Tuesday, October 30, 2012

Let's get up a football league

Legend has it that one day in 1895 while sitting in Bud Risinger’s barbershop on Main Street in Norman, Oklahoma John A. Harts spoke some famous words: “Let’s get up a football team”. From there the Sooners were born.

The NCAA has approved what seem to be significantly more powerful sanctions on those who break the cartel’s rules. Be sure to read the article at SI. This comes as a response to the fact that the rewards from “cheating” are greater today by an order of magnitude than they were in decades past. NCAA czar president Mark Emmert recognizes as much:
We have sought all along to remove the 'risk-reward' analysis that has tempted people - often because of the financial pressures to win at all costs - to break the rules in the hopes that either they won't be caught or that the consequences won't be very harsh if they do get caught. The new system the board adopted today is the result of a lot of hard work and membership input devoted to protecting the collegiate model.
Unfortunately for the cartel, this is a losing battle in a soon to be lost war. Besides the growing sentiment against the NCAA’s practices, this change reflects the stakes growing in the sports world. The attractiveness of an alternative model wholly removed from the grip of the NCAA is higher than it has ever been. King Cnut Emmert will not halt this rising tide.

Value of life

Economists get into trouble they don’t deserve for a lot of bad reasons. One area where this is highly prevalent is when discussing the value of life. Those who don’t understand economics well misunderstand what an economist is really saying about the value of life. Importantly, economists are generally interested in the value of a statistical life. This is important to understand. Let’s consider some hypothetical situations to tease out these distinctions.

First, let’s arbitrarily assume the value of a statistical life (VSL) is $10 million. This isn’t the value of each life uniformly. Rather this is an average approximation of the value of a general human life for purposes of analysis at the margin. That last part about marginal analysis is key. We’ll come back to it shortly.

Consider a baby somewhere in America. This baby may grow up to be the next Steve Jobs or a terrible criminal, but probably something in between. In the former case his economic contribution to society will be vastly greater than $10 million, and in the latter his contribution will be considerably smaller if not negative. But we don’t know ahead of time what a person will turn out to contribute economically, and further this definition of a life’s value is not what an economist is getting at. To see that consider this false bargain:

The baby and a new building worth $10 million are located directly beneath the path of an approaching meteor. The implication of the economic value of life is not we are generally indifferent between moving the baby or the building out of the way. This should be obvious on its face as it is a lot more difficult (read expensive) to move a building than it is a baby. But what if next to the baby was an $100,000 armored car containing $9.9 million worth of gold? Are we indifferent now?

To ask the same question a different way consider this: An evil person somewhere in America has this baby in his clutches. He threatens that unless he is paid $10 million of societies resources (not paper money), he will inject the baby with a lethal dose of cyanide. We are certain never to catch this evil person or recover any of the resources given in exchange for the baby, but we will certainly get the baby back completely fine if the ransom is paid. Is the proper economic thinking here that we are indifferent between paying the ransom and letting the baby perish? You’re gut tells you no, and your gut is correct. The economic thinking on the VSL has nothing at all to tell us about these decisions. The key is marginal analysis.

The VSL is a tool for marginal thinking; that is, thinking about the costs and benefits of an incremental change. VSL tells us that the value of avoiding an increase of 1% in the chances of getting a baby into the path of a meteor or clutches of an evil person is some figure that when divided by .01 equals a number like $10 million. But the circumstances of actually being in the dilemma dictate entirely different thinking. Value is ultimately a subjective concept. The value of the next cup of water you will drink is vastly different if you are lost in the desert or chatting about last night’s football game at the water cooler. To attempt to extrapolate either of those values out to be the value of the Earth’s water supply would be complete foolishness. Similarly, to equate a decision made to avoid an incremental increase in risk multiplied by the weighted quantity all possible risks and the value of avoiding total risk (risk of certain death in an immediate moment) is foolishness as well.

Like the great Mr. T said, “I pity da fool who [confuses thinking at the margin with thinking in the aggregate]”.

Monday, October 29, 2012

Secretary of Business

Copying the success of the Department of Homeland Civil Rights Abuses Security, Obama has eluded to a Secretary of Business in his next administration heading up a consolidated group of business-related agencies. A one-stop shop for corporate welfare.

