Who benefits from recruiting deregulation?

The media tend to follow conventional wisdom. Sports analysis is much so the rule than the exception. Here is case in point #342 . . .

CBS Sports is guilty in this case by failing to connect the dots to the obvious--that Alabama has more to lose than gain in the NCAA's new recruiting deregulation. 

Here is the big surprise:

But, according to al.com, Saban told Birmingham's Over the Mountain Touchdown Club at its Monday banquet that he didn't think the changes were necessary.

"I'm kind of happy with the system we have now," Saban said. "To use the idea that, 'We can't monitor it, so why don't we just make it legal?' I don't buy into that at all. It's like saying, 'People are driving too fast. We can't enforce the speed limit, so let's just take the signs down and let everyone go as fast as they want.'"

No kidding he's "kind of happy with the system we have now". So was Pan Am in 1974 happy with airline regulatory policy. Saban is effectively responding to the question should the NCAA change with, "No! I think you should stay the same wonderful person you are today." Unfortunately, this change is just a change in clothes. Real reform will be met with much more kicking and screaming.

CBS is also guilty of confusing success with wealth and power:

It has been widely speculated--including by [Georgia athletic director Greg] McGarity himself--that wealthy programs like Alabama would gain a competitive advantage over less-wealthy schools by employing whole staffs of recruiters.

Georgia is a "wealthy" program. Georgia is on the same side of this as Alabama. It is the Georgia Techs and Boise States of the world who stand the most to gain from NCAA ease up.

Looking to the example of OU and OSU, it takes one wealthy donor to elevate a program to much higher plateaus. But staying there is made very difficult in a world where competition is limited in scope and scale. By removing certain dimensions of differentiation and competitive advantage (that is by having stringent recruiting rules as there are currently), the NCAA helps Alabama, et al.

A TBTF TARP exchange

Over the past two weeks I've been having an on-going conversation with a colleague at work debating the virtue of TARP back in the fall of 2008. While the colleague agrees with me on virtually all points related to the problems with Too Big Too Fail (TBTF), the government's role in creating the financial crisis, the problems with the responses, etc., he disagrees that TARP could/should have been avoided. He tends to see it as TARP or catastrophe  Because I thought it was interesting, I've included here some of our exchange as conducted over email. Some names have been changed to protect the innocent.

From me:

I see the case against TARP as follows:

•  The common pro-TARP narrative is basically fiction.

• We were not at the edge of doom (at least there is next to no evidence for this view)

• It was not approved as originally sold nor implemented as approved

• TARP rewarded through bailout those who had made very poor economic decisions.

• TARP did not and could not ease credit conditions nor bring liquidity to the system. That responsibility was The Fed’s and if they had done their job, the recession would have been a bump rather than a crater, and the financial crisis would have been short lived if nonexistent. The financial crisis was 80% an effect but only 20% a cause.

• TARP was an avoidable mistake in that there was ample time to come up with alternative solutions even if we assume the basic premises supporting TARP’s passage.

• There were weeks before the first TARP bill and between the initial failure and eventual passage.

• There were alternative ideas and other methods to buy time such as suspension of mark-to-market accounting, bankruptcy options including “speed bankruptcy” whereby equity is wiped out and creditors become the new equity holders, et al.

His response (in red):

I see the case against TARP as follows:

•  The common pro-TARP narrative is basically fiction. DISAGREE

• We were not at the edge of doom (at least there is next to no evidence for this view)  DISAGREE (DEPENDS WHAT DOOM MEANS)

• It was not approved as originally sold nor implemented as approved  AGREE

• TARP rewarded through bailout those who had made very poor economic decisions.  AGREE

• TARP did not and could not ease credit conditions nor bring liquidity to the system. That responsibility was The Fed’s and if they had done their job, the recession would have been a bump rather than a crater, and the financial crisis would have been short lived if nonexistent. The financial crisis was 80% an effect but only 20% a cause.  DISAGREE WITH THE FIRST SENTENCE (AT LEAST THE FIRST PART), AGREE WITH THE SECOND SENTENCE AND UNSURE AS TO THE THIRD.

• TARP was an avoidable mistake in that there was ample time to come up with alternative solutions even if we assume the basic premises supporting TARP’s passage. AGREE

• There were weeks before the first TARP bill and between the initial failure and eventual passage.  

• There were alternative ideas and other methods to buy time such as suspension of mark-to-market accounting, bankruptcy options including “speed bankruptcy” whereby equity is wiped out and creditors become the new equity holders, et al.

So we’re in agreement, then, to separate investment banking from “traditional” banking....

My response:

I think you have to separate “doom” for the big, problem banks and “doom” for us all. They are and were not the same.

That applies as well to the credit easing part. Did it ease credit between the problem banks (banks as a broad term where financial institution is more appropriate)? Possibly this was helped by TARP, but even that is debatable. It is not clear that TARP made anyone more willing to lend to those bad banks.

Are you unsure of my 80/20 probabilities or unsure about what I mean in general. I believe the monetary contraction beginning in 2007 created the financial crisis largely. That is what I mean by 80/20 effect/cause. I am not firmly committed to exactly 80/20 . . . I know you know that.

