Sunday, March 7, 2021

My Friends Are All Wrong For Different Reasons

I have always prided myself on the diversity of friends I have been blessed with. This goes along with an ability to be a welcomed part of many different social groups. (At least I think I have been a welcomed part . . .)

To take one example, senior year of high school my first class was Leadership with all the cool kids--the ones who were popular enough to be class officers, etc. The bulk of the day was honors classes with the smart kids--"nerds" was strictly a putdown back then. The last class was gym with all the others--misfits who in many cases lived in fringe realms and in some cases it was amazing they hadn't dropped out of school already. I don't know of anyone in my class of 600+ who could actually approach my level of diverse and deep integration. 

At my best I am a social chameleon. At my worst I'm a jingle you can't get out of your head.

Among other things, this quality has given me a chance to learn from lots of different people as well as compare key difference among groups. Painting with a broad brush, here is one thing I notice.

My friends on the right tend to naively believe the rhetoric of the politicians they admire. They think the things they hear are sincerely believed and will be sincerely pursued. 

My friends on the left have the opposite problem. They tend to naively believe that the rhetoric espoused by the politicians they admire should be ignored—that the true pursuits will be reasonable, noble, and unarguably worthwhile. 

Both can be willfully blind to the most grotesque, pandering, and ridiculous rhetoric. 

I admit this is an overgeneralization to make a point, but it is still a generalization based in truth. While there are many exceptions to this rule, in the cases where it holds I don't find the friends usually to be in contempt. They are almost always unintentionally wrong rather than willfully guilty. Political cognitive dissonance is a very real and rationally held phenomenon

My ultimate takeaways:
  • Looking inward first, I should be on guard for both of these problems in my own thinking and behavior. 
  • To change minds on the right where I agree with a friend on the policy desire, I should emphasize how politicians and political solutions fail to pursue our common cause.
  • To change minds on the left where I agree with a friend on the policy desire, I should emphasize how politicians and political solutions work against our common cause.
Changing minds on the right or left where I disagree with a friend on the policy desire is much more daunting. It probably starts by inquiring as to why they want what they want in the first place. From here it is very often the case that we have the same desired ultimate outcome. It is just that we disagree about how to achieve it. Without first finding common ground, a discussion inevitably becomes an emotional argument rather than a fruitful search using logical arguments.* 

For example, trying to change a paternalist's mind on the drug war cannot constructively start until he understands that you are not advocating unconditional, rampant drug use. He will imagine chaos on the streets and label you extremely dangerous. He has been conditioned to believe that opposition to drugs because they are bad = support for the drug war. 

Likewise, you cannot begin to alter the position of a supporter of the minimum wage until you firmly establish the common ground that you both want the best for low-wage workers.



*People have always misunderstood my love of argument thinking that I love to be in arguments. 

A Hypothetical SARS-CoV-2 Study

Perhaps this already exists, but I doubt it. At least I do not expect this ambitious of a study has been attempted at the rigor I desire. And I know it is a lot to ask. 

Nevertheless, here is the rough outline of what I'd love to see done well.

Independent variables examined using county-level data for the U.S.:
  • 20-day trailing average humidity
  • 20-day trailing average temperature
  • Latitude 
  • Population density
  • Stringency measure (government-mandated restrictions)
  • Mobility measure during COVID relative to the same mobility measure average value for 2019
  • Median income
  • Proportion of population 65+
  • Percentage of elderly in LTC facilities
  • Population proportion by ethnic/race ancestry (hypothesizing that prior immunities are associated different geographies)
  • Date of first case within y-hundred miles (adjusting for treatments, interventions, etc. changing over the timeline)
Results:
  • I would like to see the cross sectional results by standardized timeline (from date of first case; from date of first death; from x days past first case within y-hundred miles).
  • I would also like to see the time series analysis in total and by various cohorts.
My general hypothesis is that every thoughtful observer will find the results somewhat surprising. These same, thoughtful observers come at the problem with their own biases and priors as well as some unintentional agendas (the intentional agendas are for the unthoughtful observers). I think they tend to emphasize the areas they find compelling while somewhat negligently remaining silent or quiet on the areas they actually don't disagree about but feel are overemphasized by others. To that extent there is a lot of talking past one another. I am very specifically thinking about the realms of both the libertarian/classical liberal/neoliberal/generally freedom-championing thinkers and the economists/social and public policy thinkers. 

The problem is the audience has very much grown and diversified for these thinkers. It is very hard for the casual observer to understand the nuance and the starting positions of general agreement. For example, the public has always been completely oblivious about the fact that economists agree fundamentally to the vast extent that they do.

In the case of COVID this problem has been greatly magnified. And at the same time the slippage into hyperbole has been greatly amplified too. The result is painting ourselves into corner solutions. When the narrative has been taken to the extent that many so often and so easily have taken it (myself included of course), our narratives tend to fall apart. Again, this is for the thoughtful observers

P.S. Yes, at first glance I can see potential problems with the independent variables, and I assume there are many more I can't yet imagine. The covariance between stringency and mobility might force one of them out of the analysis. In that case I would like to see a rigorous comparison between just these two--Phil Magness points to some of what I would expect in that voluntary mobility changes dominate policy. After all, politicians follow rather than lead.

