Saturday, March 23, 2019

The Big Five - Choose Your Battles Wisely

Here is the low-hanging fruit of public policy. 90% solutions (improvements) on these issues are several orders of magnitude more important than 99% solutions on a thousand others. They are in no particular order (alphabetical):
  • Drug Prohibition (end it--allow adults to make their own choices)
  • Education (privatize it--give the government an ever-smaller role)
  • Immigration (open it up--allow people to freely move and freely interact with other people)
  • Taxation (simplify and redirect it--efficiently tax the use of resources not the creation of resources)
  • War (move away from it--make postures less bellicose and violence less of an option). 
Everything else at this point is details. They are interesting details, yes. For example, the recent interesting, generally important, but marginally insignificant issue of the legality of blackmail. [note: I side with Robin Hanson, but I am sympathetic to and willing to live with the counter case.]

How should you vote? I would suggest an equal weighting of these Big Five policy stances as the guiding framework. While this recommendation is a prescription to be a few/select-issue voter, that should be considered a feature not a bug. Similarly straight-party voting isn't necessarily morally or intellectually inferior to a strategy of "voting the person not the party". By what criteria is a candidate-by-candidate voter deciding? Why should they believe they are properly weighting the issues, correctly identifying the stance on the issues, and accurately evaluating each candidate's position and expected actions on the issues? Using a few benchmark issues as the litmus test keeps the focus properly on that which meaningfully matters and gives the best hope the rationally ignorant voter is making a good decision.

More importantly, how should you advocate (much more bang for the buck)? Let's say solutions are just as simple as awareness (I know it is not, but it is a useful analogy). Spend about 95% one's advocacy efforts roughly evenly on the Big Five: ending the drug war, privatizing education, opening immigration, reforming taxation, and reducing war. The remaining 5% goes for everything else. My own behavior has not adhered to this framework, but since I am just now formally defining this, I grant myself pardon. Will I follow this going forward? All I can do is try.

Sunday, March 10, 2019

I Know Why Dracula Is So Rich

Before we can understand why Dracula is so rich, we need to understand why investments make money at all. Why isn't the current price simply the sum of all future returns? Well, because future returns are uncertain. A business venture might be profitable. Money lent might be returned. And the investor might be around (alive and well as today) to collect when the future return is available. Hence, an investor needs to be compensated for the risk that the investment will not generate a return and for the risk the investor cannot use the invested funds as well in the future as today.

I am positing that uncertainty is the single (the one and only) source of financial investment return above the time-value of money (TVM). Assuming we all have an identical time preference, which we do not, the time-value of money can be summarized as a single discount rate, an annual compound interest rate. Let's set the discount rate to 3% whereby $100 today is equal to $103 in one year, $106.09 in two years, and 1.03^n into perpetuity. To any degree that there is uncertainty about collecting the future investment, one would require a premium to the discount rate--an increase in it to compensate for risk (e.g., 3% becomes, say, 5%, which would be 3% for TVM plus 2% for risk). I realize "discount" is counterintuitive, but understand that it simply means discounting a future amount to be equal to a value in present terms. 

One way to get rich is to have a discount rate (a time-value of money) less than 3%—like say 2%. Then getting someone to pay you 3% in one year’s time is like getting paid almost 1.5 year’s interest in a single year since you only require 2%. It wouldn’t take much leverage (or much time) to make this a very real and very big get-rich-quick (or eventually) plan. 

Another way to get rich is to have less uncertainty about the future--the mythical crystal ball. Even if it is cloudy, it plus what everyone else (the market) knows is better than only what everyone else knows. 

This dawned on me when I was listening to Jason Wiser's retelling of Bram Stoker's Dracula (Dracula: The Night King (part 3 of 3), specifically about the 35:21 mark). Because he is an immortal monster, Dracula can simply wait out any temporary problems--go to sleep for forty years as those who hunt him age and die. Now, think about Dracula's time preference for money or anything else. He plays the loooong game. He doesn't need to consume now and can let his wealth work for him quite easily--decade-long naps allow for very deferred consumption. Relative to mortals, he has a very, very low discount rate because his time horizon is astronomically longer and uncertainty from his perspective is much, much lower. 

