Friday, December 27, 2013

Highly linkable

What happens when you combine hundreds of images of a sunset into one image? Magic.

Here and here are a couple of takes on photos of the year.

I want to go to there.

It is actually logical, but reprehensible, that part and parcel of the NCAA's enforcement includes limiting universities' abilities to provide additional tutoring.

Here is Landsburg's latest puzzle. It seems simple enough. Once you've attempted, go to the solution--I got it wrong and stumbled initially to see how the solution was true.

The free market is this era's Galileo.

The world needs radicals like the late, great Nelson Mandela. In fact it needs them to be even more radical.

So you're telling me they help write the rules that they will later be forced to follow? Like I said at Cafe Hayek, which deserves a hat tip for the link: "So many people delude themselves into believing that regulation is some benevolent construct created from pure knowledge, guided by thoughtful reason, immune to bad intentions, and protected from unintended consequences. If only the sausage factory were so."

Cass Sunstein says we need Moneyball-like metrics for non-profits. I agree and would take it further. We pay them to solve problems. Not to fail by trying to hit an arbitrary size of administrative expense.

A degree in English does not necessarily mean you can speak the language of business or economics. And here are two more from John Cochrane on why there is hope for healthcare after Obamacare completely fails.

Finally, 2013 saw yet another great economist pass on to that higher utility curve in the sky. Walter Oi is remembered quite well here by Steven Landsburg.

Saturday, December 21, 2013

Put Me In Coach

I beat up on coaches a lot. More in conversation than in this blog in fact. I've done my share of armchair, from the bleachers, and Monday morning quarterbacking. Allow me to defend coaching a little and relate some economic concepts to the coaching profession.  I want to focus on college football coaches and to use Oklahoma's Bob Stoops in 2013 as a specific example, but this applies in large part to coaches at all levels and in all sports.

Flat out, coaches have a tough job. Yes, many are very, VERY well paid to do this job. Of course, many more are not. The job is tough because it is high-profile performance judged by a vast sea of people who have much less information and skills and who tend to approach the issue from an emotional standpoint. (Not me, of course; when I am yelling at my TV, it is because of my passion for reason and logical decision making.)

A coach has to balance between running an on-going training program while producing output that meets consumers' high demands. The training program is comprised of the gamut from relative beginners to high-value-producing experts (I'd call them professionals, but this isn't that blog post)--all of them thrown into the same "classroom".

Let me use the 2013 OU football team as an example of how coaches face issues involving asymmetric information, decision-making under uncertainty, skewed risk-reward payoffs, and management of public and intra-firm relations.

Throughout Bob Stoops' very successful 14 seasons as Oklahoma's head football coach he has either had a high-profile, all-star quarterback or an inexperienced newcomer who struggled not just when compared to his high-profile predecessor but also in absolute terms. 2013 was of the latter variety.

As Stoops sought to replace the 4-year record holder Landry Jones, he was evaluating the options with many backseat onlookers. The obvious choice to many was Blake Bell, the two-year backup. But in late August Stoops awarded the 2013 starting job to freshman Trevor Knight. When Knight stumbled some in early games, the natives including me grew restless for Bell to be given a shot. A combination of a bad first half and a slight injury gave the natives what they wanted in the West Virginia game, and Bell performed well. But then a few games into his starting role, Bell too fell into a malaise. The offense stumbled contributing greatly to OU's losses to Texas and Baylor. A little in and out substitution between Knight and Bell over a couple of games ended with Knight regaining the starting job for the Kansas State game (a victory) only to exit the role at half-time against OSU due to injury. Bell came in and played well if not better than Knight. Oh, and the formerly third-string sophomore Kendall Thompson was inserted before Bell replaced him in the OSU game.

To say this wasn't according to script is an understatement. But the script isn't actually written by fan dreams. It is an emergent process governed by both luck and coaching decisions. The coaching decisions are governed by a couple of underappreciated forces--uncertainty and asymmetric information. Coaches know a lot, and I mean A LOT, more than the rest of us. They see these players in practice and in games and in replayed videos of both. They interact with them. They also have a game plan and a complex strategy of plays to accomplish that plan. We don't know the plays, the formations, the game plan theories, or how well or poorly the players fit into them all. Add to that the complexity that combinations of players will imply different outcomes. Oh, and players are living lives all this time meaning they simply aren't the same in Spring of sophomore year as they are in December of senior year. Oh, and coaches are humans with biases and informational blind spots. They are operating in a cloud of uncertainty. We are in a fog orders of magnitude more dense than coaches are due to the asymmetric information.

And yet we judge them and will call for their heads if too many of their decisions turn out "wrong". Was Knight the right choice for Stoops to make in August? In September it seemed like the answer was no. In October and November it seemed more and more like the answer was probably yes. In one half of one game in December (n = .5 for statisticians out there) the best we could say was, "Looks like it was a toss up either way". It took us as onlookers an entire season to finally say what we should have been saying all along. To wit, "The coaches probably are making the best choice available, and that choice is still a guess".

"Coaches are paid the big bucks to make those calls and get them right!" you say. Well, yes and no. What is "get them right"? Right as judged by critics--media, fans, detractors, players, administrators, donors, parents, etc. Coaches have many masters. Effectively managing the intra-firm (i.e., players, assistant coaches, administrators, donors, some fans) relations along with the public (i.e., media, some fans, detractors, other team's coaches) relations implies they have interests that may conflict with simply maximizing the probability of long-term winning. Their risk-reward payoff matrix is skewed to a degree that is hard to appreciate. Balancing this well is an art.

Reflecting on the Sooners' 2013 season has humbled me and caused me to appreciate the coach's job(s). I don't think it is just because I view the season as a success with hindsight knowledge (it would be judged a failure from an ex ante point of view). Trying to put aside how a last-minute comeback victory over Oklahoma State makes me feel, I think I would feel that Stoops did a great job in 2013 win or lose that game.

Thursday, December 19, 2013

Highly linkable

What a country!

I've suspected this for some time, and I don't think it will be very controversial before too long except maybe among old-timers.

Mungowitz at KPC had a couple of very good ones worth reposting. Here is the first--graffiti unchained. Here is the second--close calls.

A few years back I did a 180 on antibacterial soaps, et al. because of reading and learning and doing some thinking about what makes the most sense biologically/evolutionarily. Megan McArdle has more to that end. (If I had been doing it back then, this could have been the fulfillment of my continual New Year's Resolution.)

Here is a very good summary on why we MUST END the senseless, horrific war on drugs.

I want to go to there.

Tuesday, December 17, 2013

The Regulator's Dilemma

Imagine two rooms: one is a group of consumers and one is a group of producers. For now the rooms are completely isolated from one another. As they are labeled, these two groups will interact in trade.

Now imagine a regulator whose job is to, well, to do something. The regulator has imperfect information but is guided by a few beliefs about the job to be done. The first is a belief that the job exists somewhere along the dimension of necessity, which extends from anti-necessary to necessary. At the extreme of necessary the regulatory job is required for a good outcome. Anti-necessary is not the same as unnecessary; rather it means the job of regulation is in fact destructive—that the execution of the regulatory job brings a clear net harm.

The second belief is about where the need exists. Is it the consumers or the producers who need "help"? Let's call this dimension need.

The third belief is that he as the regulator will do a good job of fulfilling the regulatory mission. Let's call this dimension effectiveness. This dimension obviously extends from positive to negative meaning he does a good job or a bad job regulating.

The regulator has limited resources in addition to imperfect information. He must make tradeoffs. The interaction of where his beliefs land on the three-dimensional grid of necessity, need, and effectiveness will determine how he approaches the job of regulator (of course, it may not just be his beliefs that guide that decision, but he is a good proxy for the fact that something guides those beliefs).