Saturday, February 27, 2021

What Stops School Choice?

We should fund students instead of systems.

That is the ubiquitous and powerful tagline from Corey DeAngelis and the larger pro-school-choice movement. I wholeheartedly agree with it. 

I also strongly agree that the pandemic was a very fortuitous turning point in the long struggle to improve educational opportunities for all and especially underprivileged students. As one of my Big Five low-hanging fruits of public policy, this is an exciting development. Yet we are still a long way from here to there. 

Understanding what stops or prevents immediate realization of the eventual winning idea, that parents should be free to send their children to the schools of their choice, should help us understand what it will take to get there eventually and hopefully sooner and sooner. 

Here is my rough approximation of the obstacles including how much they account for the prevention:
  • FOOL & FOOM*  --  20%
  • Local Xenophobia  --  20%
  • Incumbent Interest Protecting Turf   --  60%
The first one is a shared concern of both progressives and conservatives. The second tends to be more the domain of conservatives--I'm thinking specifically of suburbanites. The last is much more in the domain of progressives. 

*Remember that FOOL (HT: Arnold Kling) and FOOM are Fear Of Others' Liberty and Fear Of Others' Mistakes. These are the only defensible position for the three causes I identify, and only on the surface are they defensible. IF we cannot trust others (other parents, etc.) to make good choices for their children's educational needs, then perhaps this is a justified obstacle. 

But if we cannot trust them for that, what can we trust them for? Feeding and sheltering those same children? Voting for the politicians that will run the school system that is instituted and operated by a government we can trust to do right by those parents and their kids? 

There is an awkward tension between placing blame upon parents for underperformance (disgraceful performance usually) of government schools while at the same time lacking trust that those same parents could or would possibly make good choices for the children in those government schools. Taking it one-step further, those who believe that the problems of government schools lie at home outside of the schools (e.g., lack of a stable home life, help with homework, etc.) should not advocate for greater and greater resources for the schools since they claim the problem isn't in the schools. If they are right, let's put those extra resources into improving things at the point of the problem.

Circling back to advancement of the school-choice cause during the past 12 months, I feel like progress is being made against all three areas of prevention. We can cure FOOL & FOOM by attacking them head on appealing to real-world examples and analogies along with asking those holding the concerns to put themselves in the shoes of those they are concerned with.

Local xenophobia takes a long time to cure. Appeals to morality only go so far. People have a natural, animalistic-like protection instinct for their children. The hypothetical Other disrupting the fragile world of one's child is a salient fear. Experience with counter cases is the best medicine, and it is a slow process.

Fighting incumbent power is like bankruptcy. It comes on slowly and then suddenly. I would like to think we are entering the sudden stage for many communities. Check out Corey's twitter feed for hope in this regard. As more successful examples emerge of funding the kid with a backpack rather than the building with the career administrators, it will be more difficult for the incumbent resistance to hold.




Sunday, February 21, 2021

A Crowding Theory to Explain the Trade of the Decade

Bold title, I know. Yet while there may be some hyperbole in it, we do face a situation in equity markets quite unlike anything we've seen since the dot-com tech bubble era. 

[Disclaimer: This is not investment advice because I don't know you. I am not analyzing your situation, your appropriateness or suitability for equity or any other investment idea, your goals, or your risk tolerance. This is an attempt to explain what I believe to be the valuation existent in the market today. Read at your own risk.]

I. The Trade of The Decade

Typically with tolerable variation equities are "cheap" or "expensive" at the same time. The Great Recession was a period where equities went on sale, so to speak, for those willing and able to bear the risk. You didn't have to be brilliant; you just had to be brave. Buying and holding throughout the deepest points of the downturn (roughly Oct 2008 - Mar 2009) was a rewarding investment. Make no mistake it was not easy to do this as for years after the market bottomed it still never felt quite safe, but that is what investors generally and equity investors specifically get rewarded for--buying when no one wants to. 

At least they should be rewarded for that. And the expected reward is the "risk premium"--the expected return over and above the return for a risk-free investment. Think of it simply as the premium you should expect to earn for bearing the risk. Every investment has one. Sometimes it is relatively high like for stocks in the early 2010s. Sometimes it is relatively low like for stocks in the late 1990s. That "relative" measure could be in relation to its own history alone, the position of that asset class compared to other asset classes, or both. Current market risk premiums are the foundation behind my hypothesis that a big opportunity/challenge is in front of equity investors today.

The "trade of the decade" I allude to is a relative trade. Unlike so many highly-touted trades in history, this one is fairly simple. I wish to briefly outline it without effectively proving it so as to get to the true purpose of this post: a hypothesized reason for the opportunity to exist in the first place. After all, I am a strong supporter of semi-strong efficient markets theory (EMH).

