The Ben Bernank ordering breakfast doesn't make him hungry, or . . .

Getting cause and effect backwards.

Often I hear investment pundits describe an effect as a cause giving them reason to be bullish or bearish on particular sectors, etc. The typical mistake runs like this: "We expect equity flows (investments into stocks) to increase driving stock prices higher." Think for half a second how one might determine the value of a stock . . . Stock is ownership in a company. That company derives value for owners by creating profits. Those profits eventually must become a series of cash flows back to the owners. If we could make a good estimate of the timing of those cash flows and apply a reasonable discount rate, we could approximate the present value of the cash flows (what they are worth in one, lump-sum price today) and hence the present value of the company.

Nowhere in that analysis is room for the thinking that if more people like the cash flows, they are worth more. True if more people like the series of cash flows, the discount rate goes down and the present value goes up. But here again we are getting it backwards. Why do people like the series of cash flows at a given price more all of a sudden? Because the discount rate used to calculate the present value now seems wrong. Therefore, the price seems low making it more attractive driving the desirability up until the price seems right again.

The girl is more attractive after the Extreme Makeover not because people are now more attracted to her. People are more attracted to her because of the makeover.

So how does this relate to The Ben Bernank and The Fed? I think many people including some economists often get it wrong in describing the cause and effect related to the economy and Fed activity. Consider this Arnold Kling post which points back to this Scott Sumner post which points back to this David Glasner post all of which got me thinking about this issue once again. And here is a money quote from another Arnold Kling post that illustrates my thinking:

Probability that monetary policy “merely reacts to what would have occurred anyway” = .75

I think I would put that probability at least that high. To explain why, I'd like to introduce a metaphor that I believe aptly illustrates the right way to think about the Fed's role in the economy as it "sets" monetary policy ("sets" is too powerful a word here; "escorts" might be better):

Think of The Federal Reserve as the regulator of a man-made lake where The Fed controls the dam and where it controls a floating dock that many boats use as a prime spot for anchoring. The lake is the money supply and the dock is both the Federal Funds Rate (the interest rate at which reserves held at The Fed are traded between banks) and the Discount Rate (the rate at which The Fed will lend money to banks to cover short-term needs). The Fed can control the outflow from the lake to help determine the water level (money supply), but this is a clumsy process. If The Fed doesn't have a good handle on what nature (the market) will bring in terms of rainfall and drought (i.e., if indicators are poor), then too much or too little water may be in the lake. Likewise, if The Fed sets the federal funds rate or the discount rate inappropriately low (high), the dock will be under water (way out of the water). In either event, boats can't use the otherwise popular dock which makes lake activity difficult.

Some want The Fed to look out on the lake with omniscient vision seeing well-planned development. In truth The Fed is simply trying to accommodate the level of water nature otherwise wants for the lake while trying to satisfy those who desire to use the lake as a resource--adding or reducing water to smooth the ups and downs. If only The Fed could ask nature what was in store for lake water levels (an NGPD futures market), it could do so much better getting the water level "correct".

Those were the days . . .

Before it got any further belated, I wanted to give proper mention to what was a great TV show that ended this spring--"The Office". This is another show from my top 50 of all time and this one would make the top 10 I am guessing. Here are some thoughts:

• "The Office" was path breaking (both the original British and the American versions). Like "Survivor" in the reality genre, it brought an idea mainstream (sorry, "The Real World" was about as mainstream as "Girls Gone Wild"). "Moonlighting" 20-years prior made use of the direct dialogue to the camera and then some, breaking the so called Fourth Wall. The idea of merging the reality concept with a scripted sitcom was brilliant allowing dynamic elements never before possible.
• Incidentally, I think this show did more to accelerate the trend away from laugh tracks than any other. 
• I felt this show had somewhat run its course when Michael, Steve Carell, left. But they were able to avoid jumping the shark ever so narrowly--aside from Nellie, the Cousin Oliver of Scranton.
• I saw every episode of this show. Watching every moment, I regret nothing. That's what she said.

While this show ended continuing the trend of me losing more shows than gaining, there are several ideas recommended to me: "The Americans", "Breaking Bad", and a few others. My official TV advisor is reconstructing my portfolio. If I can simply learn to take his advice, perhaps I will stop making mistakes like "Up All Night". I stayed with that one far too long. I've started "Downton Abbey" and dabbled in "Mad Men". Both are shows followed and loved by my wife. I probably will catch up with both and continue along. 

At least one show will still be around that I had not counted on. The prototypical overachieving, underappreciated show "Community" received a reprieve from the gallows. I am afraid its ultimate, untimely fate lies there. I anticipated its demise and began thinking about a post using it as an example; it lives, but I will use it anyway. 