For example he can concentrate his efforts on the group of consumers. In this case he surveys the room of consumers with the underlying belief that 'there are people in this room who can't be trusted to make good decisions even if there is no fraud involved. I must protect those idiots from themselves.' Call this option 1.

Alternatively he can concentrate on the producers thinking 'there are people in this room who can't be trusted to act ethically. I must stop those crooks.' Call this option 2.

And of course there is the more likely option that he divides his efforts between both groups. Call this option 3.

Here are my thoughts:

  • We unfortunately tend to view the job of regulation and regulators as highly necessary and highly effective. This means they punch hard and with impunity. The only thing left to decide is where they punch.
  • Option 1 can be a realistic point of view or it can be a disgusting point of view. People do make poor choices—all the time, every day. But the magnitude of those poor choices matters. So does the incentive arrangement—who is in the best position to benefit from a good choice and hurt but learn from a bad choice. At the extreme this point of view relies on a paternalistic philosophy that assumes the best way to make decisions is through a poorly incentivized and poorly informed regulator. Free market processes are highly superior to a regulator if option 1 is our focus for regulation.
  • Option 2 is the best case that can be made for regulation. There will be fraud and with it real blood. But again the role of the regulator can and should be limited here. The regulator can be a blunt and poor instrument for discovering and preventing fraud in all its forms including unintentional harm. Liability law via common law and contract law (both emergent processes) can be equal or better regulators than a pure regulator himself.
  • Option 3 is where most regulation tends to land from the SEC to the FDA. And think about how the more dynamic real world plays out. The rooms aren’t actually isolated from one another nor are the groups mutually exclusive. Everyone is in one big room wearing multiple labels. The imperfectly informed regulator is going to look for the help of the relatively informed producers to help guide his attempts at helping consumers. He is asking people, some of whom are crooks and many of whom have ulterior motives, to structure and enforce option 1. He will also look to define fraud from the point of view of the “victim”. The relatively injured consumers (who will self-select among those who have suffered a harm—happy people don’t complain) will help guide the regulator. He is asking people, some of whom are notoriously making bad decisions but not bearing the full burden of those choices, to structure and enforce option 2. This is a formula for regulation that is anti-necessary, ineffective at all the wrong times, and fulfilling mythical needs.

Sunday, December 15, 2013

Highly linkable

As we of historically unimaginable wealth prepare for a wonderful holiday season, it is important to remember that Americans (among too few others) enjoy a life better than any before.

Looking for a New Year's Resolution? How about becoming a Jedi Knight?

More help for the Pope.

Whether you are a libertarian or are critical of the libertarian ideal, you should read this to better understand what libertarianism, the ideology of against, is actually for.

Three more strong challenges for the minimum wage policy of pricing low-skilled workers out of jobs: here, here, and here.

What you think you know about the Great Depression that just ain't so.

With bureaucracy we get one small step forward for many hundreds back.

Playing the lottery may be hazardous to your health.

Remember my post on common things today that will horrify or simply humor future generations? Bryan Caplan has a similar post that does a great job identifying an example for each of the three major ideologies: conservatives, progressives, and libertarians.

And how about these guys with the deal of the century? (HT: Mungowitz)

Wednesday, December 11, 2013

The Electric Company

This post is in response to a reader’s request. Specifically, the reader asks (I'm paraphrasing) for some explanation as to why even if a stock (i.e., a safe utility) has a dividend above average (e.g., 5%), it is probably still going to take a hit when U.S. Treasury rates rise. The inquiry continues that this is in light of prevailing rates currently being under 3%.

This is a great question. Before we can attempt to answer it, though, we have to challenge the assumption that rising Treasury rates will indeed probably negatively impact a high dividend stock like a utility. Looking back at some historic correlations* using Bloomberg, I see that since January 2000 (nearly 14 years) there is not a strong relationship between utility stocks and U.S. Treasury rates. And that relationship is actually a positive correlation in many cases meaning that when one is up the other is up slightly as well. This lack of a relationship between the two breaks down even more when we look back 24 years to January 1990.

A lack of correlation isn’t surprising. There are a lot of factors that affect these financial instruments. And lost in that noise is the fact that interest rates do most likely have a negative relationship with high-dividend paying stocks. And notice that my quick-n-dirty correlation analysis compares utility indices and not necessarily high-dividend stocks—I was assuming that commonality, but it is a fair assumption. Below is the case for why rising rates might be bad for a theoretical high-dividend utility stock. But keep in mind an important question is why are interest rates rising when they rise. Is economic growth improving? Are inflation expectations increasing? Are the bond vigilantes finally saying they've had enough?

1. High CAPEX: Utility companies have high rates of capital investment. Higher prevailing interest rates (ceteris paribus) imply higher costs; hence, lower profits.

2. Increasing Inflation Expectations: Utilities may have a poor ability to pass on inflation to customers. At best rate increases come with a lag as they wind their way through the political process. If rates are rising because inflation expectations are rising, then that implies lower profitability for the price-restrained utility.

3. Investor Demand: This gets to the heart of the case. The attractiveness of a specific source of yield is relative (and inverse) to the competitive market for yield regardless of how much higher or lower the specific yield in question is. If I give you $100 for the promise that you will pay me $5 per year forever, that promise is worth less when the going rate of such promises rises from $3 per year to $4 per year. I used to have an asset (the promise) that was worth $167 in the open market (present value of 5% interest on $100 when rates are at 3%) but is now only worth $125 (present value of 5% interest on $100 when rates are at 4%). This relative yield component of the theoretical utility stock's price implies another reason rising rates might be negative for the stock . . .

4. Improved Economic Prospects/Alternative Investments: If rates are rising because economic growth is improving, then a lot of investment opportunities start looking better as compared to the utility stock. Just as alternative forms of direct yield (such as dividends or interest) impact the stock’s value, so do prospects for indirect yield (such as price appreciation). The utility has less uncertainty regarding its future value—that's why it can be a good investment in downturns. However, that lack of uncertainty caps the upside as well. Whereas, the high-risk tech startup firm has relatively high uncertainty positioning it to benefit when future prospects improve.

This is not investment advice. I do not directly have a long or short position on utilities; nor do I have a prediction as to what the future holds for them.

*I compared the S&P Mid-Cap Utility and S&P 500 Utility indices with 3-month, 3-year, 5-year, 10-year, and 20-year constant maturity U.S. Treasury series using both weekly and monthly correlation calculations.

Friday, December 6, 2013

The rent is too damn high!

One of the growing pains associated with getting wealthier is that things change in value and thereby the dynamics of tradeoffs change in turn. Here is a great example of this phenomenon. As I heard this story driving into work the other morning, I was struck by how poor the reasoning was for those who are "fighting back".

The essentials in this story are indicative of something happening in many places. San Francisco is a very desirable place to be. It is not just my opinion that it is awesome. As evidenced by the story, it is many people’s opinion and those opinions are strong (as measured by the willingness to put lots of their money behind that opinion). As the San Francisco desirability has grown, the value of real estate there has grown too. Ah, but there is the rub. Not everyone benefits from that increase in value. Now that new additional people and their wallets have arrived, the current residents who were enjoying it for less cost than what it is worth today are screaming, "There goes the neighborhood!"