First, some assumptions:
  1. Markets are generally efficiently priced. This means all important known information is thoroughly and quickly incorporated into market prices. Therefore, an investor should not expect to be able to outperform the market. 
  2. Risk tolerance (degree of risk aversion) among investors and risk outlook (the economic picture going forward) determine risk premia. The world looked very scary in March 2020 and investors' general appetites for risk were substantially lower than usual. 
  3. Risk premiums today are generally low across all asset classes. A couple of ways to say this in everyday language are: equity returns going forward (next ten years) will be lower than what we have enjoyed historically especially in the last 11 years and interest rates look to be lower for longer (lower than historically and for longer than typically has been the case). Caveat: risk premiums can be low and returns look high and vice versa. I am being a bit casual with how I equate risk premiums and future returns as compared to history, but I believe the underlying point holds.
Here is the problem, opportunity, and challenge all rolled up into one. Today certain portions of the stock market look fairly expensive (high valuation) while other parts look fairly attractive (low valuation). To be more concrete about it the high/low valuations are in comparison to those specific equity subclasses' own history. However, adding to the puzzle the risk premia for those asset classes look typical for the expensive group while they likely are desirable for the attractive group. 

Even a sloppy reader at this point is growing quite frustrated by the fact that I haven't identified which groups of stocks I put into the expensive and attractive categories. That is intentional as I don't want that to be the takeaway from this post, but I will now relieve that frustration as long as you know I am NOT effectively proving my case. Take this too as assumption. 

From the perspective of valuation, large-cap stocks in the U.S. (especially growth-style stocks) are expensive compared to their own history. Small-cap stocks in the U.S. (especially value-style stocks) are cheap compared to their own history. International stocks (especially value-style stocks) are also cheap compared to their own history. One way to measure valuation is to look at the current market price compared to the earnings, the P/E ratio. The higher the ratio all else equal the more expensive the stock.

One of the best ways to see this is to look at long-term analyses of real (inflation-adjusted) price/earnings ratios. The most famous of these is Shiller's CAPE (cyclically-adjusted PE) for the S&P 500 index. 


We can then do very similar analysis on various other indices considering important subclasses to see how they compare to the S&P 500 (large-cap U.S. stocks). This analysis [summarized in the table below] is where we see these key differences. Namely, that the riskier areas of the stock market (value-style companies, smaller sized companies, international companies, et al.) look relatively inexpensive.




Risk premiums* [analysis and results not shown] both echo some of the valuation analysis as well as tell a bit of a different story. The risk premium for large U.S. stocks is near the median of where it has been over the last 15 or so years meaning that adjusted for risk these stocks look appropriately priced. The risk premium for small U.S. stocks is far above its own historical median meaning adjusted for risk these stocks look very low priced. To a lesser degree the same low price depiction can be ascribed to international value stocks. The risk premium for international growth stocks is more similar to large U.S. stocks (i.e., it is around its historic median). So we have a general range of stocks from those that look appropriately priced (safer stocks like large companies and growth-style companies) to those that still look attractively priced (riskier categories mentioned before).

The risk premium story is not as sanguine for large U.S. stocks as it may appear. Despite my assumption above that interest rates will remain low for a long time, they don't have to. And they can rise meaningfully above current levels and still be historically low. If they do rise, that will have a big impact on stock valuations. Large growth stocks in particular look very sensitive to this risk as their cash flows come far into the future. A rising interest rate means a rising discount rate applied to those cash flows, which reduces the current value of the stock.

The trade of the decade is to fade away from large U.S. stocks and increase exposure to small U.S. stocks (especially value) and international stocks (especially value). The most acute version of this is for large growth versus small value stocks in the U.S. Specifically we could identify indices like the Russell Top 200® Growth Index and compare it to indices like the Russell 2000® Value Index. The reason I call it the trade of the decade is because my more in-depth analysis focuses on 10-year expected returns and risk pricing as well as the fact that it might take a decade to fully play out. The reason you should heed caution before engaging in this trade is (1) this risk might not be for you (it indeed comes with risk not specified in this post) and (2) this is not an endorsement of reducing diversification (I still advocate exposure to large-growth stocks, etc.).

II. The Crowding Theory

IF I am correct about the different relative risk-adjusted valuations for various equity subclasses such as large growth stocks versus small value stocks, interesting questions emerge. How did this come to be? What explains it consistent with EMH?

I believe two crowding effects have brought this about. Flight to safety is the first crowding effect. Sophisticated money avoiding public equities is second. 

Recall my assumption that risk premia are determined by the general level of risk aversion among investors and the market's risk outlook. The tidal wave of the pandemic that unfolded gradually then suddenly from mid-January 2020 through to the market bottom of late March 2020 was a massive reevaluation of risk that triggered an extreme flight to safety. Note that it was not the entirety of the valuation dispersion between various groups of stocks. For some time now growth has been outperforming value, large has been outperforming small, and U.S. has been outperforming international. For U.S. equities the market's reaction to the pandemic was in fact the dominant portion of the differences we see today. 