I used to lament how many shows I felt were very good that were cut down early into existence. Many didn't make it past a first season. While I won't work so hard as to try to recall them, the pain being too much, I will mention one of the most famous since it has been resurrected in a way, "Arrested Development". This show was similarly overachieving and under appreciated. It also was path breaking. Its return via Netflix says a lot about my more developed thoughts on TV show evolution. 

Remember how I said, "I used to lament . . ."; well, that is because it dawned on me one day that economics teaches us to roll with the changes rather than mourn for what will no longer be. Schumpeter's Creative Destruction is alive and well here. When a new show is ahead of its time or just not mainstream enough or simply not well marketed, etc., the death of the show does not mean the death of the creative, desirable, inventive elements that drew its too few fans in. Those same writers, producers, and actors are still out there trying again. The process of success and failure leads to better and better products down the line. Consider this as an anecdote against bailouts and the moral hazard that accompanies them. Better to let "Community" die, than to prop up its existence artificially. 

What's more, the overwhelming trend in this medium is to profitably broaden the scope and narrow the target audience. "Arrested Development" is back on but not on Fox, its original network. It is web based essentially. As the movement to a more and more decentralized and individualized market in television entertainment continues, more and more opportunities emerge. Consider this as an anecdote against monopolistic protections.

PS. "Futurama" would have been another example of a show resurrected. 

Recycling my mind

You may remember that here at MM we are always looking for ways to change our minds. In fact, it is an ongoing resolution. Well, we may have found my jewel of the Nile for this year.

I referenced this recycling conversation in my last blog post. I highly encourage you to read all the essays and followup conversation. Mike Munger makes what is for me the first rational point I've ever encountered theoretically supporting mandatory recycling programs. Recycling is an economics and business issue. It is about optimal use of resources. The problem might be that we have too little of it. Why? Because the incentives might be messed up. How? Because we want them to be. I don't mean choose them to be in some sinister, corporate-cronyism sort of way (although there is plenty of that in the larger political economy of recycling). I mean truly want them to be . . . to a degree and as an unintended consequence.

The intention is to make landfills artificially cheap by subsidizing them so that illegal and undesirable dumping is minimized. As a result the relative incentive to recycle is lower than it should be as compared to landfilling. In his response essay Steven Landsburg raises very good and strong concerns about what that actually implies for a recycling effort. Remember, I said theoretical case for mandatory recycling. It is in seeing now a theoretical defense of mandatory recycling (or preferably some less coercive means of encouraging recycling) that I have changed my mind. To that point and in his last response in "The Conversation" Munger makes a very Coasian/Hayekian point about how we need to shift the incentives (Coase would emphasize property rights here) but that he doesn't know, a la Hayek, what that solution(s) will actually be. I agree very much with that thought process.

Another very important point raised throughout the issue is how the moral crusade for recycling is quite an awful thing. It magnifies and worsens all that is bad about excessive recycling, and most mandatory recycling is excessive. A little neglected in the issue is the simplistic but problematic solution of fighting the subsidy come incentive problem with an additional subsidy--this time for recycling. That would be the road to a farm bill for waste/recycling. You think I hate mandatory recycling now . . .

The Cape Crusaders

I've just returned from a family vacation in Cape Cod and Maine. We spent four lovely days in Cape Cod followed by two in lower-coastal Maine with Portsmouth as our base of operations. Here are some thoughts:

• There is plenty to do on the Cape as well as plenty of ways to do nothing but relax. It is a highly recommended retreat. 
• It is hard for an outsider to appreciate how out in the country Cape Cod can be. As we learned navigating our way back from Scituate (see "Boston detour" below), you travel from rural to rural. And New England is not the flat, open, grid-patterned world a midwesterner is used to.
• To uncharitably generalize, Cape Cod is the Upper East Side gated by Branson . . . if the Upper East Side were in the country and the cast of Hair Spray ran Branson. This is quite unfair, but it gives a sense of how diverse some of it is. 
• There are different traffic norms up there. I noticed stopping to let people in including stopping on a busy two-lane road to let someone make a left turn. As a result, many drivers proceed with the expectation that you will allow for this. Hence, many times cars pulled in front of us or stopped to wait for us with the drivers giving irritated looks when I didn't notice what they were expecting from me.
• In many places there was a tolerance and incorporation of weeds (I'm saying in the small green spaces of nice businesses) that would not be acceptable in this part of the country (particularly Texas and Oklahoma).
• But there is seemingly less tolerance for "neglect" of a property or perhaps more respect for what "neglect" a neighbor will see. Upkeep is impressive in almost all corners. In that same vein you see a bit of the delicate balance between historic devotion and modern adaptation. Political signs about proposition XYZ being "wrong" for [insert a Cape Cod town] allude to this. Of course one problem is  what if the Cape Cod style of house falls out of fashion. What if population/ownership turnover leaves these many properties significantly less desirable? 
• On the road the exit numbers do not match the mile markers. They simply count up from the road's origin. This seems so wrong that we can call it stupid. Am I missing something? Isn't the system in the west superior in every sense? And do we really need a full mile marker sign every tenth of a mile? Is this a kickback to Big Sign? 
• The Boston Detour aka, the Undependable Train, a lesson in good business practices, character, and adaptation. To my three-year-old son, Max, there are two things in this world: trains and not trains. On Tuesday we were to do a bit of the former by riding the Cape Cod train from Hyannis to Provincetown. This is a narrated scenic ride with one departing at 11:30 and one departing at 2:30. Since we were 30 minutes away in Chatham, the 2:30 was the better option leaving us time before to take in Sandwich (a place but we did coincidentally eat a sandwich there). Upon navigating the mess that is Hyannis, we arrived at the train depot about 1:45. The whiteboard sign out front read "TUESDAY: no trains today [frowny face]". Ever the optimist, I went inside to confirm our fear. Two people sat chatting, and it took them a minute to process that I might need some assistance. Once awoken from their unresponsiveness, they were friendly, but the answers I was given were unsatisfactory on several levels. I was told mechanical issues halted today's trains. But then I was told that I really should make reservations rather than just walk up. You see sometimes they don't have enough customers to run the trains. But then I was told there is no way to know, which I would like to being that I was coming from some distance away, because often they have a lot of walk-up traffic at the last minute. Contradictions aside, the fact remained that I had to go out to the car to tell a little boy he was not going to ride a train today. The letdown was as predictable as it was sad. We scrambled for ideas. There are lots of commuter trains in the area running to Boston. If we could connect with one, that might save the day. Thankfully smartphone technology enabled that brainstorm hope to become a reality. We headed toward Plymouth, but after further research we opted to go farther to Scituate for the best chance to make a train with time to spare. Thirty minutes later we were waiting at the station enjoying donuts with plenty of time before the 3:40 arrived. Into Boston we went. We emerged from South Station as rush hour was projecting people into it. We cleared the crowds and made our way to Quincy Market. Lobster rolls, clam chowder, and pizza recharged us. Outside we saw a familiar performance: a street performer we had seen a little over a year before in Denver. Her act, style, and looks were unmistakably the same. Time was ticking and we wanted to do a little more. We went to the North End both for me to see the fruits of the Big Expense Dig remarking how "close" the North End is to downtown now (it is amazing the effect) and to enjoy some treats from Mike's Pastry. The charm of the streets and excitement of the restaurants made me long for more time. But we didn't have it. After a moment enjoying gelato, the kids didn't want pastry, we began our trek back to South Station. Only now the overcast had turned to sprinkles which turned to drops. We had one umbrella between the four of us walking with the youngest curled under the stroller's awning. While at first we thought we could make it, the heavier rainfall was changing our minds. We ducked into a doorway for cover. By luck it was a CVS. Inside we fled for two essential items. Our unexpected detours had us in need of both an additional umbrella as well as a phone charger. Remember, outside of Boston travel is rural to rural. The combination of navigation and train planning had drained our phones. The pictures of Boston finished them off. Getting back from the train station to the main highway in the rain-filled dark was not an attractive idea sans Google Maps. At this point I was excited for the character building exercise I was about to put my kids through. We had about .7 miles to walk, much of it uphill, in significant rain, with temperatures dropping, and pushing a stroller. But they didn't even flinch. In fact they enjoyed it. My daughter protested loudly when we considered a subway ride escape. We made it to South Station. The imaginative story we concocted on the train-ride back will be the inspiration for a future post. This could have been a low-point or breaking point in the trip. Instead it was just another highlight.
• The apparent housing irrationality: I thought I had stumbled onto an obvious business mistake. On the scenic highway 6A leading into Provincetown, there are quite a few condos for rent. In the pictures below is the group that first caught my eye. They start at $200,000 a piece. Presumably the ones with ocean access are even pricier. Zillow has them at $325M. They appear to be the size of Monopoly pieces. My conclusion of an apparent business mistake came when I spotted similar real estate about a half-mile down and farther from town that was for sale--price undisclosed. The second set of properties was in shambles. Something seemed amiss. Was this a great arbitrage opportunity? Was it simply irrationality on the part of the sellers of the highly priced condo properties, et al? Land restrictions perhaps were to blame, but that didn't quite jibe unless coupled with building/renovation restraints. Materials and labor would be perhaps $50 per square foot. These were priced at approximately $2,000 per square foot. If that is the going rate, the dilapidated property and many others are free hundred dollar bills laying in the street. How could a freely functioning market let such a disequilibrium exist? My first conclusion was a poor one--that uninformed/disengaged sellers were suffering housing crisis amnesia. My second conclusion wasn't much better--that government restrictions must be preventing supply at a drastic affect. Upon more thoughtful reflection, I think I have the missing consideration: risk. While all of the prior explanations probably were at play somewhat, we should never underestimate the effect of uncertainty. This was no disequilibrium per se. Once I had properly channeled von Mises, it became clear. Markets are only in equilibrium in textbook models. In the real world markets are constantly moving toward equilibriums taking in new information and realizing new knowledge. Pricing down the quaint, efficiency condos carried a big risk of lost profit. Investing heavily in renovating the run down properties or converting raw land was far from a sure bet as well. The next sale at $325M might be the last for a long while or it might be the start of a boom. These huge unknowns implied huge bid/ask spreads--just what we found travelling highway 6A.
• I couldn't help but notice how recycling has gone cultish in New England. No sooner had I done so I saw this excellent Cato Unbound issue on environmentalism. More on that to come . . .
• Portsmouth is an awesome town worth a weekend excursion for those in the area. 
• Travelling up the shoreline in Maine was excellent. I needed a lot more time for Maine. 
• The people of New England seem to have an appreciation for summer that is more taken for granted in the south. Their summers are beautiful. And the experience of them is a truer glimpse of nostalgic (perhaps stereotypical) Americana to me that what we see in the hot Southwest. I like it.
• Two gripes related to the rental car. First, we rented a Chevy Traverse. The short review on it is it sucks. The longer review is that it seems to be a car built by a factory in 1985 who happened to know about some technological and style features demanded by people in 2013. Remember how Soviet warplanes always had a "strange" resemblance to their better designed American counterparts? In Soviet Russia, Chevy Traverses you. Second, do we really need severe tire damage gating around rental cars? This is the best way to prevent theft? How many times is a driver in a confusing situation (like the Manchester Airport's rental car return garage) backing into these compared to how often a thief is deterred by them? 
• Speaking of the airport, the Stasi have a new method of winning compliance. The TSA agent who checks IDs gave my kids TSA sticker badges. I was hoping they would refuse when offered, and they did hesitate like it was a trick--smart kids. I had to bite my tongue. I found this little propaganda infuriating. Don't make my kids an advertisement for your unwarranted policies and ridiculous behavior. 
• Let's not end on a sour note. This was a great vacation. Here are some pictures:

These are $200,000+ condos.

Rule of democracy: politicians don't lead, they follow.

I've thought about this idea for some time, and I continue to see examples of it. It isn't original to me except maybe to the extent I find it nearly ubiquitous.

I believe a rule of democracy is that politicians do not tend to lead but rather tend to follow the common view. This is true in a general sense and in most specific instances. On the surface it shouldn't be surprising, after all democracy is should give rise to this, and it is unclear if in aggregate it is a feature or a bug. I believe it is a bug on net, but only slightly, and I assign low confidence to this view. Say what you will about the results of totalitarianism, at least it is an ethos of leadership.

The most recent example I found was this one from Todd Zywicki of the Volokh Conspiracy. It the piece he is pointing out that traffic fatalities were falling for a steady and long period before the formal introduction of the National Highway Traffic Safety Administration (NHTSA) in 1970. His discussion is a bit richer than just that as he considers the merits of liability law and regulation versus market forces. Here is the graph that caught my eye (original source):

A similar graph can be plotted for nearly every regulatory agency. The one above reminded me of one I saw back in college, which led me to get out my old Economics of Regulation and Antitrust textbook. In that example workplace safety is shown to be steadily declining prior to and after the creation of OSHA.

I think Robin Hansen would be in agreement with my view--"Politics isn't about policy".

The reason I think this is a net bug is that government isn't well suited for many of the tasks it takes on. The incentives are bad, perverse, or at best non existent. Government is highly subject to regulatory capture. Government's one-size-fits-all approach, which is a natural and good product from equality before the law, is antithetical to evolutionary adaptation.

