Monday, April 11, 2016

Highly Linkable

I want to go to there.

For those of you pondering in your apartments 'why should I read in my shower when I could listen to a podcast in my tub', this edition of links is especially for you.

First of all, EconTalk has been on a tear lately. Three gems:
Marina Krakovsky on the Middleman Economy
Jayson Lusk on Food, Technology, and Unnaturally Delicious
Matt Ridley on the Evolution of Everything
Second, Bejamin Powell joins Free Thoughts to discuss Out of Poverty: Sweatshops in the Global Economy.

Third, Uber co-founder Travis Kalanick shares how Uber plans to kill Big Traffic. BTW, Lyft is getting in on the carpool action as well.

Now for those who prefer to click and read the way nature intended:

Kavin Senapathy writing in Forbes suggests we not get too excited about the prospects (and promises) of microbiome makeovers.

Leave it to Grumpy to throw cold water on the magical promises coming out of the Sanders for Tsar camp.

So a science professor claims to have discovered a hidden value accruing to certain members of a particular profession, and a history professor is pretty sure he knows how much several groups of people in a profession should be paid. Luckily, Andy Schwartz is here to disagree.

Phil Magness draws interesting parallels between failed economic modeling and failed climate modeling. The money paragraph (HT: Arnold Kling):
In a strange way, modern climatology shares much in common with the approach of 1950s Keynesian macroeconomics. It usually starts with a number of sweeping assumptions about the relation between atmospheric carbon and temperature, and presumes to isolate them to specific forms of human activity. It then purports to “predict” the effects of those assumptions with extraordinarily great precision across many decades or even centuries into the future. It even has its own valves to turn and levers to pull – restrict carbon emissions by X%, and the average temperature will supposedly go down by Y degrees. Tax gasoline by X dollar amount, watch sea level rise dissipate by Y centimeters, and so forth. And yet as a testable predictor, its models almost consistently overestimate warming in absurdly alarmist directions and its results claim implausible precision for highly isolated events taking place many decades in the future. These faults also seem to plague the climate models even as we may still accept that some level of warming is occurring.

Wednesday, March 2, 2016

Investment List Question Partially Answered

A few days ago I posted two partial lists of investments and posed the question to identify the key distinction between them. Here is the answer.

The key distinction is cash flows. I contend that the assets in list #1 meaningfully generate cash flows while the assets in list #2 do not.

Consider what a cash flow is: a stream of payments going (flowing) to asset owners generated by the asset itself. This does not include money or other assets taken in exchange for ownership of the asset. That trade value is important, but using it to evaluate current (present) value must ultimately rely on guess work--namely guessing what someone in the future will pay for it. Using cash flows is a very useful method to value assets and get around this resale (aka, "greater fool") theory of value. 

Once you have a guess as to what cash flows will be for a given investment, all you need to do is apply a discount rate, sum the results, and viola you have a net present value (current price). And more importantly you now have a method to compare various assets' valuations. Of course, it is not quite that easy. We have to guess/argue about the timing and amount of cash flows, and we have to appropriately guess what discount rate to apply for a proper time-value of money adjustment. But there is even more complication.

There is a tension between my logic and my lists. The implied rent payment one saves by owning their home is fairly vague while the returns from turning copper into the product of electrical wiring is not so vague. Conceivably, if you define "cash flow" broadly enough, everything has a potential utility value that could be described as a cash flow (or in cash-equivalent terms). For this reason I said list #1 meaningfully generated cash flows. I am assuming a reasonableness standard we can generally agree to. 

As such, I don't view gold as an investment in the same realm as I view, say, a share of stock. Gold's value is too reliant on the presumption that someone else will want to buy it at a later date. (Here is some of what the Oracle has said about gold. Read at least #4.)

My two lists of investments are not intended to be uniformly separate. Each item to varying and changing degrees exists on a continuum. Think of it loosely as the Beanie Babies to U.S. Treasury Bonds scale. The "cash flow" from Beanie Babies is only the joy one may get from holding one and the opportunity to sell it down the road. The cash flow from UST bonds is semi-annual interest paid and the promise to mature at par value. Where do you put gold on this scale? As you answer that question for each asset, you start to see a large gap forming naturally separating the two emerging lists of investments. 

P.S., When I first started to answer the question, I fell down a deep rabbit hole that took me quite a while to escape. Read on if you'd like to witness the journey. Bonus points for realizing the subtle point that creates the difference between the answer above and the answer below.