It has always been the case that a rising value of real estate meant that the use of that real estate would change over time, but for some reason it has become a popular media topic. There are a few of ironies in these stories that don't get adequately reported if they are mentioned at all:

  1. A large part of why the cost of living rises quite rapidly as popularity rises in many highly desirable places like San Francisco is because of legal impediments to growth and development. The same government that creates the zoning laws et al. that limit development is the government those "fighting back" would like to see prevent the cost from rising.
  2. Dovetailing with that is the irony that rent-controlled living, artificially shielding renters from the full cost of living, discourages real estate development that would then be subject to rent control. A viscous cycle emerges of artificial scarcity begetting higher costs and hence higher value for the cost shielded (rent-controlled) space.
  3. As evidenced by some of the comments in the written piece, there seems to be a huge intolerance for change (and those bringing the change) by those who espouse tolerance as a virtue of the current neighborhood.

But here is what really struck me—the poor reasoning of those "fighting back". I put fighting back into quotes because the use of it in the reporting is pejorative towards those being fought against. Those "fighting back" (the renters) actually are attacking those who were already being disadvantaged through rent control. My points are the following:

  1. It sucks to see things around you change in ways that you don't desire. Part of that in this story is the composition of the neighborhood. But I think that is a sideline issue and a distraction. The renters would not be bringing it up if it did not put a more high-brow spin on the real fight—namely, the desire to continue to get something for less than the full cost at someone else’s expense. Nevertheless, let’s take seriously the consideration that change isn't always beneficial to all involved. But that is a fact of life. Don't be mad at those changing the neighborhood. Be glad to live in a place that largely allows change.
  2. No one said you deserve to live in the same place for the same cost for as long as you like. That is a promise no one can reasonably keep. Don't be mad that the real estate owners have found a "loophole" to evict the rent-controlled tenants. Be glad to have benefitted at the owner’s expense up until now.
  3. You are the RENTER. You chose to RENT the place you lived in, which meant you weren't responsible for all the risks and expense associated with being an OWNER. Now that the OWNER, the one who is entitled to the property, has seen a return potential for the risk he bore, he has the natural right to realize that return. Don't be mad that the OWNER has new options. Be glad you didn't have to bear costs and risks you chose to avoid.

Yes, this change isn't working out very well for those who were benefiting from rent control. And I do indeed sympathize with the difficulties and emotional stress and loss that all come from having to move. But think about it this way. Suppose San Francisco had instead grown to be very undesirable. Suppose rental rates had plummeted. Suppose that come renewal time those in rent-controlled apartments either had cheaper rent options in different apartments or simply wanted to leave San Francisco altogether. Would it be in any way right to force the renters to renew the now more expensive rent-controlled lease and to force those who wanted to leave to stay in San Francisco?

Tuesday, December 3, 2013

Highly linkable

NFL overtime is broken. Fortunately, Brian Burke is here to fix it.

Be happy because, well, Cause it's getting better; Growing stronger, warm and wilder; Getting better everyday! (be sure not to miss the second link, Fool!).

But I had the best of intentions; I didn't mean for that to happen.

The real reason Henry Ford raised his worker's wages--standard high school history is lies and garbage.

Something to be thankful for.

The Pope has a lot to learn about economics. Reviewing the extensive Library of Economics and Liberty would be a good start. Here is a recent piece by Bob Murphy to get him started.

I, for one, welcome our new robot overlords

This article (HT: Tyler Cowen) got me to thinking about the coming dystopia where the robots take our jobs, eat us, etc. As bad as it will be, we are bound and determined to bring on the singularity . . . So, what to do about it or rather how to do it right?

What if we put sufficient distance between us and the new life form and shrouded its creation in enough mystery that they wouldn't come looking for us? And what if we still had some method of observing them unbeknownst to them and perhaps an ability to interact in their world--affect change here and there? Not a lot, just when they needed a miracle or a little sign they weren't alone.

Yes, this isn't exactly what the singularity is all about, but I'm just spitballing here.

Friday, November 29, 2013

What is a recession, and why do we care?

Imagine a large group of people (perhaps it would be better to consider groups of peoples) on a quest to conquer a very large, uninhabited continent. By "conquer" I mean they seek to live on this land and improve their lives and the lives of their progeny. We can call that the goal, but it is important to understand that there is no singular goal. There are many, many goals, and within each goal are numerous sub-goals. To measure success toward this generic goal there are two important qualities:

  • How much people advance toward their goals
  • How efficiently people advance as they attempt to advance

The first quality is about increasing resources while the second is about maximizing the use of existing resources. Doing better at one can come at the expense of the other (a zero-sum game), but it can also come to the improvement of the other (a positive-sum game). The political-economic system that governs will determine which game conditions will exist.

To hone in on the concepts I am exploring, let us consider the early days of exploration of this new, raw continent. Let us further consider the macroeconomist to be the omnipotent (but certainly not omniscient) expedition leader. The process of moving across the continent is a constant process of trial and error. At times this becomes a seemingly coordinated activity whereby many errors or successes occur at the same time. At these times it is more of a surge/retreat process. This is akin to the so-called business cycle of modern macroeconomic parlance.  But why do we seem to get surges and retreats—that is massive, similar results at the same time where the magnitude makes it "clear" this is something happening not just to me or my small group but to "all" of us at the same time?

In all macroeconomic models feedback is an essential contributor. All leave room (in varying degrees) for animal spirits. The different schools of thought are taking up daunting challenges. They are attempting to not just answer the questions of why is this happening and how can we stop it but also the question is it really happening.
Problem posed by the group: We’re lost and don't seem to be making good progress…
Solution offered by the macroeconomist: Are you sure you're lost, and if so, how do you know if you are or are not making good progress?
The particular school of thought from which the macroeconomist originates will determine the next steps in the solution. Here is an oversimplified summary:

  • The Keynesian seems to believe that if the group just keeps moving in any direction, they will eventually start making meaningful progress. Activity for activity’s sake with no fear (old Keynesian) or qualified fear (new Keynesian) that the induced activities will be more costly than curative.
  • The Market Monetarist seems to want to change the scale on the map. If the group is deceived about the pace being made, the group will more effectively make progress.
  • The Real-Business Cycle (RBC) adherent seems to believe that the actions of the Keynesians and Market Monetarists rather than solving the problem have in fact caused it.
  • The Patterns of Sustainable Specialization and Trade (PSST) devotee seems to say we just sometimes have to stop and recalibrate and maybe send scouts out to see if there are better paths or impassable obstacles in our way.

Leaving our allegory but still over-simplifying, recessions are when progress is not what we think it should be and to a degree of magnitude such that we give it the label (in fact I'm somewhat surprised we don't name recessions as we name hurricanes). To be certain we are constantly falling short of potential, but it is all relative. What matters is when that falling short is some combination of quite short, for quite a while, for quite a few of us, and (this is key) without quite the natural recovery we would otherwise expect (i.e., persistence, which is in the eyes of the beholder as witnessed by the extent of the macroeconomic debate). Some parting random thoughts:

  • Keynesianism seems least concerned with how we got here—it is a recession and here is how you get out of recessions. Arguments about if it is duck season or rabbit season are of no concern. If the fire is hot and your hand is burning, take your hand out of the fire. How or why the fire started is of little concern. As such it leaves the most room for magic both in problem definition as well as solution.
  • Market Monetarism seems to offer the most straight-forward solution (get monetary policy right), but it is the specific solution too few can agree on the definition of.
  • PSST seems to explain recessions as a combination of coincidence and regulatory policy error. Recessions free up resources after major disruption(s). There resources usually include labor, but can be many types of capital too. The disruption(s) can be greater-good productive (e.g., computers and medical advances) or counter productive (e.g., regulation and tsunamis). As such, PSST has the most defeatist fatalism built in to it.
  • At many times RBC seems to be a particular form of PSST in the midst of market monetarism with the fear of one particular manipulation (money-interest rates-price of credit) causing the problems.