Efficiency in this area would not mean better SBA loans and smarter import-export subsidies—assuming there is a role for government to play in these endeavors. It would mean simply more of these activities with the associated growth in spending and malinvestment.

Generally, organizations don’t consolidate to bring efficiencies to the end customer or enhanced production. They do so to make it easier on the reported-to entity. Instead of nine offices reporting up the chain separately, the nine report to one office who then reports further up. The opportunity for cost savings is very limited by combining these functions. As functional areas are combined with “redundancies” eliminated, the risk of losing specialized knowledge grows, and the chance of good practices dwindles.

Sunday, October 28, 2012

Sports roundup: October 28th

Here is my take on a few sports results and sports-related news. From my perspective these are three stories of losing.

First the big one for me, Notre Dame defeated the Sooners last night yet again. I was very impressed by Notre Dame's game plan, execution, and grit. I was also "impressed" by the officials ability to call a questionable holding penalty on an OU touchdown, miss a pass interference call in a play that had an "interception", and then also miss after review that the ball clearly was trapped on the ground in that  interception. These were critical plays that could have changed the outcome. But I definitely recognize that the team that played better last night won the game.

Because they remain relatively untested for the rest of the season, it will be hard to assess to what degree ND is great versus to what degree OU is just above average. OU has played two very highly ranked opponents this year and underwhelmed in each case.

OU is now 1-9 against the Irish. It is interesting how a team can seemingly "have your number". Those of us at MM know that the number to have is sample size, and that is the key here. This small sample size just doesn't tell us much at all about how great and evenly successful both programs have been. The sample size being so small makes it very susceptible to selectivity bias. In this case some of that is opportunistic while most of it is pure chance. Notre Dame never played a Switzer team and they managed to avoid quite a few Wilkinson teams as well. They've only played Stoops twice catching the Sooners in relatively down years. OU and ND were supposed to play in 2000 and 2001, but it is my understanding that ND bowed out of those appearances.

I can relate to Notre Dame fans in ways I can relate to few programs' fans. They are a highly successful organization with the highest expectations year after year. That makes it hard when losses come. OU's season is now a bitter disappointment for me and most OU fans. When your goals are to compete for conference and national titles, the bar is set very high. It looks very hard for OU to still win the Big 12 this year. Winning the remainder of the games including a bowl game by 50 points would only bring to high relief the disappointment of not completing what would then look to have been possible. This is classic loss aversion as described by behavior economics. Losses hurt more than wins, and that diminishing return affect is greater and greater as winning is more and more expected/achieved.

The pageantry last night was second to none. I was very impressed by how it all came together. We put on a beautiful show for the Irish to fondly remember.

Switching gears, let's mention something about the Harden trade by OKC-Houston. This is striking many as a major WTF? Those sentiments may prove off the mark, but from what we know and see now, the head scratching appears reasonable. Harden is great and valuable. So, either Presti mistakenly estimated value (direct revenue from winning and brand strength and indirect from chemistry) or Simmons overstated the economic upside for the Thunder. There is a chance this tension is looking in the wrong place. The Thunder ownership could be loss averse in the financial sense. They aren't willing to make the investment and pay the luxury tax to effectively bet the come on future gains being worth certain extra expense. They could also suffer as an organization from several behavioral economics shortfalls including optimism bias and overconfidence effect.Or maybe it was spite: Harden wasn't showing "loyalty" and knowing his place as a sixth man. It wouldn't be the first time NBA owners asked not what a player deserved but what that player could give to the cartel organization.

One last topic, the double injustice of Tyrann Mathieu of LSU. The Honey Badger worked hard for negative current wages in the 2011 season for LSU. While not being reasonably paid for his labor, he brought happiness to LSU fans and profit to the LSU athletic department. Contemporarily and subsequently to that season he apparently chose as an adult old enough to die for his country to use some chemicals that are deemed highly naughty. Now his expected future wages are a slight fraction of what they were nine months ago. His life has been a tough and at times sad one. NCAA policies and U.S. law have made it tougher and sadder with less hope.