Consider what a cash flow is: a stream of payments going (flowing) to asset owners generated by the asset itself. This does not include money or other assets taken in exchange for ownership of the asset. Ultimately, for an asset to have value, it has to be intrinsically valuable to someone. Take a bond for instance. A bond is intrinsically valuable because it generates income in the form of interest. And that interest (cash) has value because it can buy stuff like beanie babies and food, which are intrinsically valuable because . . . because my daughter likes beanie babies and she and I both need food. . . okay, we might have a problem here. If you didn’t catch the circular logic, go reread that.

Any time you hear “intrinsic value”, your spidey sense should start tingling. That concept suffers from what I call the artificial logical stopping point. It is the fallacious attempt at halting what becomes “turtles all the way down”. In a chain of subjective value propositions we assert at some point that one of those values is so esteemed, so important, that it is an intrinsic value. If that sounds arbitrary, it’s because it is arbitrary. One can always challenge the leap to the intrinsic showing that leap to be invalid. Objectivism philosophically solves this conundrum by basically rejecting the need for an intrinsic value concept. I believe that is the correct way to conceptualize value—value is the relation between the object valued and the individual valuing it, but can I reconcile it with my belief that the two lists are distinguished by the presence of cash flows? I can because of what I am arguing cash flows are and what they are useful for... [this is where I caught my mistake and began anew].

Saturday, February 20, 2016

Highly Linkable

Thank God they don't make 'em like they used to.

Watch this and be sure to watch the last "magic" point about a 52-card deck which starts at the 14:06 mark.

Tucker Max offers great advice on why he stopped (and you should stop or not start) angel investing.

This is not a top ten ranking for a university to aspire to.

Steve Landsburg brings his always valuable counter-conventional perspective to Serial: Season One. It is as hard for me to argue with his logic as it is to accept his conclusion. I believe he is right, but I also believe he has introduced an implied simplifying assumption(s) that ignores principles of justice and that may reduce or even reverse his conclusion. I think these principles could impact the model in both a practical sense (given the iterative and complex/diverse nature of the world of crime and punishment, including these principles might get us to better outcomes) and an ethical sense (it seems problematic to have low thresholds for high severity crimes). I might also quibble with his standard of proof and his philosophical position that a juror should be trying to reach a state of belief rather than my philosophical position that a juror should be trying to validate that the prosecution "undoubtedly" proved its case.

Let's look in on how the nation's first experiment with a $15 minimum wage is going--"Look Away . . . I'm Hideous!" Wonder how the guy who wants to take this model nationwide would react? And keep in mind Seattle's cost of living index is about +20% above the national average. How would this minimum wage sell in Peoria, Illinois, to name just one low-cost-of-living place?

Finally and while we're mentioning The Bern, don't miss Reason's take on Charles Koch's friendly letter to Bernie.

Two Partial Lists of Investments

The following partial lists of investments have at least one key, distinct difference between them. Can you identify it?

List 1:

  • Stocks (equity ownership - residual claims on assets)
  • Bonds (credit lending - contractual claims on assets)
  • Real Estate (equity ownership of real, surface property such as your personal home, a home or apartment you rent out, a business building, a REIT, etc.)
  • Mineral Estate/Rights (equity ownership of real, under-the-surface property - the right to mine resources)
List 2:
  • Currencies (US Dollars, Euros, Yen, etc.)
  • Commodities (energy and agricultural such as oil and frozen concentrated orange juice)
  • Precious Metals (gold, silver, etc.)
  • Industrial Metals (copper, nickel, aluminium, etc.)
I will follow up with the answer in a few days.

Wednesday, February 3, 2016

Highly Linkable

Let's begin with a few on immigration (I've been saving these; hence, the late dates on some):
Alex Tabarrok made the case for completely open borders in The Atlantic.
Bryan Caplan continues to fight the good fight. Here are some points he didn't have an opportunity to make at a workshop but did get to share with us, fortunately. And don't miss his speech at the Open Borders Meetup. 
Found this advice on idling cars in the cold helpful and attractively counterintuitive.

