Monday, August 18, 2014

Highly Linkable

Then there was only the ocean and the sky and the figure of Howard Roark . . .

A new day is dawning in sports. A tyrannical dragon has suffered the first strike of what I predict will be a lethal combination leading to its eventual slaying. The NCAA has lost the O'Bannon case. Michael McCann's take is, as always, a must read. He carefully lays out the limits of the ruling, but my optimism is not naive. The lawsuits have just begun, and the law from which they challenge is various--meaning more ways the NCAA can be harmed--while the judge will be the same--and she didn't mince words in rejecting the NCAA's logic and arguments. Notice that those calling for (market) reform are not satisfied yet. That is important as it means the NCAA hasn't found refuge in a new normal. Rather the hypocrisy and ignorance is being called out. And the silly arguments, which wouldn't mean salvation for the NCAA even if they were valid, are smothered before leaving the nest.

Kevin Erdmann makes an interesting comparison between school choice and financial regulatory choice with a spotlight on Dodd-Frank. The thrust is that a right to exit is essential to good institutional policies and incentives.

Speaking of exit, Arnold Kling points to others showing yet another way we could exit the FDA.

Scott Sumner wants you to know that the American middle class is fine and that is exactly what he means.

Tuesday, August 12, 2014

Do We Want To Live In A Third-Best World?

I listened to this NPR story on my way home from work today. The basic facts quickly:
  • A disabled man uses marijuana for medicine. He says it works better than anything else for his symptoms. 
  • The man lives and works in Colorado where the state law allows medical marijuana and where state law prohibits discharging an employee for lawful activities conducted off work premises.
  • The man works for Dish Network, does not use pot while at work, and does not come to work high.
  • Dish Network conducts periodic random drug tests that screen for marijuana, and the test it uses can detect marijuana's THC compound days or even weeks after actual use (the story is slightly murky on this, but I believe it is the case).
  • Dish Network dismissed (fired) the man after his positive test result.
This got me thinking about the world according to a libertarian. Here is the breakdown:
  • In a first-best world marijuana is fully legal. Employers can freely choose to employ or not employ people at their will including considering if they use marijuana on or off premises. Different firms have different policies and people (customers, employees, and everyone else) respond to those policies by respectfully agreeing or disagreeing, engaging or disengaging, and supporting or protesting. This way norms tend to work themselves out and adapt over time. The evolution is completely based on persuasion rather than force. Where disputes come up about rights (always a conflict of negative rights since positive rights do not exist in libertarian utopia), those are handled by a common law process. Again, it is evolutionary from the bottom up. Sadly, we do not live in this world. 
  • In a second-best world marijuana is mostly or fully legal. Employers must adhere to rules governing their conduct as set by a combination of common law and local legislated law, but these rules that emerge from this process are few in number and necessarily local in scope and encumbrance. The relationship between employer and employee is adaptive since it is governed some by rules imposed externally but mostly agreements made between the two parties internally. You'll never have that kind of relationship in a world where you're afraid to take the first step because all you see is every negative thing 10 miles down the road. Hence, we do not live in this world either. 
  • In a third-best world marijuana is mostly illegal. Employers are strictly governed by a multitude of rules set both locally and nationally with little of it coming out of a common law process. These rules are often in conflict with themselves as well as political tensions that dominate at different levels. The environment is ripe for lawsuits since so much is unclear and arguable. And those suits have little hope of bringing precedent-setting resolution or clarity for future disputes. Nothing is ever settled and almost nobody is ever happy with the results. The clarion call for a solution demands a top-down, one-size-fits-all approach that is as arrogant as it is unjustified. Sadly, we live in this world. 
While we work towards a better world that I do believe we can achieve (to wit: No matter what anybody tells you, words and ideas can change the world), we must settle for something less perfect. I hope Brandon Coats prevails in his case under state law. I hope the federal government takes a step back from the employer-employee relationship rather than offer its unhelpful solutions. 

We don't have to live in a third-best world, but it will take people learning to think for themselves. Your move, chief.

Friday, August 8, 2014

Remember... all I'm offering is the truth. Nothing more.

(Updated to correct small grammatical errors due to voice to text problems)

Yesterday's Marketplace Morning Report had a snippet examining different articles from an old 1948 issue of Fortune magazine (starts about the 3:45 point in the short clip). One part of the story stood out to me. It was about business and ethics and specifically about inequality using the example of teachers being underpaid. It is unsurprising but disappointing to me that this story line has been around as long as it has. It is disappointing from the standpoint of it being either economic ignorance or deceptiveness.