Sunday, November 24, 2013

Highly linkable

Gun rights are dead. Long live gun rights! Caplan offers some great insight into the Briggs-Tabarrok Effect, a study which shows that gun access doesn't lead to more violence but does lead to more suicide. The points Caplan makes are right in line with the concept that magnitude matters.

As you sit down for Thanksgiving dinner this week and Uncle Fred begins ranting about how, "The dollar has lost 97% of its value! When I was your age, I was older!You're gonna carve the turkey with that? That's not a knife; this is a knife..." You can confidently dispute at least part of his claims.

The government picking winners and losers wouldn't be quite as infuriating if it came at a decent cost.

Landsburg makes a great case for the magnitude of tragedies that happened ~50 years ago today. And Boudreaux supports the argument thoroughly.

"Failure is always an option." -- A great point among many made in this post. (HT: Russ Roberts)

Instead of a carbon tax, how about a carbon subsidy? That is not the point of this post; rather the point is don't be so presumably sure about the sign attached to the externality.

Wednesday, November 20, 2013

How would a tax on employment help workers?

I was asked to comment on this tweet from Michael Pollan and the study he references:

Michael Pollan (@michaelpollan)
Taxpayers pay $1.2 billion in public assistance to make up for MacDonald's lousy pay and benefits. Fascinaing [sic] study.

The "study" from the National Employment Law Project (NELP) basically makes this argument:

  • Many employees in the fast-food industry are also on some kind of public assistance.
  • The fast-food firms are profitable.
  • Therefore, the firms are costing the taxpayers for the amount of public assistance their employees consume. 

My review: In a word, that "study" is stupid. Totally nonsensical. It is so absurd it is closer to a parody than an actual public policy argument. Would we rather the employees not have jobs? That is the alternative. Not above market wages. Does NELP or Pollan have an argument that these employees are paid below market wages? If so, it is not in this report. CEO and top-executive pay should be disconnected from other employees' pay. An economy that would base employee pay on CEO pay would be a poor economy with lots of unemployment or very low wages. Likewise, an economy without profit flowing to owners is an economy without profit.

Thinking more about it I realize that what Pollan and NELP are essentially advocating is a tax on employment to be paid by the employers. Rather than have society in general pay for benefits we presumably want to provide for those in need, the businesses who employ them and lighten the load should shoulder the entire burden. Not only does this proposal fail an economics test; it fails a fairness test as well. 

I guess Hammer was right. It takes wages to make wage slaves.

Monday, November 18, 2013

Highly linkable

We start with a cool invention: the invisible bicycle helmet.

James Altucher bundles some great life advice in this collection of lessons learned while day trading.

Grantland has two right down the middle: one on maximum overdrive coming to baseball and another on the coach who never punts (a theory after my own heart). While never is probably not the optimal strategy, as the authors mention, the current state is sub optimal from a winning perspective.

As long as we're bucking conventional wisdom, here is something to put in your pipe: popular hysteria about crack and meth is just that--hysteria. Mark Perry shows the way pointing towards an article in the NYT by friend of free thinking John Tierney.

But I thought we should just say no; that drugs = total life destruction was a fact. Well, facts aren't always so factual. Here is a completely different example from Russ Roberts where he shows Simpson's Paradox. One would think that if every sub group of a larger group saw a decline in a measured factor that the larger group itself must exhibit a decline as well. Doh! Not necessarily and importantly not in this case of supposed income inequality.

They're about to start paying you to live in Switzerland--and paying well: ~$2,000 per month just for calling the land of cheese and chocolate home. I like the idea of a negative income tax. I like the idea of largely replacing the social safety net with fixed cash transfers. I think it is a third or perhaps even second-best solution. But $2,000 per month? We've gone from supplement to substitution really fast. Sure it might spur entrepreneurship, but do we really want someone leading the life of Riley starting a business, using capital? Oh, we don't.

One thing all those Swiss might start doing is going to college. But what is the value of that anyway? Here is one version of the debate from the Bleeding Heart Libertarians. Here is the same but Muppetized.

Finally, in most situations where a dispute from within a fraternal order (and one that is not like the typical world) is made public, there is more there than what at first meets the eye. Such is the case with the Miami Dolphin's locker room hubbub suggests Russ Roberts.

Tuesday, November 12, 2013

WWCF: Computerless companies or Flipped companies?

Which will come first?

 Most major U.S. corporations do not have company-owned personal computers 
Most major U.S. corporations have "flipped" the work week

Here is some explanation. My prediction is that at some point in the future many firms will find it unnecessary and undesirable to have the firm own and maintain computer hardware for individual employees. Instead the firm will just have some company servers hosting software/apps/websites that employees can tap into to do their job using a computer device(s) they own themselves. With technology ownership comes the burdens of keeping the technology running and safe. And increasingly employees use the technology for personal purposes blurring the lines between who that machine really serves. In fact many if not most are already practicing BYOD(evice) through smart phones and tablets. It seems it is just a matter of time before a company's technological connection with employees is more like the current connection between companies and customers. 

For this half of the WWCF to come first, we need to see a majority of major U.S. corporations adopt this policy on near company-wide scales. And this might be close at hand. IBM is offering advice on the idea. And reading between the lines of a few studies suggests we all but may already have a winner. These seem premature. I think for this to be fully achieved we would need a bit of a cultural change--employees will need to see not having their own computer/device(s) used as the way to connect to the firm and do their jobs as an antiquated concept. We are not quite there yet.

As for a "flipped" work week, I am referring to the idea that workers have fewer days in the office than days out of the office. This might mean workers would do the bulk of their work away from the office, or this might mean just a few highly concentrated days of uninterrupted work surrounded by multiple leisure days. In any event less time spent in the office leads economist David Levinson to believe we are nearing the end of auto traffic (and while we're off on this tangent, here is Reihan Salam's take on Levinson's vision). But back to the point. While I agree this indeed is a trend, I'm not sure Levinson's quick timeline is accurate. All the more so since a majority of major U.S. corporations is the benchmark. 

Getting there in either case means fighting against culture, bureaucracy, and conventional wisdom not the least of which includes that which has worked should not be hastily disregarded. In my estimate these inertial forces push back our winner until after 2033 (20 years from today). And I think BYOD will be the winner. Both the firm and the employee will tend to like this outcome. As for being at the office, it's an increasingly nice prison. And from the firm's perspective, the power of "being there" is real and difficult to replace. You can ask the gardener to bring his own shovel, but you can't ask him to weed from home.

Saturday, November 9, 2013

Highly linkable

The more I read about pirates the less I think the Jack Sparrow saga is based on true events. (HT: Tyler Cowen)

What do you mean the cost of health care is going up?!?

But surely there aren't simple, compromise solutions that while they may not be first best, are second best and far and away better than the Obamamess?

Finally, here is a great summary of what market "efficiency" is really all about. One of many money quotes:
Efficiency implies that professional managers should do no better than monkeys with darts. This prediction too bears out in the data. It too could have come out the other way. It should have come out the other way! In any other field of human endeavor, seasoned professionals systematically outperform amateurs.

Sunday, November 3, 2013

We need more teacher pay inequality

A recent conversation with a relative who I am quite sure is a very good teacher got me thinking about the conventional wisdom regarding teacher pay--specifically, that teachers are underpaid.

While I feel strongly about this particular teacher's abilities, I do not feel as strongly that she is "underpaid" despite being in a position of relative low pay when considering hours and effort that go into her job. Likewise, I don't think she herself necessarily believes she is "underpaid", though that would be a common and understandable instinctive feeling. If I have to guess, I would say she is indeed underpaid, but as you will see that is not a guess I can arrive at lightly nor can I have much confidence in it.