Thursday, October 25, 2012

Cliff Hanger

I mentioned in a post awhile back about writing a post concerning the spending side of the so-called Fiscal Cliff we are approaching. This is that post. Promise kept.

Don’t expect that same kind of responsiveness from Washington regardless of who wins the election. My expectation is that Rombama will deliver as much and as little as it takes to lie with a straight face that, "In the face of an epic challenge, the American people came together to forged a grand compromise. While this solution does not match the ideal of any one party or interest group, it does satisfy many of those goals and all of our greatest needs…." Disaster avoided, I am your savior. Or something to that political effect.

The spending side of the equation, forced spending cuts disproportionately affecting the Defense Department (because that is where the discretionary money is), is arguably the less concerning part of the equation. This is especially so in the long run. The short run effects of sequestration can be mostly if not entirely offset through proper monetary policy. The monetary authority must change expectations to demonstrate a willingness to accommodate any fiscal reduction. The political will for this is weaker than it should be, but it probably is strong enough and will strengthen in the put up or shut up point of fiscal cliff diving. The added bonus would be that monetary policy arguably has much less distortionary effects than does fiscal policy—the former says demand increases somewhere and the market guides the where, the latter says demand increases through government. Unfortunately, I don't think this will happen as I don't think we will fall off the spending fiscal cliff.

The tax side of the fiscal cliff remains the more imposing part and has the more important long-run considerations. The uncertainty alone is a source of reduced economic growth. I'm cautiously optimistic about the chances for tax simplification and otherwise meaningful reform. I'm more optimistic about tax rates and incidence not being as severe as a full plunge over the cliff would be. Here I think there will be a decent compromise, but most of the benefits will be in terms of certainty rather than good policy--we'll at least know how badly taxation will be moving forward.

Back to the spending, I am very pessimistic about the chances of substantial spending reform or reduction. That means the fiscal cliff is avoided from the spending side—we don't get the big cuts, hence we don't fall off the cliff with the associated risks to short-term growth. But the manner in which we avoid the cliff is in no way a sustainable path to fiscal prudence. For evidence supporting my view on spending and the compromise to come, look at how Obama defines a "grand bargain".

Tuesday, October 23, 2012

Thinking like an economist at the Sooner Club Tailgate

As part of the benefit package associated with being a large enough donor to The University of Oklahoma Athletic Department, our group gets two complimentary passes to the Sooner Club Tailgate before each home football game. The event is described as:

Before each home football game, more than 5,000 Sooner Club members are treated to a variety of complimentary food and beverages provided by more than 40 local restaurants and vendors. Special entertainment is provided by the Sooner spirit squads, the Pride of Oklahoma marching band, and our own emcee and DJ.

It is held inside the Mosier indoor practice facility originally used by the football team (before the Sooners discovered the forward pass circa the 1990s—the roof is too low) and currently used by track & field teams. It is almost as large as a football field inside. The overwhelming majority of the floor space from the middle out is occupied by tables and chairs while the surrounding sidelines on both sides host the various vendors of food and beverage.

While I don't actually over analyze this opportunity as described below, I thought it would be a good thought experiment to explore.

Here are some relevant facts to consider as I try to think like an economist:

  • The event opens 2.5 hours before kickoff; I like to be in my seat at least 45 minutes before kickoff.
  • I generally will be on campus 2.5 hours prior to kickoff--I am already in the area naturally but on the other side of campus. I enjoy eating something before the game and I always have done so.
  • The line to get into the tailgate begins forming outside the doors about 30 minutes before it opens. Getting to the front of the line would mean leaving 30 minutes earlier from my house.
  • The event is very crowded for the space and lines are present at nearly every vendor booth constantly.
  • Vendors often run out of some items. Occasionally, one will run out of all items.
  • The event is about a half-mile walk out of my way, which would mean, of course, a half-mile extra in return.
  • There is a good variety of food offered considering only tailgate-likely foods. The food is very similar to what is offered elsewhere inside and outside the stadium. More on this in the strategy below.
  • Generally, I attend the tailgate with my 8-year-old daughter.
  • Just to be clear this is an all-you-can-eat event including all-you-can-drink with soft drinks, bottled water, and beer offered. The beer offered includes real beer like Shiner Bock and that from the local microbrewery Coach’s Brewhouse along with nonsense like Budweiser, Bud Light, and other forms of badly flavored water.
  • The two complimentary Sooner Club Tailgate tickets are part of the package for the stadium tickets my group purchases including the season donation. Receiving the tickets cannot be avoided and does not factor into our decision to purchase our stadium tickets. Regardless, once I’m at the game, it would be a sunk cost even if we had explicitly purchased the tickets for the purpose of attending the tailgate in the future. More on this in the strategy.
  • You basically can’t take food or drink out of the event, but only beer is really monitored. A bottled water or some of the packaged goods like Hostess donuts pass inspection. The layout of the facility and its surroundings preclude the risk that someone would make a repeated run in and out distributing food to outsiders.
  • A normal plate at one of the vendors inside the tailgate would probably be priced outside the tailgate on game day at between $8 and $12.