Allow me to point out the logical implication of the idea that teachers are underpaid (Fair warning: I do this to be provocative by stating it in a rather harsh but still true manner. This is designed to get a rise out of you but also to make you think critically.). Here goes:
Either they're too dumb or lazy to figure out how to get out of that job and into the one that pays them what they're worth or . . . they're worth what they're being paid.
I will let you seethe on that for a moment.

Okay, now let's be a little more charitable. Notice I won't go so far as to basically canonize everyone in the teaching profession. For those who truly could make a greater total compensation but instead sacrifice for the good of the cause, that is wonderful and to be commended. At the same time, if you are doing it as an act of charity, you have forfeited your right to complain about the pay. For the rest . . .

This could be another case of the old adage there ain't no money in that. But there is money in that; we just have to understand what type of money there is and what is truly determining that total compensation. If you make the proper adjustments for time off and other benefits including pension plans for public school teachers that may be too generous, you see that actual total compensation is fairly high. It still lags what many talented teachers could earn in other professions, but we have to respect their reasoning for making the choices they make.

So why is teacher compensation largely composed of non-pecuniary benefits like time off and job security? One easy answer would be that most of the teaching jobs are through government, which is subject to the whims of the political arena and haunted by bad incentives.

(I've updated the next paragraph to clarify my point)
Yet the larger economic reason (for teachers' pay structures including the low annual wage commonly kvetched about) is more subtle. Income is overwhelmingly determined by comparative advantage and the size of the market--not intelligence per se. Frankly speaking there are a lot of eligible candidates for teaching jobs despite the work of teachers unions to restrict the employee pool. And in the market for teaching children there are in most cases quickly diminishing returns to intelligence.

Don't believe me that income is a matter of comparative advantage and market size rather than intelligence? Imagine you are a member of a primitive society living on a small, isolated island. Would you rather have as your only differentiating skill to be the one guy who knows how to split an atom or the one guy who knows how to tie knots?

Sunday, August 3, 2014

Will The Boomers Really Kill The Stock Market?

Last week listening to NPR I heard this story on Marketplace. Marketplace's shallow treatment of the story was frustrating although not atypical. The gist of it is a concern that as Baby Boomers age and enter retirement they will begin a mass sell off of the equity portfolios in favor of bonds or cash, etc. and that this activity will depress stock prices.

This is a fundamental but understandable misapplication of supply and demand (SD). SD is different for capital investment assets. At the price I am willing to pay I will purchase stock in a company. If that price rises enough, I will sell. Hence, once I take ownership, I am a supplier. But if after I purchase the price goes down enough and I don't think fundamentally anything has changed, I will buy more. Hence, I am also a demander. This is a peculiar situation where the same entities are both suppliers and demanders.

Normally, you're on one side or the other. Think of Wal-Mart and myself in the banana market. Wal-Mart is clearly the supplier and cannot realistically take the position of a demander no matter how low the price of bananas falls outside of using the bananas as an input for making, say, banana bread and then supplying that. (Wal-Mart can buy more to turn around and sell more, but it cannot actually consume bananas keeping it firmly on the supply side of the equation). Likewise, I cannot realistically become a supplier of bananas no matter how high the price of bananas climbs. (Sure, at some point it is profitable for me to drop the day job and take up a plantation south of Panama with David Lee Roth, but in what world does that happen and I am the guy best suited to do it?) So unlike in regular goods markets, SD clearly has some special properties when dealing with investment assets.

Because most of the time only a small fraction of the total quantity of stock in a particular company actually trades, you need simultaneous and opposite shifts in SD to get a large price change. Conceptually this makes sense if many investors are thought of as both suppliers and demanders simultaneously--my increased interest as a buyer for a particular stock shifting demand to the right is mirrored by my decreased interest as a seller for that same stock shifting supply to the left. Figure 1 below demonstrates.

Perhaps a better way would be to look at the supply curve as fixed (vertical) at the point where quantity equals the total shares outstanding. The demand curve then does all the heavy lifting. The supply curve only shifts when there is increased or decreased short selling or when the firm issues new shares to the market or removes shares from existence. Figure 2 below demonstrates.