From Vanguard: 

Difference in annualized total returns over rolling five-year periods

Difference in annualized total returns over rolling five-year periods
Source: https://advisors.vanguard.com/insights/article/growthvsvaluewillthetideschange

As the risks and worry of the pandemic grew, investors sought refuge in the safest of assets, U.S. Treasury securities. This lowered interest rates to nearly zero across the yield curve. They also derisked in other ways. For those who wanted continued equity exposer, they flocked to the safest equities in the world, large U.S. growth companies. The now much lower interest rate conditions worked in tandem to make these equities more and more attractive. The riskier aspects of the market suffered as investors tended to rotate away from them and into safety. 

So that is how risk premiums for various stocks got so extremely different, but why didn't sophisticated investors step in to absorb the difference? After all, they are supposed to have extremely long (infinite?) time horizons and not be subject to wild swings in risk. 

Sophisticated investors is a bit pejorative on my part. Here I am talking about the so-called "smart money" of institutional investors like endowments and pension funds. They like to think of themselves as cunning lions, but they bunch together like scared, vulnerable sheep. Theoretically, they should be a counterbalance to short-horizon investors who are theoretically much more sensitive to changes in risk appetite and risk conditions. 

For example, a person close to or recently entering retirement should be invested positionally to withstand the risk of market volatility. The same can be said of any investor--they should be so positioned. Yet often times they are not. And even more often they are liable to overreact to bad news leading them to drastically alter their investment positioning as an attempt to predict the future. However, I do not think this is a big effect. It is a behavioral story that isn't necessarily as irrational as it seems--extreme events like the Great Recession and COVID pandemic give us insights into our attitudes on risk tolerance not apparent before. 

At the same time the sophisticated investors themselves are subject to the same types of risk tolerance reevaluation. Rather, to be a counter-balance they need to be in the market. The reason why the “smart money” hasn’t absorbed all the excess risk premium in riskier aspects of the market already is because endowments and pensions have trended far from traditional public marketsEndowments have on average reduced their public market equity exposures by 50% in the past 50 years going from about 60% to less than 30%. They are crowding away from public equities making them unavailable to provide a counterweight. 

To be sure riskier assets have done well in the past few months--small-cap U.S. stocks were up 35% for the three months ending in January 2021. The primary catalyst were vaccine developments in November. Add to that improvement in our understanding of the true risks of the pandemic as well as rapidly improving economic fundamentals. Even still, risk premiums in risky assets (value, small cap, international stocks) are at elevated levels compared to their own history as well as their safer equity counterparts. 

As risk aversion gradually (and perhaps in sudden bursts) returns to normal levels and as the risk outlook continues to improve, my hypothesis is that those assets with outsized risk premiums will perform relatively well (high confidence) and absolutely well (moderate confidence). 

Incidentally while this bodes well for public risk assets, it likely portends poorly for alternatives (private equity, venture capital, hedge funds, et al.). That is a crowded space with not much low-hanging fruit, and what is there is very expensive to be had. 

*The reason I deliberately gloss over the risk premium results is the model I am referring to is proprietary, but more importantly the calculation of risk premia is art and science. Laden with assumptions, it can be very much argued over in fine detail. However, I believe the depiction above is well grounded and firmly supported by a wide range of reasonable underlying assumptions. For more on this topic see Research Affiliates work among many others. 

Thursday, February 18, 2021

It Depends . . .

One-dimensional thinking vs deeper-level thinking (AKA, solve for the equilibrium).

Considering this:One-dimensional thinking concludes:Deeper-level thinking concludes:
To arrive at a destinations sooner one should drive…FasterSlower
A risk-averse investor should consider taking on…Less market riskMore market risk
A successful salesperson…Knows how to get what she wantsKnows how to satisfy peoples’ needs
To increase revenues...Increase pricesLower prices or offer coupons
To reduce the damages of a dangerous vice...Prohibit itNormalize it
To better preserve competitive balance in sports leagues...Restrict player compensationLiberalize player compensation
To reduce the risk of gun violence there should be...More gun restrictionLess gun restriction
To change minds...Speak moreListen more
To increase the income of low-skilled workers...Enforce high minimum wages lawsLower or eliminate minimum wage laws
A satisfied restaurant customer...Cleans his plateLeaves some food uneaten
Basketball teams who shoot poorly (have a low percentage of shots that go in) should...Be highly selective with their shotsShoot the ball a lot more
To help the children who toil in child-labor manufacturing we should...Ban and boycott their productsBuy and enjoy their products

Sometimes the obvious is right, and fast thinking serves us well; sometimes the less obvious is right, and slow thinking serves us better.



Saturday, February 13, 2021

Biden O/U Performance Predictions

Admittedly I’m being too vague to be falsifiable, but set some agreeable terms, and I’m willing to bet (#MoneyWhereMyMouthIs #TaxOnBullshit). 