Here are my thoughts:

A status of being low paid is only meaningful in a relative sense. However, a status of underpaid is also a relative status, but the two are not congruent. Underpaid is a deeper sense of relative--kind of a second derivative in a manner of thinking. To be low paid simply means having a lower absolute level of income in some comparison. To make that comparison more meaningful one should seek a good apples-to-apples arrangement. Obviously comparing a $40,000 a year job to a 10,000 Euro per month job doesn't tell us much. We get more information in comparing a $20 per statutory hour job with a $30 per statutory hour job, but we don't get a whole lot more. Most professionals including many teachers put in time beyond the standard work day.

Suppose we could get a standardized denominator of effort hours (we can't just use hours because an hour spent scanning people in at the local gym is not the same as an hour spent fighting a fire). How meaningful would that comparison of pay then be? The answer is "a lot more meaningful but still significantly short of deep economic significance". Certainly that information would help guide a lot of career decisions, but it still doesn't tell us if someone is underpaid. To get that comparison, we need to know if a particular person should make more. The person should make more (technically speaking, command a greater share of society's resources) if the value of her teaching (resource she creates) is worth more than the total pay she receives (resources she uses). Our best bet to know this answer (and this is a loose use of the term know since we actually can only hope to have a really good guess) is through a market process--and you thought I was going to say government omniscience.

Notice that the market answer is usually the standard to judge the righteousness of outcomes not because we define optimal resource allocation as the outcome the market creates but because we believe (with really good reason) that under the right conditions the market will elicit optimal resource allocations. Those right conditions are when markets are deep, cheap, and esteemed (lots of knowledgeable buyers and sellers with low transactions costs where property rights are firm, clear, and respected). We need a substantial degree of all of these to describe a market as a free market. The free market is not God. The free market is our way of discovering how a benevolent, omniscient dictator (a god-like super creature) would allocate resources.

But the education market is not conducted under very favorable conditions to elicit good allocations. Transactions costs are high and knowledge is expensive. Government separates buyer and seller insulating sellers from the discipline the market would otherwise provide*. We can probably expect a few outcomes from this as it relates to teacher pay. Pay differentials will become compressed where bad teachers are overpaid and good teachers are underpaid. Resource allocation communication and decisions will be further polluted pushing good teachers out of the profession or encouraging them to shirk while inducing bad teachers to enter the profession.

Because of this, I am led to believe that my relative is indeed likely underpaid (I have a lot of inside information about how good a teacher she is). However, (and now isn't this ironic?) for the same reason I believe she is underpaid, I cannot have much confidence in this judgment. That is at the heart of the problem with heavily government-influenced markets--they obfuscate knowledge inhibiting the communication process the market wants to provide.

*Nature abhors a vacuum and the market abhors bad resource allocation. In this sense the market naturally works toward being a free market. It is because of this positive feedback loop, a virtuous cycle, that markets are so powerfully good.

Saturday, November 2, 2013

Did we really expect Big Bird to be good at running the world's largest health insurer?

In 2009 in the midst of an economic and financial crisis, the President of the United States chose to direct his administration's efforts toward solving the problems of health insurance as he saw them. For some reason he believed massively increasing third-party payment (a condition that we have no evidence and no theory to suggest should work) was the key solution along with price controls, production quotas, and government-provided alternatives. There were lots of reasons to believe this would not work out well, but the generally overlooked one was the world's largest mega-conglomerate has a horrible track record of getting from intentions to effective and efficient execution.

The virtues of Obama's intentions were well disputed. Arguments were also strongly and sufficiently offered against the effect these policy changes would bring about. But few, Megan McArdle the exception, predicted the websites wouldn't work. Yet we shouldn't be surprised. All reasonable philosophies of political economy leave room for the failure of democratic governance. Coming from a libertarian, free-market philosophy, I believe these schemes are destined to fail because government lacks the proper incentives. But others coming from a progressive philosophy should expect that sinister Republicans, conservatives, tea-partiers, et al. will thwart the efforts of the enlightened. It only becomes utopian nonsense when after the supposed thwarting the defense of failure is "It would have worked if it weren't for you meddling kids."

The website failure is a demonstrative microcosm for why Obamacare is doomed. These aren't glitches, this is a canary in the coal mine.

Tuesday, October 22, 2013

A challenge to Landsburg

Steven Landsburg is an economist I greatly admire. The depth and uniqueness of his mind and viewpoint are quite amazing. So it is with trepidation that I challenge an argument he has made several times before and has touched on in another guise yet again. I expect it is likely that I am not refuting Landsburg. More likely I am misunderstanding the argument and hence not addressing it or I'm making a weak argument--a weakness I cannot see.

The main argument is about wasteful competition. The first appearance I can recall is here. Followed by another here. Then came this very interesting question about taxing novelists for the same reason we may want to tax carbon. He followed the post with another for clarification.

There are multiple arguments being made in these posts, and I agree substantially with many. Where I disagree is in this concept of wasteful competition--that the additional athlete, football team, novelist, etc. is more socially costly than beneficial. If I have it correctly, the argument runs as follows:

  1. The resources devoted to a marginal addition in output for good X can be substantial.
  2. In many cases the output of good X before the marginal increase was already substantial.
  3. The gain from the marginal addition of good X is slight.
  4. Therefore, we have wasted resources on the margin since the gain does not justify the cost. There is a market failure.

I think there is more going on here. On the surface he appears to lack an appreciation for quality. It is as if at the extreme (perhaps an unfair reductio ad absurdum) he believes mediocrity is the optimum. Yes, that is an unfair characterization, but it is getting toward my point. Looking deeply I do not think we can be so linear in how we think about marginal improvement. It is multidimensional and part of a larger purpose.

The resources that flow into a given endeavor only look out of proportion to the marginal output when we narrowly define the output. The nth cereal on the aisle may not add much to the quality of my breakfast, but it may be a natural and unavoidable byproduct of the magnificent process that brings me cheap cereals (and so much more) on demand and basically without fail.

Consider also that although cost curves decline as quantity produced increases while economies of scale persist, only usually does quantity produced mirror the progression of time. It doesn't have to be the case that quantity and time are interchangeable as the X-axis. So while it may seem wasteful in isolation to see yet another novel published, that may be part of the cost of the first novel.

Finally, innovation often comes in unexpected surges emerging from dull periods of slight and arguably inefficient activity. The iPod was not just one more MP3 player. ESPN was not just one more way to see the already-watched sports.

As for competition and the fear it may become wasteful, be scared. You can't help that. But don't be afraid. We have to strive on for better and higher possibilities.

PS. Here is how I answered the novelist taxation question.

Monday, October 14, 2013

Highly linkable

As politicians seemingly fiddle as we begin to dance on the ceiling, it is important to realize it is going to be okay. This actually is business as usual--it is just not usually so obviously unproductive. Wasting resources (through an unfettered process of spending money) apparently looks to the media and much of the public as productive progress. It is not. Arguing about the terms under which the money spending process will continue apparently does not look as productive. It is not that different.

Hey, guy who sells ethanol. Is it a good idea to create and foster a monopolistic environment in which you can operate?

Ethanol guy: "Yes!"

Everybody else: "Hell no, are you kidding!?!"

Casey Mulligan makes a strong case about just how high and damaging tax rates are today including as a result of Obamacare. Grumpy says he may be underestimating how bad it is.

Here is the long (and excellent) and the short on why Fama was an excellent choice to share the Noble Memorial Prize in Economics as announced today. Shiller and Hansen are also fine choices in my opinion. It is just that I believe Fama casts a big longer and a bit stronger shadow.

Wednesday, October 9, 2013

WWCF: Gridless Power or Wireless Power?

Which will come first?