Here are some irrelevant facts to disregard:
  • The Sooner Club sells tickets at the door priced at $30 for adults and $15 for children 12 and under. Since it is just me and my daughter and we have tailgate tickets already, these price points are not important. This is the first lesson. To determine the value of the event to me, I must consider my opportunity cost in obtaining it--the value of the next best alternative foregone. The price of the tickets at the door is not relevant.
  • A normal plate at one of the vendors would probably be sold at the vendor's primary place of business on a normal day at between $5 and $8. Also not relevant and in this same vein, a hot dog in 1940 cost $.30.

Here is my thinking and strategy:

Do I attend?
  • If the weather is bad (rain or snow or high, very cold winds), the decision not to attend the tailgate is easy. The walk over is unprotected from the elements. I’d rather stay warm and dry in the Student Union and pay for the same meal. The price of my food thus at most equals the amount at which my daughter and I value being warm and dry. Remember, the tickets, even if explicitly purchased before the season, would be a sunk cost at this point.
  • Otherwise, I will generally attend unless there are some special circumstances like meeting friends from out of town before the game. Again, the price of food purchased as an alternative would be equal to or less than the value I place on meeting the friends. So far this year I am 3 for 3 in attendance. I must need better friends :).

Do I get there early to get to the head of the queue before it opens?

  • No. The food is good, but that isn't really important. It must already be good enough because I am attending. What matters is the range of opportunities within the tailgate (the best food relative to the worst food), and all this leads us to the expected food. Remember that I said vendors do run out. Presumably the highest demanded food has the greatest chance of running out. Also, there are varying lines of people within the tailgate waiting to get each vendor’s food. The best food will have the longest and quickest forming lines. So, I was wrong before? Here is where thinking like an economist helps and leads me to the answer not to get there early.
  • It is unlikely that there is much difference between the vendors for the typical consumer. If you have very atypical tastes, this might be a reason to get there early. More likely it would be a reason not to attend as the cost would be too high. Snobby foodies can’t afford to attend “free” tailgates.
  • If there were much of a difference, the line to get in would form that much earlier and the fight inside would be that much more intense. It is hard to beat the crowd when price is not a rationing tool.
  • I like to watch as much football as possible on Saturdays. My daughter can't walk as fast as me. Leaving early or rushing across campus to get to the front of the line is costly. And we can safely assume it isn't worth it. The food isn't likely to be that much better than the competition outside, isn't likely to be greatly different once inside, and isn't likely to all run out—not if the Sooner Club really intends this as an enticement to be a big donor. 

Am I picky about what I get to eat?

  • No. While not snobby, I do consider myself a foodie. The food here is good, and some is better than others. Do I scout out my options on the website before the game knowing some vendors drop in and out? Do I do an initial recon mission once first in the facility to plan my attack? No and no. Remember, there is a limit to how good and how bad the food can be, and the internal lines will smooth out the differences for the typical consumer. I do consider myself fairly typical in this case.
  • An example: Bubba’s BBQ is very good. Burger King is an average burger. Bubba’s BBQ is at the back, and the line moves slowly. Burger King is at the front and is quick. There are a lot of trade offs here, but they most are negligible except for my time. The marginal benefit of the BBQ over the burger is greatly outweighed by the marginal cost of 10 minutes longer spent waiting. My goal is to get in, get something decent to eat, get over to the game.
  • You just can’t go that wrong or that right in this situation. There is no grand arbitrage to be played here. Grab some food. Attempting to find the optimal solution is costly to the point of ridiculous. The margin of error on food choice is much, much lower than the risk of wasting your time. In short, you're fearing regretting the wrong thing (food choice instead of time spent).
  • The one area where I will exert a little choosiness is beverage. My preference is beer, but my first choice, Coach's Brewhouse, is usually out of reach because the line is too long. Moving down the preference chain until time spent is worth the taste usually lands me at Blue Moon or Shiner Bock. Again, the best choice is made at the marginal trade off.