Here is a partial list of what I predict the Biden Administration's performance will be in a number of important areas. Specifically where will it outperform (Over) and where will it underperform (Under) the conventional wisdom’s current estimation. To be clear this is where it will be better/worse from my desired perspective than the conventional wisdom’s current estimation. 

For example, I think the conventional wisdom is that Biden will greatly raise personal and corporate income tax rates, increase capital gains tax rates, and restore the SALT deduction. Mostly all bad items from my perspective. I think it won't be as bad as assumed. Likewise, it is presumed that he will user in a much better world of trade and immigration policy. I think it meaningfully won't be that good. 

Over:
Taxes
Environmental regulation
Other general business regulation
Minimum wage

Under:
Trade
Immigration
Drug policy
Health regulation
COVID
Foreign policy (not including hot wars)
Police reform

On Target (bettingwise = no action):
War (actual hostilities)
Education
Demagoguery and divisive politics





Wednesday, February 10, 2021

Fine Art Markets as Taxes on the Rich

I previously explored some of the many problems with art markets and art museums in particular. Let us now turn to the question of the art of taxing art.

The counter to the oft made accusation that lotteries are taxes on the poor might be that fine art is a tax on the rich. What better way for the rich the be relieved of their capital? 

Assuming the rich won't be investing it studiously, using their capital to purchase art at highly inflated prices is preferred to them spending it on goods and services with more tangible resource demands, and perhaps it is preferred to them giving it away to charity. If we don't trust them to invest it well, why would we trust them to donate it any better. 

Of course, we have to think this through. Doesn’t somebody end up using the funds to purchase consumption? Likely in many cases, but as long as they are operating in a closed system (I buy your painting, you buy my sculpture), this needn’t be the case. 

And all the better if the art is fake. Turns out a lot of the art in museums is fake (perhaps +5%), and all the players in the art world are on the take to keep this a secret. If the rich are swapping art at inflated prices that isn't actually authentic art, we have them well occupied spending their wealth, potential demands on resources, on a minimal amount of actual resources. Listen to Michael Lewis' The Hand of Leonardo for more on this. 

Yes, it would push resources into pursuing production/creation of fine art (too many painters and sculptors) but is this really so bad at the margin? 

How should we actually tax it? Tax deductibility for donations to museums is problematic. If I give up a non-income producing asset, why should I necessarily avoid an income tax? And if I give it to an entity exempt from income tax, this is doubly problematic. Should we separate fine art from collectibles (wine vs paintings vs classic cars vs musical instruments, etc.) with the ultimate distinction being those that are value-holding assets (similar to precious metals) versus those that are consumption assets? How much of each quality does a piece of art possess and who decides? This gets pretty fraught pretty quickly. Back to Michael Lewis' podcast above, the compromised ref is very much at risk.

Should we exclude art and collectibles transactions under a consumption tax such as a VAT or national sales tax? These activities aren’t significant resource consumptions. All else equal we want to encourage this swapping as opposed to the funds being spent on actual resources.

If you tax something, you get less of it. My principal is to tax the use of resources and not the creation of resources. A consumption tax does this, but items like art pose problems. Unlike pure capital assets (stocks and bonds for example), collectibles have consumption value and use resources. It looks to me at first glance that most VAT systems distinguish between individuals and firms with only the later subject to the VAT. This makes sense and probably preserves my secondary idea of not unnecessarily discouraging the rich from "taxing" themselves through art.

P.S. Also, see this interesting report.



The Trouble with Art Museums

A few years ago I had the pleasure of visiting the Barnes Foundation art museum in Philadelphia. It is extraordinary, and I highly recommend it. The history of this art collection and why it is where it is today is very interesting. And that's where the trouble begins.

Supposedly, the art collection is worth $25 billion! Wow, that's a big number. If your first thought upon hearing that is, "how would we know?", you are thinking like an economist.

If the museum burned to the ground losing all the art inside, would the loss to society actually be $25 billion? How would we know? Without robust and recent market transactions, we wouldn't. Yet that is just the beginning of the problem. 

The reason the art is in its current location is because in the 1990s the foundation was in financial trouble. One solution was to take some of the art on a world tour and then move the collection, the Barnes, to Philly. Maybe I'm just na├»ve or cynical, but things worth $25 billion aren't that hard to cash flow normally. 

The foundation raised about $150 million dollars to relocate a few miles into Philly from Merion Station, PA building a new facility and presumably using the remainder as an on-going endowment for maintenance. While there are many minor points to reconcile in all the legal and financial battle involving the move, there is a bigger point I'd like to make. Admission to the museum is at most $25. What's more, capacity is very limited--it is a relatively small space with limited hours of operation. At $25 billion in value why isn't there a line out the door and/or a very high-priced secondary market for tickets? Seems like a steal. Well, it is part of the art market; therefore, it probably is . . . just not in the way my questions would indicate. 