Absent a surprise change in the fundamental condition of a stock such as a new product success or a fire destroying inventory, what can actually affect a shift in demand (using Figure 2's modeling of the market)? New buyers of stock enter the market all of a sudden? How would that actually work? For example, imagine a rich, crazy man walks onto the NYSE trading floor (opens a Schwab account for you literalists). He wants to use his entire $10,000,000 net worth to buy Apple stock paying as much as double the market price although nothing has changed fundamentally for Apple. What happens to Apple's price? Well, it goes up, temporarily. What next?

Well, what can he do with the stock once purchased? He can't destroy it. He can hold it. He can sell it. He can give it away. Regardless of the action he takes, the stock always goes back to the rational price. Here we have another case where we simply should insert the response "And then what?"

It isn't enough just to make a vague assumption of a market outcome. One needs to have a basis for the outcome and then work through the possible consequences. The same applies to scare hypotheticals (circa 1985) "What if the Japanese buy up all the real estate in the U.S.?!?" or (circa 2014) "What if the Chinese buy up all our oil and gas and coal?!?" Same answer: Okay, and then what?

Without something fundamentally changing in regard to a stock's value, a price change can only happen if risk tolerances* change. Consider a two-asset investment universe (riskier stock and less risky bond). A shift in the average appetite for risk will change the relative attractiveness of the two assets which will be realized through a change in price. If the average risk appetite increases, the riskier asset (stock) will increase in price while the less risky asset (bond) will decrease in price, ceteris paribus. Note that it is unclear in a more realistic many-asset universe how a change in average risk tolerance would propagate into changes in prices as risk is neither linear (one rate of change) nor singular (one-dimensional), but the principle remains the same.

What could Baby Boomers actually do? IF they changed the average risk tolerance of investors, then you would tend to see a decline in more risky asset prices and an increase in less risky asset prices. This could mean a decrease in the price of equities. Yet this change in average risk desire is unlikely. It is not clear that people actually get that much more risk averse as they age. And to the extent that they do, growth in life expectancy and desires to bequeath partially offset any expected increase in risk aversion. Growth in population, which of course occurs at the bottom of the age distribution through births and near the middle through immigration**, will also tend to reverse any age-specific effects on average risk tolerance.

This is the way to think through the situation to find a real path by which a group of market participants like Baby Boomers might affect prices. It is nuanced and fuzzy--two things that don't work well in a three-minute radio broadcast.

*I am being quite liberal with the term "risk tolerances" here as I look to include many facets of taste and perhaps all of Lord Keynes "animal spirits".
**This would only be referring to immigrants who were very disconnected from financial assets since otherwise they would already be a part of The Market, which is indifferent to dashed lines on maps and labels on passports.

Highly Linkable

Andy Schwartz has penned the best analysis that I have ever read of the NCAA, its position as cartel, and the situation before it. Read it to understand the problem(s) and choose a side: Team Market (my group), Team Reform (the bootleggers and Baptists coalition of paternalist progressives and traditionalist conservatives), or Team Cartel (the NCAA today). I believe only Team Market is fully on the ethical and logical high ground. Team Reform's advocated position is not sustainable--the economic incentives will break it down as teams depart the model. Team Cartel might be sustainable in the medium term provided it can unconditionally win the multiple-front legal war it faces. I am being an optimist predicting that Team Market wins decisively and soon. I am simply being logical predicting that Team Market wins eventually.

Speaking of predictions, Randal O'Toole, the Antiplanner, discusses planning for the unpredictable as it relates to city planning and self-driving cars. And Mark Rogowsky makes some predictions about the business side of robo-cars, et al.

More predictions: Scott Sumner discusses some things that can't but will go on forever along with making some interesting predictions.

Here is a prediction that I will make in light of this excellent analysis (HT: Barry Ritholtz): Over the next 5 years hedge fund/alternative asset investment strategies will change A LOT while significantly falling out of favor among institutional money managers (anything outside of the retail brokerage level). I'll predict that in five year average fees are half what they are today and allocations are one-third lower. (UPDATE: To clarify, I am predicting that average fees collected are half as high in five years. If you think about how the average is affected, you'll realize this isn't as bold a prediction as it may seem.)

That's enough predicting for one post.

So Bryan Caplan has basically been following me around chronicling my strategy for success on my terms in life and in business.

Art Carden points out that while there are many negative aspects to poverty and most transcend time, fortunately a low income in absolute terms isn't one of them. Nothing gets you nothing . . .