Gridless Power (household power commonly generated on site)
Wireless Power (batteries or battery-like power sources that largely self charge)

Both of these would be very big advances as respective cords are cut. For gridless power the aesthetic benefits would be dramatic gains all by themselves. Imagine a world where we are nostalgic for overhead power lines. The telephone pole as romantic as horse-drawn buggies. But don't forget the benefits of blackouts and brownouts being as foreign as breadlines are to us today. Whether the target of terrorists or ice storms (take a guess which one has taken out more power supply in the past 10 years), the centralized power system creates a dependency and hence vulnerability that we would certainly like to avoid.

In wireless power this could include simply batteries with life something like 100x greater than currently available. But imagine your iPhone actually charging from the motion it undergoes while in your pocket. Or perhaps from heat in the air. Or moisture--maybe water isn't the kryptonite of the mobile phone. 

Gridless power doesn't have to be solar; although, that is a big likelihood. You don't have to be a super genius like Tesla to imagine wireless electricity. And yes, these two overlap quite a bit--it seems. Sometimes things similar in concept end up being quite different in practice.

My WAG is wireless beats gridless in terms of large-scale affordability and consumer penetration by at least a decade. The economies of scale at work in the grid are quite powerful forces. The abundance of natural gas strengthens the inertia for the grid considerably. 

Sunday, October 6, 2013

Saving football from itself

Football is at a major inflection point. These don't come along often. The first one of this nature was at the beginning of the twentieth century when Teddy Roosevelt "saved" football by urging rule changes. In 1905 there were reportedly 19 fatalities from playing football. Following that season an intercollegiate conference, forerunner to the NCAA, established radical changes for safety's sake. The NCAA would continue in this capacity, in-sport rule-making body, for another 50 years or so before becoming the cartel it is today.

Other inflection points have been the creation of two-platoon football the first time in 1941 ending in 1954 and the second time in 1965 and the widespread racial integration of the sport in the 1970s.

Today the inflection point is again safety related. The sport is getting more physical and more dangerous as society is getting less tolerant of violence and wealthier--meaning the value assigned to safety and health are growing. Just as when the highest scoring offense meets up against the lowest point allowing defense, something's got to give. If not, this could be the end.

Here is a spitball list of some potentially safety enhancing changes to the game. Perhaps changes like these would be enough to save football. To many traditionalists, myself included, these may seem quite unpalatable. But the truth is change of some kind has to come. We can continue to dance around this if we want to, but we might be left behind. Some aspects of football as we know it today probably will someday look totally removed from the real world--the actions of imbeciles with everything out of control.

  • Get rid of the intentional grounding rule.
  • Outlaw all blocking below the waist.
  • Outlaw any tackling or blocking where the one tackling or blocking leaves his feet.
  • Extend the automatic ejection rule for "targeting" (one that I applaud except for the poor decision to not allow the 15-yard penalty portion to be reviewed as the ejection decision is reviewed) to horse-collar tackles or facemask infractions to include helmet and head tackles. For facemasks, perhaps bring back the idea of a difference in severity by including the ejection for more severe facemask infractions.
  • Outlaw zone defense including perhaps not allowing any defender to start play farther than 10 yards behind the line of scrimmage.
  • End kickoffs and punts--force fourth down attempts. 

Tuesday, October 1, 2013

Let's keep it suboptimal

Last week while visiting the wonderful city of Seattle, I spotted a delivery truck with an unfortunate message painted broadly across its side. The truck was a produce delivery truck and the message was apparently an intentional advertising slogan. It read, "Let's Keep It Local!" I didn't have time to take a picture. Presumably based on the other advertising art this is a local fruit and vegetable company.

I have to admit my first reaction was a little hostile. My thoughts were: Will they sell to me? What if I plan to take it back to Oklahoma? At the Pike Place Market I purchased an extra honey crisp apple and mango with the intention of taking them home. What a shame it would be if those purchases had been prohibited based on my intentions to eat them abroad. But I'm sure the localizers do not care about my consumption venue, or that I can peel an apple in one long, curry strip. It is only the production origin that concerns them; I can imagine them saying. But that just leads to more questions:

  • You're okay with exports, but you don't like imports? 
  • So, you're saying you'd like to have your apple cake and eat it too? 
  • Does it concern you that such a scheme will lead to your own wealth being reduced? 
Did I lose them with that last one? It is the mantra of the local movement that by "keeping it local" we keep both sides of the exchange--notice the "we" here, and remember there is no "we". We is an arbitrary fiction. It implies at some point people stop being one of "us" and start being one of "them". Such xenophobia is not just morally unhealthy. It is economically destructive--itself a moral wrong.

If you eat your own apple cake, you then won't have one left over. If you (import and) eat mine, you still have yours. All I ask is that you give me something you value less than the cake but that I value more than my cake. Like perhaps a Locks tour from Elliott Bay to Lake Washington. This is the essence of gains from trade. These gains expand as the market expands--as more of "them" become "us". 

Sunday, September 29, 2013

Highly linkable

Back from bi-coastal travel with a backlog of blogs to write. Let's start with some links to get us caught up:

What is probably most amazing about this is that we don't find it as amazing as it is. (HT: Steven Landsburg)

Art Carden is demanding action "FOR THE CHILDREN" a la, Helen Lovejoy, in this first of what will perhaps become an on-going series (there have been three posts in this meme so far).

The United States is incredibly and perhaps paradoxically wealthy.

Caplan shows how Game of Thrones makes the case for pacifism.

The EA Sports proposed settlement in the on-going legal battle between college players and the NCAA cartel is a both a win for the players as well as a win for consumers as pointed out by Sports Law Blog's Rick Karcher. Probability of a strike or other work-stoppage demonstration is rising. A couple of years ago it was rumoured that a team in the NCAA March Madness tournament was planning on a demonstration including perhaps refusal to play if they made the Final Four. The team was eliminated in the Elite Eight round.

Posts like this one make me understand why I relate to Scott Sumner. Perhaps I should discount somewhat my agreement with his views on monetary policy fearing I have an unconscious bias.

Is the magnitude of U.S. gun violence evidence of civil war warranting international intervention? I think not so much. This article is hyperbolic and the arguments within fallacious I believe.  I found the biggest problem with the lumping of suicide deaths by firearms, accident deaths, and violent crime deaths. Those are quite different subjects. Attacking firearms is attacking the particular method and not the underlying conditions. Crimes aided by guns and accidents are the cost side. The benefit side, crimes reduced or prevented (including government-committed) and the joy of gun ownership, is completely ignored. But the article was thought-provoking, nonetheless.

Sunday, September 15, 2013

WWCF: Social condemnation of hunting or human combat?

Which will come first?

Social condemnation of sport hunting
Social condemnation of human combat sports

By social condemnation I mean when will we be past the point where being a hunter or being a fan of a human combat sport is acceptable in polite (general mixed) company. Yes, there is an underlying assumption here that the long-term trend is toward these ends. At some point the argument over rabbit season versus duck season will be moot--it won't ever be either. 

I think these come in degrees as they are long-term developments with stages for each. We need some ground rules on which will represent the true tipping point. First let's look at the levels we must consider.

For sport hunting I see it as a gradual outlawing by the spot an animal represents on the food/intelligence chain:
  1. Apes, monkeys, dolphins, whales, dogs, cats, . . .
  2. Elephants, lions, tigers, bears, oh my, . . . 
  3. Deer, ducks, turkeys, fish . . .
For human combat I see it as a gradual abandonment if not outlawing by the apparent brutality of the sport:
  1. Olympic-style wrestling
  2. Boxing
  3. MMA, cage fighting, etc.
We are already somewhere between 1 and 2 for sport hunting and nearly past 1 for human combat. Consider point three in this list in regard to sport hunting (this would represent a proxy as noted in the next paragraph), and consider how wrestling continues to be on the ropes. Here is my test for WWCF: when five state legislatures outside of New England pass broad legislation outlawing or highly limiting most items of the third type. We've already noted how politicians follow rather than lead. I feel it safe to say if this legislative test is passed, the overwhelming majority of voters must agree with the position. Alternatively, we might get to WWCF through other means such as the market for selling human combat evaporating. 