The art world is not designed--no system this involved ever is. It is the result of an emergent evolution. The spontaneous order that created it and drives it is not entirely or even largely benign. It is the result of a series of intentional manipulations and unintentional consequences from private, selfish, and in some cases socially-negative ulterior motives. Art museums aren't about public access to refined artistic culture. 

Allow me to begin the disillusionment with an excellent EconTalk, Michael O'Hare on Art Museums. The most forbidden thing an art museum can do is sell any of its collection. Even if it means some art will never be seen, it is somehow better that it stay in cold storage than be sullied by commercial activity. For the short version on why, see this episode of Adam Ruins Everything. For the longer version, see this article from Quartz

Value is like water--it seeks its own level. Interferences with this natural process can be expensive and often are resource destructive. One version of this is politically powerful people, who are otherwise unwilling to put their money where their advocacy mouth is, working to stop market transactions. Consider also cases like when the city of Detroit's bankruptcy reorganization had creditors pursuing the collection at the Detroit Institute of Art

This is the kind of example where preventing "priceless" collections from being sold or commercialized might mean very hard choices for governments facing enormous pension liabilities. If those assets are off limits, there are two big problems. The first is how the liability problem gets solved once a great option (selling off valuable assets) is removed. The second is how well can that same entity be a good steward for the art. They have already gotten themselves into financial difficulty, and now they are additionally constrained by having to at least store the art. 

I enjoy art museums generally and some in particular. The idea of art museums is something I support in theory, but in practice it has become rather fraught with very undesirable aspects. The pretentiousness is not just a bug. It is a feature of a bigger bug. Art museums are about exclusion despite the conventional marketing otherwise. Perhaps they are simply fancy, tax-favored institutions for hoarders? Malcolm Gladwell's Revisionist History makes the case in two episodes

Speaking of taxes, that is yet another troubling aspect of the art market with museums playing a key role. I'll explore that in the next post



Friday, February 5, 2021

One-Two Punch, or . . .

. . . How to go down for the count.



Let's make a boxing analogy for "appropriate" humor: Know your sparring partner; know when it is the real match; there are rules (no below the belt, but the belt moves); stay in your weight class. 

I post this in reflection upon the recent blow up of a comedic tweet by Niskanen Center's now former vice president Will Wilkinson. 

As one who has always been very comedic, I both identify with and fear hitting below the belt. I’ve done it, and I have fortunately always been forgiven when it mattered. I also identify with and fear what got Wilkinson into trouble--not knowing when it was a real match. In other words making a joke in the "wrong" way at the "wrong" time. I use the scare quotes because I've never been big on this concept. It is "wrong" because you the audience (intended audience or accidental audience) didn't like it. 

I am ambivalent on the idea that an honest attempt at humor is wrong. I don't want to offend people, but I know it will have to happen from time to time as both a risk of comedy (and serious argument) and because everyone at one time or another is overly sensitive (or hears things the wrong way). In truth I agree with Scott Sumner that there are no offensive jokes. So my views are simultaneously: I am sorry you have taken offense and Too. Fucking. Bad. 

To one degree or another grown-up comedy (not necessarily “adult” but certainly mature in the sense of developed and sophisticated) makes the audience uncomfortable. The other elements of comedy (surprise and irreverence) are at play here too in that comedy has to push boundaries or it is too childish to be considered “grown up”.

Time and place are tricky, though. Elon Musk has been very active on Twitter either joking or promoting (or both) the GameStop, et al. and Dogecoin trades. Is he humorously trolling? Should he be? 

This is a thorny issue. He uses Twitter to promote serious ideas including his public company. People look to him as an authority figure. We know we lose context and tone in email. That shortcoming is often taken too eleven when on Twitter. Maybe what he is doing is going over my head, and I should see rule #3 below. Regardless, he is an adult speaking to adults . . . yes, rule #3 indeed.

A healthy society allows mistakes. Actually it embraces them knowing they are a cost of progress. If a comedian cannot bomb, he cannot ever entertain. 

Here are two rules we as the audience should follow:
  1. Assume good intent.
  2. Accept sincere apology.
  3. When offended, get over it. - if for no other reason, your own happiness
So back to Wilkinson. His comedic attempt was ruled a mistake by Niskanen who didn't accept apology. We don't live in a world where my rules above are followed. Rather we live in what Arnold Kling calls a Zero Tolerance Culture. And as Jason Brennan perfectly points out, this is a cancel culture with glaring hypocrisy. 

Knock knock
Who's there?
Boo
Boo who?
Why you cryin'? It's just a joke.

Wednesday, February 3, 2021

A rose by any other name...