What are the implications for us in the non-fictional, mortal universe? Tyler Cowen's Stubborn Attachments wrestles with this concept (confession: I have not read it yet, but I have purchased it, intend to read it, and have listened to approximately 3.79 trillion podcasts of him discussing it). As I understand it, he argues for a discount rate of 0% thereby valuing the future as equal to the present. In such a framework at the individual level you would not be paid a premium for deferring consumption. However, I believe he is proposing this at the societal level and more as a framework for policy making. A conclusion this leads to is generally favoring growth as the primary goal/aspiration for social policy.

What about implications for investors? Individuals are not immortal; so unless you are planning a trip to Transylvanian, you better continue to demand compensation for deferred consumption (TVM) and some premium for risk being taken.

What about endowments and foundations? I would propose they are not nearly as much like Dracula as they would like to be--in the time horizon and uncertainty dimensions. I won't at this time accuse them of having other Dracula-like qualities (fodder for a future "shots fired" post perhaps). These entities have current and continual demands for withdrawals. An X% annual spending policy and a collection of interested parties with very different perspectives strongly challenges any argument for a lower discount rate. The foundation as a concept may theoretically have an infinite time horizon, but its donors, beneficiaries (both current and near-future ones), and employees do not. At the very least it will be difficult for them to think and act as if there is an infinite time horizon when they should (deferring consumption in tough times) and rather easy for them to do so when they shouldn't (assuming future growth will solve all current shortcomings). 

Lastly, what about governments? Well, should they really expect to be around into perpetuity? How many can reasonably expect this? So far at least technically the success stories number zero. (Perhaps another future post expanding on this question and applying to foundations as well.) I will grant that governments in a practical sense to a degree (magnitude matters) can assume very long time horizons borrowing against the future. It will work just fine until it doesn't. Given enough splinters (growth-hampering regulations, inflation, entitlement promises, etc.) you'll eventually have a wooden stake. Governments may aspire to be Dracula (see below), but they face many, many obstacles in getting there. 

This brings us to a Partial List of why governments are like vampires:
  1. The light of day is toxic to their way of behaving.
  2. Taxes = blood.
  3. They can seduce with their promises.
  4. They create captured minions whose self interest becomes subservient and aligned to the master's.
  5. We trust them blindly at our peril.
  6. They are incapable of looking themselves in the mirror.

Wednesday, February 27, 2019

Ranking College Football Programs - 1970-2018

It is about time that I updated my previous work on ranking college football programs.

Recalling the methodology from before, I am attempting to answer who's better, who's best. I am limiting the data set to my generation (1970 through 2018) because it happens to coincide with what I believe is the modern era of college football. To rank the teams I use average margin of victory. Opinions could differ, but who are you to criticize? Join together with your like-minded brethren to create your own list. Just be objective rather than try to fool us again with some anyway, anyhow, anywhere to make your team come out on top.

The results are below and the spreadsheet with the full analysis is here.

Since 1970:

Since 1998 (BCS and College Football Playoff era):

Since 2014 (College Football Playoff era):

Saturday, February 16, 2019

Render Unto Caesar

I just filed my tax return, so it seems like a logical time to post on taxes.

The current regime (a Democrat-Republican alliance co-opted by many special interests (law-financial planning-accounting industrial complex, real estate industrial complex, big farm, big charity, and on and on)) has us running in circles.

On the one hand they giveth: corporate tax rate cut and increase in standard deduction--the two true highlights of the 2017 Trump tax reform.

On the other hand they taketh away: tariffs, which are just taxes on U.S. consumers, and threats of escalations in complexity and burden, +70% top rates and wealth taxes to name a couple.

I continue to find actual tax policies (basically everywhere) and most general discussion about tax policy to be a strong indictment of where we are as a society and how (un)critically we think. As an alien visiting your simple planet, I find it quite humorous how unsophisticated and corrupt the whole of taxation is and has always been. It is a Baptists and Bootleggers conspiracy combining the dumb with the evil.

As an example, an awkward tension exists between where implied tax levels are (the amount needed to pay for all the obligations and expenditures currently in place) and the current, explicit tax level actually in place (higher than commonly believed, but not high enough). The Republicans/conservatives cannot admit the Democrat/progressive proposal for very high rates is necessary for the very spending they are a partner in. Likewise the Democrats/progressives cannot admit the Republican/conservative fear of high taxation smothering future wealth is well placed.

There is hope. There are great ideas being well communicated and lurking in the forest. Examples:

Scott Sumner says tax luxury not wealth or income.