Note that sport hunting does not include harvesting of fish, lobster, elk, or other game for mass consumption on a secondary market. Hunting a deer and eating it, though, is sport hunting still whether or not the deer's head ends up on the wall. 

I think the key here is considering when does general public opinion pass what I will term a social acceptability threshold. At some point activities that were once common (e.g., smoking cigarettes, chewing tobacco, sexual harassment in the workplace, etc.) become beyond the pale. In the other direction eventually behavior once thought uncouth (e.g., interracial marriage, tattoos, etc.) become acceptable. I believe a large driver of this is the number of people engaging in the particular activity. 

In 1955 about 55% of men and 28% of women smoked. By 1990 the rate for men was equal to the 1955 rate for women while the rate for women had fallen about a fifth to about 23%.

For sexual harassment in the workplace note that female labor force participation may be the critical driver. Positively correlated with the LFPR trend would be female advancement in the workplace--probably with a lag due to the time it takes for the greater numbers of women to be experience-eligible for advanced positions as well as both active and institutional discrimination factors. When Don Draper was running things, the female portion of the labor force was about 33%. By 1990 it was nearly half (45%). 

Perhaps at some point I will have to awkwardly admit I do not have a tattoo. 

As for my prediction, I say that human combat has a shorter shelf life than sport hunting. This despite the fact that in the former behavior the participants are willing and compensated whereas in the latter behavior this is the case only on one side--and the other side doesn't just lose but dies. Alternative methods for population control of pest animals such as deer might accelerate the trend for outlawing sport hunting. But as we get wealthier and healthier, dangerous activities like human combat sports become more costly. This trend I believe dominates.

Thursday, September 12, 2013

Boardwalk Stillwater

This is really a story about prohibition. And prohibition is at its heart a story about economics.

When you make something illegal that is demanded, you get a black market. In this case the thing demanded is successful college football. The prohibitions are on free-market transactions that connect those providing value, college football players, and those who are consuming the value provided, college football fans. When value cannot fully be reflected between suppliers and demanders, externalities exist—in this case positive externalities meaning the market is undersupplying college football along some dimensions*. The market abhors externalities and is only prevented from erasing them by transactions costs that outweigh the benefits. Transactions costs cast shadows upon markets. When those transactions costs are high enough, the communication process revealing gains from trade can break down significantly. Hence, black-market transactions take the place of open-market transactions.

Black markets have two significant downsides: they aren’t as efficient as open, free markets and they come with baggage (technically speaking, negative unintended consequences). Notably in the second case, black markets incentivize suppliers who aren’t as sensitive to the transactions costs as the typical supplier. Additionally, black-market transactions take on forms that are both less efficient in an economic sense and less sensitive to the standards the original prohibitions attempted to uphold. To wit: Gangsters are successful because they are more willing and able to break the rules and the rules attempt to prevent what otherwise would come to be.

The local response has been predictable in nature and course but surprising in intensity. The clan has been attacked, and all members are called to unquestioned defense. I believe most of the response track has followed something similar to the stages of grieving, and I predict it will continue in such a fashion.

First has come Denial. This couldn’t be true because I don’t want it to be can be read between the lines of many responses. Some examples have been along the lines of: “The players making the accusations are disgruntled former troublemakers,” “There are no documents revealed proving these payments happened,” “One of the authors is an OU alum who dislikes OSU.”

Next will come Rationalization. I expect the group response to be along the lines of: “This happens everywhere, why single us out?” “Most of this isn’t that bad in the grand scheme of things,” “These events are taken out of context; it isn’t that bad.”

Next will come Acceptance along with Anger (I said similar to the stages of grieving, not mirroring it). Expect both some contrivance and sorrow along with a few scapegoats offered up. Eventually, though, someone significant must be to blame, and that person or group of persons will have to pay. Remember, I’m not saying what the NCAA or general public response will be. I am predicting the response from inside the community affected.

As for the response from general public opinion, the Oklahoma State brand has been badly tarnished. The labels these accusations will bring will not easily or quickly be erased. Assuming the accusations are completely true, which I do not, but I do believe they are largely and substantively true, I have already found and expect further to find interesting inconsistencies. There is what sounds bad given our mores: marijuana use along with other drugs, sexual arrangements, payment of college athletes for work performed (playing football well) and work not performed (housework, construction, etc.), and academic leniency and fraud. And then there is what does not sound so bad again given our mores including what is absent in the accusations: alcohol use, athlete exploitation, and unrealistic academic expectations. It is like our social norms on toleration and prohibition were determined by coin flip.

Take us home, Radiohead.

*There is nuance here. The aggregate supply of college football may be sufficient or excessive due to subsidies but at the same time there are specific shortages. For example, it could be that resources aren’t reaching their optimal use by being underemployed—football quality is too low at Oklahoma State and is too high elsewhere.

Wednesday, September 11, 2013

Highly linkable

One of the greatest economists ever, Ronald Coase, passed last week. He was 102 years old. He was still an active, working economist. His two great contributions, The Nature of the Firm and The Theory of Social Costs, fundamentally changed the field. In these he established the importance of transactions costs within firms and how that leads firms to be authoritarian and how assignment of property rights matters in a world of social costs when transaction costs are not zero. These are likely the first and second most cited papers in the history of economics. Here is a good summary of Coase's work and here is an appreciation written upon his passing. Both are well worth reading.

Malcolm Gladwell does an expertly crafted job in this The New Yorker piece pointing out the tension between the general social distaste for athletic differences equalized by certain means (chemical and biological therapies) and the general acceptance of athletic differences generated by natural or surgical means. The contradictions defy good reasoning.

At Advanced NFL Stats John Morgan shows how to lie with statistics. Just remember, it's not a lie if you believe it.

Sunday, September 8, 2013

WWCF: Solar power or passive heating and cooling systems?

Which will come first?

Economical solar power
Economical passive heating and cooling systems

The key here is the leading term economical. It is not enough to develop the technology--especially not in simply a proof of concept form. We are interested in when we can truly use these technologies. In some limited cases we are already there for both types, but those are indeed limited. The essence of this puzzle is when can we expect to see these things widespread including in average households. And while these are related in many cases, I don't think I'm splitting hairs here to make the distinction.

A passive heating and cooling system (or either one alone to satisfy the achievement) would be something akin to geothermal but not necessarily limited to such. The roof and attic of my house are exceptionally hot in the summer. Once the sun goes down, my attic cools a lot faster than my garage because the soffits work air through the attic accelerating cooling. There is an opportunity in this greenhouse effect. Similarly, my brother's basement has a more moderate climate (albeit more humid) than the ground floor and upstairs of his house. To qualify a passive system would rely on a minimal amount of catalytic energy to initiate a system that would use these energy properties to the effect of a desired cooling or heating result. To be clear, using my attic heat in the summer to run a generator to cool my house counts.

Solar is the great, green hope. The power the sun rains down on us continually during the day, which is obviously a big impediment to solar energy, is fountain of youth and El Dorado all rolled into one. The future society that can economically use this energy will be quite rich. It is important to note that the there is a bit of chicken and egg here as the society may be rich enough to develop the technology as much so as the technology makes that society rich.