Partial list of things as they really are (these are not all original to me):
  • Universities are hedge funds that run research labs and have football teams. 
  • Fast food companies are real estate firms with kitchens. 
  • Democracies are insurance companies with armies. 
  • Public (government) schools are unions that run day care centers. 
  • Police departments are unions that run protection rackets. 
  • Banks are time-travel machines for assets that tax uncertainty. 
  • Home Ownership is tax-sheltered/favored investment masquerading as industrious virtue. 
  • Public libraries are intellectual social status symbols with warehouses. 
  • Churches are mutual-aid societies that offer moral guidance and tribal solidarity. 






Thursday, January 28, 2021

All Aboard!

Apropos of nothing in particular . . . 

Invest with the perspective that we are just passengers on trains. 

We are not the engineer. 

We are not a little kid laying out a model train set. 

We can choose the trains we board and the ones we avoid. 

Some are faster. Some have better safety. Some have more amenities. 

None are perfect, but some combinations are much better at getting us to our destination, and, importantly, we do not all have the same destinations. 

We cannot dictate the trains' schedules, speed, route, etc. 

We just have to accept what the trains before us are offering and decide among that option set--not an ideal, imagined one. 

We do not have to take the most popular trains if they aren't actually the right fit for us. 

Constraints are individual just like goals. For example, even though we both want to go from Los Angeles to Chicago, the Silver Streak may be best for you but not for me because I have a lot more luggage to transport and that train has limited capacity. 

It can be good to have a travel agent to help plan our trip, and a great conductor can help guide the journey. But it is us who have to decide, board, and endure the journey including if the train breaks down forcing us to find alternative options. 




Monday, January 25, 2021

Good Minds Resist Generalizing

Categorization is a natural and helpful way to navigate the world. Yet taken to an extreme it leads to very poor conclusions. Figuring out when the process is benign and helpful versus when it is harmful and nonsensical is high art--there such a fine line between essential black-and-white thinking and destructive stereotyping. 

That is one of my takeaways from listening to Kevin Dutton on The Michael Shermer Show this morning on my drive to work. I might summarize the argument as a distinction between a wise-thinking skeptic and a poor-reasoning lizard brain. 

The lizard brain wants quick, straightforward answers that cleanly divide the world into two dichotomies. It wants jointly exhaustive (all things of this type are found in this model) and mutually exclusive (all things are each in exactly one or the other of the categories). That is not how the world works of course. 

Wise-thinking skeptics adjust their conclusions and update their priors. They allow more latitude for exceptions when the stakes are higher as well as when the evidence is less clear. Consider this graphically:


The lizard brain operates along the red line increasingly generalizing for ever-more important the subject. The wise skeptic is the inverse resisting generalization increasingly as importance rises as shown in the blue line. Notice how the skeptic is not linear as well. For him magnitude matters.

I promise to try to keep this in mind as I go about thinking. 

Sunday, January 24, 2021

The Time of Biden

Now that all the attempts at election stealing are over I feel compelled to put down in writing some predictions about Biden's presidency. Call it political fatigue from the 400 years of the Trump Presidency, but it is hard for me to muster much energy to do this. Still, here goes . . .

Optimism:

There are two kinds of optimism in the case of Biden--relative and absolute. The relative is in regard to the Trump alternative and perhaps the Biden of politics past. The absolute is more genuine if not also more wishful. 

Trade - This one is quite positive even though it is strongly of the relative variety. Biden was never great on trade and many times poor. Still this has changed as he shifts in the political winds. He both wants/needs to be not Trump and the political base is different for Democrats today than it was when he first ran for president over three decades ago. See my Five Tribes theory for background, but Labor is not the Democratic lock that it was in the past. Just a reset to pre-2018 (actual policy) and pre-2016 (rhetoric) would be a great improvement. 

Immigration - There is a strong chance that Biden will be very good on immigration. The development of Democrats getting better on immigration has been building for some time having only accelerated under Trump. So in this case we have relative and absolute improvement opportunities. 

Drug Policy - My optimism is tempered here, but it is present in an absolute sense. At the very least we should get a more hands-off, non-escalating war on drugs policy. This is a BIG improvement from what we would have expected from a 1990s Biden. My baseline expectation is eventual of decriminalization/legalization of marijuana within the next few years.  

Presidential Prestige - I am optimistic that the tone and style of the office will now be back to a civilized place--very much a relative optimism. The office of the U.S. President should be occupied by a person easily described as a gentleman or lady. Trump never fit this description, and his final days were the icing on the top. Yes, I want that same office to be greatly diminished in terms of power and worship. My hope was Trump would deliver the diminishment without going Game of Thrones. Largely my fear of getting the reverse was realized. 

Pessimism:

Unlike the optimism analysis, the pessimism comes basically only in the absolute variety. It is also the areas I tend to be most confident, unfortunately. 

Judicial Appointments - This one is not as pessimistic as one might assume. I don't want judges from the right or the left--that is a silly concept. I want judges that think critically and consistently demonstrating good application of the Law. Certainly I expect Biden's typical nominee will be less desirable than was the typical Trump nominee from my perspective. However, the best judges are impartial and well reasoned, and those include very many Biden will nominate. 