Let me take a moment to sing the praises of Comedy Central's "Drunk History". If you haven't watched it yet, start now before finishing this sentence . . . too late. I can think of three ways it is awesome:

  1. It is a better way to learn history than traditional approaches because you remember and enjoy it; therefore, you stick with it longer. In that sense learning is a lot like exercise--the best method is the one you will stick with and the one that will stick with you. 
  2. It tells stories that our traditional, state-driven history instruction won't tell. 
  3. While it is uproariously hilarious to listen to the various drunk narrators describing history, it is also a pretty insightful take on history in a meta sense. Namely, history is vague and uncertain. We should be careful not to be too confident that we've got it figured out precisely.
Tyler Cowen's interview with Chris Asness is extremely rewarding. A few of the money quotes:
"There’s no investment process so good that there’s not a fee high enough that can’t make it bad."
"High frequency trading [which he doesn't engage in] has made the world more just and fair, particularly for small investors."
"This is not Lake Wobegon. We can’t all beat the index. It’s actually a precise mathematical identity."
On superheros: "Even the most insane billionaire cannot afford a hundredth of what frigging Tony Stark or Bruce Wayne have. It’s infuriating. ... I’ve done well. I’m not the most insane out there. But if I wanted to go build a Batcave at my house, it would take approximately 600 times my wealth, and everyone would know about it."
Speaking of rewarding, George Will always delivers as he does here on Michael Bloomberg's potential entry into the presidential election.

And lastly, Scott Sumner on economists who lack an imagination. (I agree in all four cases, and there is no contradiction between that and my other strongly held views.)

Thursday, January 28, 2016

Presidential Optimistic/Pessimistic Outlooks

We are on the cusp of phase two of the great American game: Who Wants To Spend A Million Million Dollars?

Phase one, you might remember, is when every third American denies he or she is running for office and then promptly announces they'll give it a go.

Phase two is the more sensible phase where a small collection of obscure states get to pick who will make it to the more substantially populated states who will then determine who makes it to the finals.

Phase three is the finals where two nearly identical twins argue about trivia while basically agreeing they like good things, are against bad things, and have a vision of how to either "keep us on course for greatness" or "turn it all around to restore greatness" depending on if people are happy or upset in general.

Let's run down the current leading contenders to see what the optimistic case and the pessimistic case is for each (from my point of view, of course). Keep in mind these are scenarios where optimistic and pessimistic are generally but not necessarily mutually exclusive (we could get some of both).

Optimistic - Shows why we should lose (and should have lost a long time ago) our reverent awe for the U.S. Presidency; prevents major government action/intervention/meddling on any number of issues by being a circus act writ large (his administration's priorities will be prestige and showmanship rather than policy accomplishment); forces a meaningful debate and action on limiting executive power (a little bit in tension with the previous prediction as this one mitigates a Trump administration that is actually trying to do something).
Pessimistic - Engages in major international war actions (beyond the high amount the each of his opponents would do anyway); sets back trade freedom and immigration substantially; creates strong racial, ethnic, nationalistic, and gender divides.
Overall - I estimate the optimistic possibilities are more likely than the pessimistic possibilities. 
Optimistic - Is a strong ally of free trade in goods and services with a relatively good view on immigration; offers a serious challenge to some aspects of cronyism like ethanol subsidies, the Ex-Im Bank, and Net Neutrality; promotes a less interventionist military policy on balance; gets meaningful progress on tax reform. 
Pessimistic - Fails to get past a vision of a secured border leaving immigration policy languishing; allows military spending and engagements to grow substantially; uses executive power to similar ends as Obama and Bush. 
Overall -  Pessimistic are slightly more likely than optimistic.
Optimistic - Advances immigration freedom substantially (this would be a major political advance for the GOP helping its demographic problem); promotes free trade well; gets meaningful progress on tax reform.
Pessimistic - Engages in major international war actions while strengthening government surveillance; extends the actions of executive power in defiance and weakening of the Constitution; proves that just as a he could be bought as a Florida politician (e.g., Big Sugar) he can be bought in the White House (i.e, cronyism). 
Overall - Optimistic are slightly more likely than pessimistic. 
Optimistic - Creates an era of gridlock not seen since the first Clinton administration keeping government at bay; allows for meaningful immigration progress; allows the drug war to recede while not actively doing much to bring about its demise.
Pessimistic - Engages in major international war actions while strengthening government surveillance; dreadfully extends the actions of executive power in defiance and weakening of the Constitution; makes good on her technocratic promise to bring government involvement to new realms while deepening it in familiar places.
Overall - Pessimistic are more likely than optimistic.
Optimistic - Allows meaningful retreat in the drug war; sets back the cause of socialism by giving it power and identity; greatly reduces military involvement and spending while curtailing government surveillance; produces government sclerosis by getting lost in the wilderness of the endless desire to "do something" about each and every apparent malady.
Pessimistic - Gives power and identity to socialism in policy; accelerates greatly the growth of government spending; sets back free trade and immigration; creates new social divides and fosters greater identity politics.
Overall - Optimistic are slightly more likely than pessimistic.
What does it all mean at this point? Not much. Remember phase three... But for what it's worth, I would like to see a Cruz vs. Sanders finals. However, if we extend the field some (but unfortunately not enough to include Rand Paul), my preference among the awful alternatives is Bush vs. Sanders (this is definitely a minimax analysis).