John Cochrane takes Krugman, et al. to task for lending support for some recent nonsense and he follows it up with a good discussion on the effective property tax rate.

Tyler Cowen warns that the Warren Wealth Tax won't be as popular (or desirable) as Democrats believe.

Related to all this is the UBI, and if you don't realize the relation, you aren't thinking critically enough. Arnold Kling offers some thoughts, and note the abstract of this recent paper (HT: Tyler Cowen).

Wednesday, February 13, 2019

Highly Linkable - Q&Q Edition

Nat Eliason asks: How many of these psychology myths do you still believe (or did until reading this post)? There are several I want to be true and perhaps they are at some level--just not to the extent originally purported or popularly presumed.

Scott Alexander asks: Is science slowing down?

Arnold Kling asked for readers to share their favorite Klassic Klingisms: They did not disappoint.

Scott Sumner asks: How should we think about the theft of intellectual property? and Can we handle the truth?

Bryan Caplan asks: How is immigration like nuclear power?

Saturday, February 9, 2019

Government Shouldn't Run Healthcare, Etc. -- Round Basketball Court Edition

Driving by watching this park develop years ago it surprised me as I noticed this circular pavement being built not knowing what it was going to be.

When basketball goals went up I became irritated and was reminded of this irritation again every day as a drove by. Anyone who plays or watches basketball knows this is not what a basketball court looks like or how it is played. In fact it is dangerous. Not just because anyone who has played much basketball builds a muscle memory of the court being rectangular with corners extending to a baseline, but simply because the natural flow of play will take people off of the edge of this circular court.

Of course, this is not something to go to the mattresses over. As frustrating as it is, this incorrectly built basketball court is not the problem; it is just a symptom.

The problem is that even though a strong public goods case can be made for local government’s role in parks, government is ill-suited to successfully provide parks. It is not for lack of good intentions and not even necessarily for lack of good, intelligent people. Rather it is because of a lack of good incentives or perhaps more accurately a good incentive structure.

Government doesn’t have the right feedback loop. Government actors do not have the tools they need to course correct as they make decisions. It doesn’t matter that it won’t be the same people who designed and built this park trying to run healthcare or trying to guide the financial system or trying to fight wars or trying to [insert whatever grandiose project you want government to do]. And it does not matter that there will be enormously greater resources devoted to the grandiose project; in fact that probably makes it worse.

One High Net Worth Investment Manager's Plea: "Raise Tax Rates to 70% NOW!"

Shout it (and dance it) from the rooftops! We need higher tax rates on the rich. I'm not greedy. This is all I ask.

Please raise rates like in the good ole’ days.

Give me a way to help rich people shelter income from the tax man.

Bring back all the intentional loopholes, the legal methods to ensure that old money stayed on top.

Help me tie up capital in ways that benefit the haves and fill my pockets as well as those of tax lawyers and Wall Street financiers. It isn't just me that is hurting. Plenty of other people were promised lifetime high incomes and prestigious positions. Now we are forced to sully ourselves with talk of "adding value" and "matching the benchmark"--as if I should have to justify my 6-figure bonus. I have an MBA, for God's sake!

I don't mean to lose my cool, but I have had enough. In this world of passive investing, low fees, minimal commissions, and democratized capital we desperately need a way to justify our enormous salaries which fund our lavish lifestyles.

I am so disappointed in recent politicians. I'll tell you something. This country is going to the dogs. You know, it used to be when you bought a politician, that SOB stayed bought. Now they are raising the standard deduction and taking away options like having taxpayers help rich people pay for stuff--no more tax breaks for $100,000 football suites, etc.

We had a great system. It was working just fine during the days of Ike. They warned that kid, Kennedy, not to go down that path of "rising tide lifts all boats". Don't let the camel's nose into the sheikh's tent. He did it anyway.

Dream of a better tomorrow starting today. Imagine how more complex and elaborate our schemes could be in the modern world of international world of finance. Give me a 1,000 billable hours and a few well lobbied-for loopholes, and I could craft a perpetual wealth-shelter machine to ensure no taxman or 99-percenter ever touched a penny of great-granddad's fortune.

First they come for the 150-foot yachts...

Taking my tongue out of my cheek, the sad reality is we are still far, far away from an efficient, effective, fair, and simple tax regime (see also the long version). Progress has been made, but so much remains.