How much do I eat?
  • It is not that good; hence, it is not worth getting stuffed. In fact, I think the risk of overeating is high; so I am careful to be moderate--unlike I was in expounding upon this post.

Monday, October 22, 2012

The coming economic mega boom

I was recently handed a copy of the working paper by Robert Gordon, “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds”. Spoiler alert, the music is about to stop for economic advancement in the U.S. The paper is thought provocative, but I put it down unconvinced. One of the better reviews I’ve read came from Gary Becker. Gordon’s paper has a strong flavor of “everything that can be invented has been invented” to it.

My counter to the Gordon hypothesis might be summed up in the actual quote from the former Commissioner of Patents, Charles Holland Duell, “In my opinion, all previous advances in the various lines of invention will appear totally insignificant when compared with those which the present century will witness. I almost wish that I might live my life over again to see the wonders which are at the threshold.”

All right, so “you ain’t seen nothing yet” is not exactly a counter hypothesis. But it does summarize my optimism which is rooted in a more sound argument. Like Becker, I believe dividends from the current industrial revolution period as defined by Gordon have yet to fully play out. The most significant potential gains and growth from major improvements similar to the epic advances cited by Gordon like running water, the internal combustion engine, and electricity would be medical advances (imagine a world where no one gets sick, ever; illness as a quaint artifact of history) and true energy independence (completely individualized, self-sufficient machines able to generate enormous amounts of energy on demand; a power station in every house, car, device).

It is reasonable that the Gordon thesis is ever more easy to convince oneself of. What comes next becomes further and further out toward what we can’t imagine. Let me reverse Gordon’s thought experiment (option A is you get running water and indoor toilets plus 2002 levels of electronic technology; option B is you get everything since 2002, but you have to give up running water and indoor toilets—a false-bargain, straw man if there ever were one). Here is the reversal: Pick the easier task. Task 1 is to explain to someone in 1800 the idea of running water and indoor toilets. Task 2 is to explain to someone in 1930 the idea of how you saw a status update on Facebook which caused you to program your DVR from your iPhone. The next technology is more difficult to imagine; hence, we fall for the illusion that advancement is also more difficult per se.

Some other critical thoughts I had were that:
  • Throughout Gordon’s paper there seems to be an under appreciation of quality improvements. Airplanes may travel at essentially the same speed as they did in 1958, but there is no comparison between the available experience then and now.
  • He cites four classic examples of greatly mistaken past innovation pessimism but then seems to build his own as he elaborates on the six headwinds.
  • In the headwinds I detect some cause/symptom confusion. The education and deficit headwinds, numbers two and six, have this quality.
  • Globalization cannot be a bad thing—part of headwind number four. This is especially odd considering the mostly positive ink he gives to immigration.
  • I agree that a consumption-based analysis is more compelling than income-based analysis. In fact, I believe that will be the only way to fully capture the measure of economic well being in the future, if not today, and that it should be uniformly extended to all—not just the bottom 99 percent. To call income inequality a headwind seems to miss the point that this is simply a bad statistic.
  • I agree with Becker’s optimism on addressing the first headwind, reverse demographic dividend, and the fifth headwind, energy and the environment.
I do agree that economic advancement probably is more a surge-subside phenomenon rather than the smooth glide path upward as the standard Solow-era modeling suggests. But is the party over? Technologies like 3-D printing and continuing communication advances (both a person organizing his thoughts more easily as well as collaborating thoughts more easily) suggest that the cost of experimentation will plummet in the coming decades. Whatever is left to be found, we have a better and better chance of discovering it.