Make no mistake about it. Each of these people would be horrible presidents when judged against the standards of liberty and the Constitution. But what else is new?

P.S., Sorry for all the parentheses.

Monday, January 25, 2016

The Devil is in the Details

I have been thinking about taxes recently and actually had a couple of potential posts noodling around in my mind and my notes for the past few months. Good thing I waited. No, you didn't miss news of hell freezing over and a sensible tax code being adopted in the U.S. But you did miss me stumbling through what John Cochrane very simply Nadia Comaneci'd.

My notes on the potential posts began with: "I propose a major tax compromise: slightly higher taxes now in exchange for dramatic tax simplification. We take the existing tax code today and replace it wholesale with a consumption tax. We'll have the debate/fight at a later time about how big the tax burden should be, which is really a debate about how big the government should be. For now let's just remove the deadweight loss that comes from the complexity and the cronyism of the tax code."

Here is the full post from The Grumpy One's webpage. Allow me to extract a few key sentences:
Left and right agree that the U.S. tax code is a mess.
The first goal of taxation is to raise needed government revenue with minimum economic damage. That means lower marginal rates—the additional tax people pay for each extra dollar earned—and a broader base of income subject to tax. It also means a massively simpler tax code.  
... A simple code would allow people and businesses to spend more time and resources on productive activities and less on attorneys and accountants, or on lobbyists seeking special deals and subsidies. And a simple code is much more clearly fair. Americans now suspect that people with clever lawyers are avoiding much taxation, which is corrosive to compliance and driving populist outrage across the political spectrum.
... the government should tax consumption, not wages, income or wealth.
Wise politicians often bundle dissimilar goals to attract a majority. But when bundling leads to paralysis, progress comes by separating the issues. Thus, we should agree to first reform the structure of the tax code, leaving the rates blank. We will then separately debate rates, and the consequent overall revenue and progressivity.
Scott Sumner heaped rightful praise on the piece while noting a few considerations. I had similar thoughts. Again from my notes: "The many complications of any tax scheme: defining consumption goods versus investment assets, not penalizing transactions (you want to tax activity as it is more traceable and definable, but you don't want to do so in a way that stifles or distorts gains from trade), not inadvertently taxing capital (capital is ideas; when you tax textbooks, you are effectively taxing capital; when you tax computer sales you are taxing both Minecraft users and the 'next Minecraft' creator), etc."

Some additional thoughts: It is important to understand that ultimately ALL taxes are consumption taxes. The only difference is how efficient they are. When you tax savings, you are taxing future consumption (encouraging current consumption, which is shameful). And this taxation is usually on income that has already been taxed, but that isn't the central reason it is despicable. To savings taxes (including investment and corporate and capital gains, etc.) I say, "You're Despicable!" because that taxation compounds making the tax disincentive for savings worse the longer it is deferred (i.e., saved).

If structured properly, the disruptive effects of taxes on consumption can be minimized. If not, they can be quite dramatic and quite limiting. Of course, the current incumbent is not a high hurdle to surpass on this last point. Consider this very conservative estimate of the gains from simplification:

Let's assume the estimates of man-hours devoted to tax preparation and compliance of 3.2 billion (many estimate it is closer to 6 billion) are way off. Let's assume it is only 1 billion man-hours. Let's further assume away any other costs (capital investment distortions, rent seeking, labor tied up in compliance/avoidance work (lawyers, accountants, internal corporate departments, etc.), enforcement, etc.). Let's finally assume we can only reduce the man-hours by half (500 million). The average U.S. wage is about $25 per hour. Just this conservative estimate yields a wealth gain of about $12.5 billion dollars every year.

PS. Will tax cheating (intentionally under-reporting tax liability) or perhaps more likely tax fraud (filling fraudulent returns to garner other taxpayers' refunds) force us to simplify the tax code? Will they force us to remove Milton Friedman's unfortunate innovation (no refunds, no fraud)? Will they force a rethinking about identity verification at least in regards to the government (even less anonymity)?