The trends in the economics of geothermal look less favorable as compared to solar (note: the links here are not supposed to be a comprehensive look at the economic trends affecting these technologies). Geothermal capital costs are exceptionally high since the target tends to be on the large scale as opposed to the household level. In the larger consideration of all passive-type, non-solar solutions, many of those potential technologies probably fall into the category of those in need of a happy accident (we aren't specifically looking for these breakthroughs). Because solar is thought of and more so developed for the individual end user, that probably gives it the edge in this WWCF. The other leading factor is that solar is a more politically attractive cause resulting in a lot more "investment" using the best kind of money, OPM. 

My guess is that solar edges out passive systems by less than a decade, but both are 30+ years away. The standard error is large in these estimates; so I have very little confidence in my guess about solar winning. I'm sure others have a firmer grip on this, and I will follow up with new information as I discover it. 

Thursday, September 5, 2013

The value of authenticity

Business Insider has an article about a new technology, 3D printing that replicates paintings, and the implications are interesting. The article focuses a lot on worries that the technology will threaten the art market. These concerns are misplaced for at least three reasons.

First and foremost, the ability to more easily satisfy demand for fine art including "priceless" masterpieces is a feature not a bug. Certainly those who have invested in art will be worse off in direct proportion to the magnitude that this new technology offers a good substitute. But that is simply a transfer from those who own the art to those who would like to own the art. We would have that same effect if we simply took the art from the current owner and gave it to someone who wanted it. But where that property-rights violating transfer probably is utility reducing since the one who loses the art probably valued it more than the one who received the art, this technology is utility enhancing since it creates value on net. The owner still has the art. Someone who values it for less than the current owner wished to relinquish it prior to the technology's advent now has greater access to it--the price of purchasing the art is lower and hence may now be in reach. And others can enjoy the art by replication in a way not previously possible.

We would see the same effect if we stumbled upon a second Mona Lisa truly painted by Leonardo da Vinci. The Louvre might be upset, but the world would gain a second painting of artistic value. The loss in value to the first would be more than displaced by the gain of now having a second.

Second, the value of art is inherently the value of the creation, not simply the monetized utility of those who yield satisfaction from owning, viewing, possessing, etc. the art. Great art has value even if no one is around to appreciate it. The most popular band is not necessarily the band with the best musical artistry. The best food is not made and could not be made for mass consumption. There really is something to expert opinion on matters artistic rather than appeal to popularity--the so called ad populum fallacy. Unfortunately for those in the business of art and art investment, this technology serves to decouple somewhat the artistic appreciation from the financial appreciation.

Third, having more art more widespread enhances us culturally. The promise of this technology advances the football considerably. Greater availability and exposure means more minds can appreciate, admire, and aspire. The economies of scale are the initial effect. The substantial secondary effect is to deepen the market for art. Music is more widespread today than ever by orders of magnitude. At the same time music appreciation, depth, quality, and variety are greater than ever and growing at a compounding rate.

The lesson here is that sharing and duplication continues to be the future. Only the selfish suffer.

It is also interesting how this technology will serve to clarify the value of authenticity. We will now be better able to see how much the average patron really likes a particular painting versus how much the average patron really likes authenticity. We might also learn a lot about how popular certain artists and works are removed from the rarity via authenticity of the work itself--for example, how many people will be hanging Picassos in the living room? And if no one really likes to look at a particular work, does that imply a change in value? I've thought for some time that a future with machines building mastercrafted furniture, art, clothing, etc. will create a world where the truly old and authentic takes on heightened meaning. But a counter force to this is not just how much easier and cheaper it is to preserve antiques (both yesterday's and tomorrow's). It is more strongly how uninteresting authentic may become when everything old is new again.

Friday, August 30, 2013

It's the most wonderful time of the year

This is my favorite time of year--football season, which maybe isn't saying much since it extends for arguably half of the year. But specifically, I love autumn and college football. The period from now, August, until late October is a splendid few months.

As I have gotten older, I have come to appreciate the joy of anticipation. That's what makes this weekend special for football fans; for it is now that hope is alive. No matter how realistic, every team is right now a theoretical contender. And regardless of how many trophies will actually be won, every team and every fan has a chance to dream of joyous, fun, and celebratory moments big and small.

I thought I'd briefly pen a few thoughts on some of the current dynamics in college football as I see them. This is a look at the larger picture beyond this season.

Conference re-re-realignments:
I fully expect this trend to continue. The current arrangement does not seem like a stable, sustainable equilibrium. Large disparity among conferences whether true or perceived weaken the league-wide product. They also hinder participants' (individual teams') ability to specialize and innovate as appearing too different can be counter productive to input acquisition (recruiting) and output revenue (fan interest). Breaking old traditions is probably more difficult than was first appreciated when this process began. That is partially why it has taken so long with so many fits and starts and busted deals. Now we are much more used to the idea that old rivalries, etc. may not continue. The other major reason why it has been a clumsy process is the relative uncertainty as to the value to be gained through new arrangements. Because college athletic departments are not fully operating within a free market, profit-driven environment, this murkiness about value is compounded. 
Super division formation:
We've heard rumblings of this recently. It is no longer the subject whose name shall not be mentioned. The product of the league has been diluted through the addition of too many teams. There are currently 126 teams playing in the highest division of NCAA football (the FBS division), and this number has surged in the past 10 years. The range among these teams in terms of quality is stark. Throughout all divisions we see this growth in the sport, although not always the self-generated resources to support it. The artificial stimulus that fuels this at the lower division level is the expansion in the number of games and the revenue streams at the upper division coupled with the need/ability to "pad" schedules playing against softer opponents. Again, this dilutes the product. I think what will evolve is a super division of perhaps 60 elite teams and perhaps a promotion/relegation method as used in soccer. While this may make a more just system of paying players more palatable and hence to the extent that trend is an inevitability it self reinforces, I would not be fully satisfied in only these "semi-pro" players finally getting their just desserts. 
How would we populate the 60-team elite league? Rather than appointing a czar or council of elders, I would propose we assume all FBS league teams have a property right in the new league and auction off slots in it. The method I propose is that the highest bidders pay the "losing" 66 bidders for the right to be in the league. Single submission, silent bidding would be used. To elicit honest bids (paying close to what it is actually worth to the individual teams), the highest 30 bidders would each pay the average of their own bid and the corresponding lowest bidder equal from the bottom that they are from the top. So, the top bidder would pay the average of the #1 and #60 bid. The second highest bidder would pay the average of the #2 and #59 bid. After the 30th highest bidder, the remaining bidders would pay simply the amount of their bid. Yes, the order of bidding would most likely not match the order of amount eventually paid. That is the point.
Playoff format:
The coming playoff format for determining the league champion will strengthen these trends on net and have a positive feedback to push towards a larger playoff. The net economic influences are also in this direction. But I believe after about 8-12 teams the diminishing returns become dominant and the process stops. Another implication of all these trends is stronger schedules--more competition among equals. 
Player pay and safety:
Players will be paid. It is only a matter of time. The NCAA is on the wrong side of justice. The hypocrisy will eventually become too much. The O'Bannon lawsuit is a major catalyst for change, but it is not alone.
Similarly, player safety (concussions, et al.) is probably on the precipice of the most significant change since the NCAA was originally formed (for that purpose no less). Equipment improvements will not be how this gets resolved. Fundamental changes to rules, practice conditions and procedures, and as importantly fan/coach/parent/player attitudes about what is and what is not proper football will be what brings about ultimate resolution--more appropriately termed the new plateau as it will only be a new but not permanent equilibrium. The NFL's settlement of the concussion lawsuits for $765 million is not an end to the issues; it is a coming to terms that major change is needed and on its way.
Enjoy the season! Boomer Sooner!