The reason I think this is only a slight net bug is that what we see generally is just a codification of the mores and demands society otherwise possesses. Hence, my libertarian problems with the 1964 Civil Rights Act with its limitations on freedom of association are mitigated by the virtues the law sought to create and the fact that society was moving that way anyhow. Government then just becomes a clumsy way to achieve what we are otherwise moving toward.

I'm sure I'll have more examples and more thoughts on this. Suffice it for now to summarize that while regulatory approaches to problems are suboptimal solutions (at best second-best if not third-best approaches) they are in fact more solution than new problem. But of course when opportunity cost exceeds benefit at the margin even slightly, the makings for compound disaster are created.

Escape from New York

I've returned from a jam-packed trip to NYC that was part business and part pleasure. I always find it hard to leave New York without feeling that leaving is a mistake. It is such an amazing place. Very few places on Earth can boast the same wide-range of risk/return opportunity sets. Here are some thoughts:

• To my impression, by a wide margin no other American city is as much an international city. This is an underappreciated quality.
• It is a shame people tend to be too uncreative to appreciate experiences that are not "tourist traps". 
• The success of the city, largely a reflection and exacerbation of the success of American free enterprise, disguises and minimizes the drag of being in the People's Democratic Republic of Bloomberg [insert any prominent former or future mayor as well]. It is hard to see the forest of unintended consequences when dealing so directly with the trees of real-world problems. Viewed in this lens, it becomes easier to excuse the frequent acquiescence to bureaucratic and technocratic power.
• If your only impression of life in NYC was from television sitcoms, you would be missing 75% of it. If it were only from movies, I'd say you are still missing 50%, and most of that corresponds to the prior missing 75%. 
• Goldman Sachs, the business portion of my adventure, is a first-class organization. I am often a critic of the revolving door between government regulators of GS and executive positions at GS along with other regulatory capture issues. Being in the heart of the dragon, one sees clearly how that cozy relationship maintains harmony. Literally, the janitors at GS exude more confidence and professionalism than I've seen among bank presidents. Uniformly both in informal conversations and formal presentations, every representative of GS was quite impressive--not cocky or arrogant, but definitely assured of themselves and their organization and certainly serious. They can and do laugh (when appropriate), but I am certain they physically lack the ability to giggle. 
• I appreciate Goldman for having me as a guest at what was a very good conference filled with good information and entertainment. I now have more respect for them as a money manager, and it is with more confidence that I consider investments with them for my clients. 
• Here is a random thought I had during the conference: Does corporate paternalism and generosity breed acceptance for governmental paternalism? This is similar to the forest/trees thought referenced above. People in these companies are very well taken care of with all ancillary needs provided or sourced, they are used to showing ID cards and having limited access within their firm and even on their floor or in their business group, they work in "safe" environments insulated from the "chaotic" world outside, etc. 
• Depending on your perceptive sensitivity to any given behavior, you can get the feeling that "everyone" in NYC matches that given behavior. For example, everybody jogs. Of course, everyone doesn't. But it is easy to be misled being that there are countless examples of any behavior, activity, etc. to be found. That is one thing >60,000 people per square mile will get you. This goes a long way to explain misconceptions visitors come away with.
• Being in the beautiful jungle of so many choices, a thought I have had previously occurred to me again. A key to happiness is being easy to please. If you can see the good in things (be optimistic) and if you can refrain from pickiness (see things as highly substitutable), you can greatly expand your happiness. In economic terms, the flatter your indifference curves and the looser your budget constraint, the greater your utility potential. 
• Nearby our hotel was a Whole Foods grocery. We have a Whole Foods store in Oklahoma City, but the store in NYC, as a microcosm of so much else, is quite different from the store in OKC. The selection was larger in scope and scale, and the services included delivery for a flat $10 fee. No such delivery option is available in OKC. Discussing this with my wife dovetailed with other grocery economics discussions we have had. We've thought before about the intrinsic differences among stores like Whole Foods and Central Market versus Safeway and the local Crest Market versus Sam's Club and Costco. Not to get too far off on tangents, but this thought problem brings up the difficulty of finding a comparable basket of goods for inflation as well as other comparisons. Back to the central idea, what are people getting out of food shopping? The joy of bargain hunting (optimizing $/calorie) versus the joy of elegant shopping (optimizing the experience per se) could be generalized extremes along what seems a reasonable dimension of quality/quantity tradeoffs (optimizing selection and discovery). At what point is the only physical grocery shopping we do that done as an entertainment (elegant shopping) with the remainder done online including preprogrammed? 
• Enough random thoughts. Here are some pictures from a great trip. Enjoy!