is hard in this environment to imagine sexual assault reporting rates going down.

Techniques to Aid Authoritarians: The Supposed Statute of Limitations on Outrage

In the Fast and Furious and IRS scandals, the Administration has purposefully dragged its feet on disclosures.  The strategy is to let as much time pass so that when bad revelations eventually come out, the heat from the original scandal is gone.  Defenders of the Administration will then argue the revelations are "old news", as if there is some statute of limitations on outrage.  This strategy has driven Republicans crazy.

So what do Conservatives do when the torture report comes out after months and months of foot-dragging trying to prevent its release? You got it, they scream "old news".  Scott Johnson:

I confess that I do not understand the rationale supporting the publication of the Democrats’ Senate Select Committee study of the CIA’s detention and interrogation program. On its face, it seems like ancient history (of a highly tendentious kind) in the service of a personal grudge. It is not clear to me what is new and it is not clear that what is new is reliable, given the absurd limitations of the committee’s investigation.

By the way, I want to make one observation on this line from attorney John Hinderaker:

Similarly, the report confirms that the Agency’s enhanced interrogation techniques were used on only a small number of captured terrorists, 39 altogether. These enhanced techniques include the “belly slap” and the dreaded “attention grasp.”

Most important, it appears that waterboarding really was the most extreme sanction to which any of the terrorists were subjected (and only three of them, at that). Given all the hoopla about CIA “torture,” one might have expected to learn that far worse happened at the Agency’s dark sites. But, as far as the report discloses, the Agency stuck almost exclusively to its approved list of tactics, all of which the Department of Justice specifically found not to be torture.

Were some of the captured terrorists treated roughly? Absolutely. Their lives must have been miserable, and deservedly so. Some of the 39 were placed in stress positions for considerable lengths of time, doused with water, fed poor diets, left naked in cells. In one instance, a terrorist was threatened with a power drill. In another case, an interrogator told a terrorist that his children may be killed. There were two instances of mock execution.

A few observations:

  • The fact that they were "terrorists" seems to justify the mistreatment for him.  But how do we know they were terrorists?  Because the Administration said so.  There was no due process, no right of appeal, no ability to face witnesses, no third party review, none of that.  A branch of the Administration grabbed the guy, said you are a terrorist, and started torturing them.  I am not saying that they did this without evidence, but I am sure Mr. Hinderaker know from his own experience that every prosecutor thinks every person he or she tries is guilty.  That is why both sides get to participate in the process.
  • "Terrorist" is an awfully generic word to give us automatic license to torture people.  My sense is that there are all kinds of shades of behavior lumped under that word.  Conservatives like Mr. Hinderaker object, rightly, to a wide range of sexually aggressive actions from unwanted kissing to forced penetration being lumped under the word "rape".  But my sense is we do the same thing with "terrorists".
  • In my mind the casualness with which he can accept these kinds of treatments for people he does not like is morally debilitating.  It is a small step from accepting it for one to accepting it for many.  It is like the old joke of a debutante asked if she would have sex for a million dollars and saying "yes", then getting asked if she would have sex for $20 and responding "what kind of girl do you think I am?"  We've already established that, we are just haggling over price.
  • For those on the Right who say that all this stuff about due process does not apply because the "terrorists" were not citizens, then welcome to the Left!  Individual rights are innate -- they are not granted by governments (and thus by citizenship).  The Right generally says they believe this.  It is the Left whose positions imply that rights are favors granted by the state to its citizens.

How Is This Even A Question? Oil Price Drop is Great

The recent drop in oil prices has been met with a surprising amount of negativity, as if something bad is happening.  This strikes me as insane.  The world uses 90 or so million barrels of oil a day.  The recent $30+ price drop in oil thus equals a world savings of $1 trillion a year.

Sure, oil companies and their suppliers are worse off (and believe me, I care -- a lot of my portfolio was invested in such things when oil started dropping).  But the economy as a whole is clearly better off and wealthier.

To understand why, the analysis we need to undertake is an exact parallel of the broken window fallacy analysis.  Its sort of a healing window analysis.

After the oil price drop, consumers have a trillion dollars more and oil producers have a trillion dollars less.  Even right?  Actually, not.  Because consumers then spend that trillion on other things.  Those other manufacturers and producers get the trillion dollars lost to the oil industry.  Still even, right?  No.  Think of it this way:

Before the price drop

  • Oil companies have $1 trillion extra revenue
  • Other producers have no extra revenue
  • Consumers have 90 million barrels a day of oil

After the price drop

  • Oil companies have no extra revenue
  • Other producers have $1 trillion extra revenue
  • Consumers have 90 million barrels a day of oil AND $1 trillion of extra stuff (goods, service, savings, etc)

The world in the second case is wealthier.  And this is assuming all the people involved are private parties.   In fact, much of the oil revenue drop comes out of the hands of  value-destroying governments so that in fact the wealth increase in the price drop scenario is actually likely even greater than in this simplistic analysis.

Postscript:  OK, yes I am ignoring any cost of carbon pollution.  But the market is not set up to price that, and readers will know that I am skeptical that the cost is that high.  Never-the-less, this is a separate issue that if it needs to be dealt with should be dealt with as a carbon tax on fuels.  The price drop should not affect the value of that tax.  Or another way to put it, if one thinks the tax should be $30 per ton based on a $30 cost of carbon, it should be $30 per ton at $100 oil and $30 per ton at $60 oil.

Trend That is Not A Trend: Increase in Typhoons and Hurricanes

The science that CO2 is a greenhouse gas and causes some warming is hard to dispute.  The science that Earth is dominated by net positive feedbacks that increase modest greenhouse gas warming to catastrophic levels is very debatable.  The science that man's CO2 is already causing an increase in violent and severe weather is virtually non-existent.

Seriously, of all the different pieces of the climate debate, the one that is almost always based on pure crap are the frequent media statements linking manmade CO2 to some severe weather event.

For example, Coral Davenport in the New York Times wrote the other day:

As the torrential rains of Typhoon Hagupit flood thePhilippines, driving millions of people from their homes, the Philippine government arrived at a United Nationsclimate change summit meeting on Monday to push hard for a new international deal requiring all nations, including developing countries, to cut their use of fossil fuels.

It is a conscious pivot for the Philippines, one of Asia’s fastest-growing economies. But scientists say the nation is also among the most vulnerable to the impacts of climate change, and the Philippine government says it is suffering too many human and economic losses from the burning of fossil fuels....

A series of scientific reports have linked the burning of fossil fuels with rising sea levels and more powerful typhoons, like those that have battered the island nation.

It is telling that Ms. Davenport did not bother to link or name any of these scientific reports.  Even the IPCC, which many skeptics believe to be exaggerating manmade climate change dangers, refused in its last report to link any current severe weather events with manmade CO2.

Roger Pielke responded today with charts from two different recent studies on typhoon activity in the Phillipines.  Spot the supposed upward manmade trend.  Or not:

kubotachan2009

c2789-wpac-50-10-weinkleetal

 

I am not a huge fan of landfalling cyclonic storm counts because whether they make landfall or not can be totally random and potentially disguise trends.  A better metric is the total energy of cyclonic storms, land-falling or not, where again there is no trend.

Via the Weather Underground, here is Accumulated Cyclonic Energy for the Western Pacific (lower numbers represent fewer cyclonic storms with less total strength):

ace-west-pacific

 

And here, by the way, is the ACE for the whole globe:

 

ace-global

Remember this when you see the next storm inevitably blamed on manmade global warming.  If anything, we are actually in a fairly unprecedented (in the last century and a half) hurricane drought.