Regulation - The Trump administration was flat out good on regulation compared to any recent president (probably including Reagan!). He didn't as much shrink, though, as he reduced or stopped the growth of the regulatory state. Biden will reverse this trend. There is one area where Trump was certainly bad and Biden will likely continue this just in a different flavor--industrial policy/meddling with individual firms and industries. 

Taxes - Many people are rightfully worried about this for mostly wrong reasons. They don't want their own tax rates to go up. Ignoring the fiscal hypocrisy of this given the spending policies these same people typically demand, it is not a major problem that individual income tax rates (especially at the high end) are likely to increase. What people should be worried about is corporate tax rates increasing and to a lesser degree capital gains rates increasing. These are both much more destructive forms of taxes as they are taxing the creation of resources rather than the use of resources. Additionally, the restoration of the SALT deduction and the reduction in the standard deduction are also bad potential outcomes of coming tax policy.

War - I am hopeful that this ends up being an area like others mentioned where Biden today is different than he has been over the last 40 years. Despite this hope, you'll notice in which category I have placed it. 

Woke Politics and Policies - Think of this item as the inverse of Trump's nationalism. The risks are similar including divisive policies and rhetoric as well as censorship and ostracization. 

Spending - Your first thought should be, "Pessimistic on spending? Have you seen 2020?" True, but in only that limited and aberrational case is the relative comparison optimistic for Biden. The ratchet works in one direction generally, and even the possibility of a republican midterm sweep doesn't leave me optimistic.

Presidential Power & Authority - Here is the other side of presidential prestige from above. Every president in the last 20+ years has looked at the prior administrations' advancement of executive orders and general authority and said simply, "Hold my beer". If we only had another branch of government designed to be the strongest branch and willing to hold presidents accountable and within the bounds of their legal authority . . . 

Overall: 

The Biden years will hopefully be a time of surprise at how good some things are, not so bad other things are, and tolerably bad the balance is. This is how I now view the Clinton presidency. All of it is quite relative of course. Hope aside, I am more optimistic than I would have expected being faced with a Biden administration. Still the pessimistic angles are acute and meaningful. 


P.S. What about COVID-19 and the pandemic? While I expect a lot of theater to emerge and a rewriting of some history in favor of the current winners, the substantive part of this large issue is basically settled. In this way it doesn't matter much who won this election. Most of the decisions to be made are in the same incapable hands of FDA and other government officials along with the capable hands of private firms, organizations, and individuals. And in many ways the die is cast. The trajectory of the virus is set--declining regardless of what comes next but with a trajectory that very much can change depending on policy and actions taken. This is true and basically the same under Biden or Trump and even without vaccines. Vaccines are just a wonderful accelerator of the progress against the virus, which very much means fewer people suffering and dying. 



Thursday, January 21, 2021

Change in Government Means Winners and Losers

While the fact is obvious that changes in regime leadership imply winners and losers, there are subtle, deeper truths that remain underappreciated. 

Government is costly in two very important ways: it wastes resources (cronyism, corruption, inefficient Rube-Goldberg processes, rent seeking, etc.) and it prevents what could otherwise be (the unseen, gains from trades foregone, etc.). I think the former is most important in the short run while the latter is so in the long run. How a government process will lower trend growth rates is insignificant in any one year but dramatically important in the compounded long run. In contrast the effects on those directly impacted by government actions are quite meaningful in the short run but largely avoidable (if avoidance is desired) in the long run. 

Essentially by definition there are losers in all government actions. This is true even if a given government action is socially beneficial as a perfect correction to a true market failure--if not, then why must it be government (aka, force) that is taking the action? Government is not a magical machine able to create or even simply discover existing free lunches. The market is a magical machine that potentially can create a relaxed notion of "free lunch" whereby an action leaves everyone a party to it better off. 

Mutually-beneficial trades are exactly this despite the fact that resources are used in the process. There might be negative/positive externalities (costs/benefits not borne/enjoyed by those engaging in the trade and therefore a theoretical opportunity for government action to make all of society better off by making parties to the original trade worse off). Just don't be so certain about how easily these can be identified much less corrected.

Those who are benefiting from the status quo (winners) are obviously incentivized to perpetuate the status quo while those who are losers are incentivized to change it. This is true before and after government action. A government action that will create winners and losers comes about because the winners stand to gain more eventually than the losers, and this action will be perpetuated by this same inertia. This is an extension of the public choice lesson of concentrated benefits and diffuse (dispersed) costs. If the losers can see a light at the end of the tunnel via eventual avoidance, they can put up with short-term acute pain knowing they will someday disperse those costs. 

Government's incentives are very poor at best, and it creates strong incentives for bad (socially negative, resource destroying, innocent harming) behavior in others. Its inability or persistent resistance to do the better thing (holding it to a lower bar than the "best" thing) is not for lack of power but for lack of will. This is the major reason why I agree with Caplan on the question of state capacity [here and here].

2020 was sadly the lesson we neither deserved nor will ultimately use to understand this.