I had the same reaction as David Henderson to this otherwise good personal finance article by Megan McArdle. People almost always misunderstand the tradeoff between 15 and 30-year mortgages as well as how to figure the cost-benefit of a refinancing decision. It's not about the time to payback on the closing costs and the likelihood of moving in the future. It is a comparison of two (or more) streams of cash flows discounted appropriately. Those other factors are just part of the input variables that must be included.

Like I said recently, the public doesn't understand inflation; Scott Sumner suggests the Fed may be coming around to understanding this and, hence, moving beyond inflation targeting.

Tuesday, July 29, 2014

WWCF: Sea To Shining Sea - Pot Freedom or Marriage Equality?

Which Will Come First?

50-State Legalization of Marijuana


50-State Licensing of Same-Sex Marriage

Let's be clear: both of these are coming and soon. Let's be clear as well on our position: it is a good thing. The magnitude of the first is substantially larger in terms of causing good. Ending this significant front in the evil War on Drugs will bear much fruit. The magnitude of the second is substantially larger in terms of indicating good. That society and its institutions are nearing a point of accepting and dare I say celebrating the choices and joys of others says volumes about where we have arrived morally and intellectually. Before we move on to the prediction side of this post, let me lay one more point down: one does not have to morally agree with either the use of marijuana or the act of homosexuality to still reach the moral conclusion that we (individually or through the government) have no right to use force to disallow either one. The first-best solution is for the government to play no role in either one of these peaceful activity/association.

It may seem obvious to some that a U.S. presidential candidate will campaign on legal pot for every chicken quite soon giving marijuana the upper hand. After all, the New York Times now supports it. Indeed as their new series puts it 37 states representing about 76% of the U.S. population current have liberalized marijuana laws. But in order for this race to declare a winner, the subject must be fully legal and recognized both within each state and federally. It is just a matter of time before Colorado or Washington residents see just how illegal marijuana still is within their borders. Oh, wait, it already happened...

Still, the trend is undeniable on the marijuana front. And when one looks at the state-by-state prohibition of state recognition of same-sex marriage, one sees significantly more opposition (see the chart at the bottom of the link). Yet, the trend here is both certain and strong. 

What really puts same-sex marriage ahead of the game is the fact that it has been scoring victories in the courts, and that really gets to the heart of this WWCF including why this isn't a fair fight. Marijuana is still the outcast. It is the humorous back story in the R-rated movie. Same-sex marriage is the lovable story line in the family-TV comedy

The ultimate force driving same-sex marriage ahead in this race is that while it literally needs governmental approval to exist, marijuana only needs governmental tolerance (or impotency in the face of economic forces more powerful than puritanical desires). The fight for marijuana legalization relies much on the unseen (the benefits of ending prohibition). The fight for same-sex marriage relies much on the seen (the people denied benefits).

I give the edge to same-sex marriage and I predict we'll have both realized (nation-wide, state and federal) within a decade. Freedom wins! Freedom wins! Freedom wins!

Cross posted at

Monday, July 28, 2014

Highly Linkable

I've been on some of these. Perhaps I should set a goal to eventually be on each one. See if you can spot the one Forrest Gump was on. There is also one that looks a lot like the one where Joan Wilder first got into trouble (but it isn't the one; that one was in Mexico posing as Columbia).

Let's hit these by author in this edition:

First, Don Boudreaux makes quick work of the childish argument "If perfection is so good, why isn't anybody perfect?" Next, he points out something cool about keeping cool this summer.

Megan McArdle hits all the notes on why we need to end the corporate income tax. One quibble: I completely disagree with her idea of replacing it with higher taxes on capital gains/income. There is no logical or moral reason to tax the same thing twice and in a way that encourages wasteful consumption--taxing savings and investment encourages consumption today that otherwise would not take place.

Speaking of consumption, Scott Sumner points out that one implication of Piketty's wealth tax ideas would be wasteful consumption. Moving away from consumption, let's discuss aggregate demand, which isn't just consumption as Sumner points out. I know a lot of smart people who don't understand that they don't understand this concept.

Next time you're aggregate demanding you might want to use the retail version of Uber as detailed by Erika Morphy.

Finally, Timothy Taylor discusses the government's arrival on the scene of "The Great Honey Bee Panic of the 21st Century" (title all mine) just as the market is done making short work of the problem.