I see little to no help in separating “investment” and “traditional” banking. If any financial institution gets into trouble, we did and will bail them out. If you can wall them off and credibly commit that we will only bailout the banks that fit a specific description (maybe only those who qualify for and pay into the FDIC), then maybe I could come around. But that is a second-best solution at best with lots of potential for major downfall.

He then asked me under what circumstances would I condone or authorize a bailout. I emailed my response:

quick answer to the "who would I bailout" question

On a personal level, I would bailout my kid. But think of [a person] who obviously has severe financial problems. Assuming the bailout(s) from her father are just simply money gifted, they don’t really help her. They only kick the can down the road. Bailing out the kid doesn't really count as a solution.

In the same guise, bailouts in the larger world only address one part of bigger problems. To the extent our problems are magnified by past behavior and bailouts (moral hazard), the problem only grows bigger. In the continuum of the economy we end up favoring one group (those living now who supposedly benefit from the bailouts) at the expense of another group (the future who has to deal with the next bigger problem and who has to pay the debt incurred along the way).

Would I bailout Illinois, California, Europe? What does it mean to bail them out? Make others pay for their mistakes (promises that now can’t be kept)? I would not. No bailouts. Workouts, yes. Bailouts, no.

TARP was a bailout. Very far from a workout. I just can’t see the existence of TARP in the vacuum of this or nothing. That doesn't make sense to me.

A very long (and good in my opinion) discussion followed a few days later where another colleague was pulled in. I enjoyed the two-versus-one debate as the other colleague opposes my negative view on TARP as well. If anything, this colleague is even more convinced that it was the end of days but for TARP. Neither colleague likes TARP, they just don't see that there were other solutions available. When all we can muster is cronyism, we have fantastically failed. I see TARP as the creation of corrupt interests with the backing of plainly unimaginative, pitifully ignorant, and foolishly panicking leaders--leaders in name only as they were devoid of leadership.

Highly linkable

Been too busy to blog, but I've had some thoughts for upcoming posts--I haven't forgotten about you, dear readers. Here are some links to tide you over:

Let's start out with a controversial one. Reason has a great piece on The War on Sex Workers. A quote:

If we are going to call attacks on reproductive and sexual rights a “war on women,” then let’s talk about a war on women that has actual prisoners and a body count. It’s a war on the women engaged in sex work, waged by women who will not hesitate to use their opponents’ corpses as political props but refuse to listen to them while they are still alive and still here to fight. 

Megan McArdle discusses the trend toward elitism, college-bias, test-taker/certification-bias, et al. (Hat tip: Arnold Kling.)

Ronald Bailey at Reason lists and details the top 5 biotech crop lies.

There continue to be great posts fighting the good fight on the minimum wage nonsense. I'm impressed by how varied are the approaches taken in these generally short posts. This might be the best of this bunch. But see this and this and this. They keep going and going and going. And yes, I'm a sucker for posts slaying fire-less dragons.

Joel Best at Cato Unbound captures a good example of how magnitude matters.

Two more from Scott Sumner: one on how we lie in undergrad econ and one on how reports of the death of the Chinese economy have again been greatly exaggerated.

The thermostat in Hell must have just edged under 32F because the NYTimes is making sense on health care.

On the lighter side, check out this fake Guy Fieri menu (Hat tip: Jason Kottke).

Highly linkable

Roger Pilon offers a strong critique of the most recent State of the Union address.

This interview with Steven Landsburg shows how not all economics is dismal.

I've refrained from writing directly on Obama's call for a $9.00/hour minimum wage because I've felt it was a political ploy hoping to bring distraction, and I didn't want to fall for his banana-in-the-tailpipe trick. But thinking more about it, there are two reasons it should be discussed: One, it is a bad idea founded on horrifically bad economic theory, and we must fight the good fight until this kind of nonsense no longer is a political option. Two, I believe his political strategy is to bring up an emotional issue in which the common man feels aligned with Obama at first blush. Through this demagoguery, he strengthens his public-opinion standing heading into the debt ceiling/sequestration debate. Rather than avoid this battle, I think the better position is to engage so as to Obama on the defensive. Therefore, I offer Mark Perry and Bob Murphy.

Updated: On the lighter side, I wanted to include two pics that among many caught my eye browsing Minteriors. Enjoy.

Obama's confusion about "wise" investment

In his latest State of the Union address, President Obama referred to investing, investors, or investment 13 times. Here are a few of those references:

So let's set party interests aside, and work to pass a budget that replaces reckless cuts with smart savings and wise investments in our future.

It's not a bigger government we need, but a smarter government that sets priorities and invests in broad-based growth.

If we want to make the best products, we also have to invest in the best ideas.

Unfortunately, making wise investments isn't as easy as asking Mr. Obama how many licks it takes to get to the cash-flow center of a public equity fund. The track record of government investment is abysmally poor. And we shouldn't expect it not to be. The government lacks the vital characteristics necessary for successful investment decision making. Most importantly the necessary incentives are not only absent; they are in reverse. Government does not have a profit motive properly aligned with success (consider this the front-end of good investment incentives)--that is not to say that individuals and groups within government lack a profit motive. Government also does not have the correct feedback system whereby success is rewarded and failure is punished. Consider this the back-end of good incentives, and this is the reversed incentive part. Government tends to reward failure at the expense of success.

Another vital component largely and effectively absent from government is talented investors. Rather than attracting and nurturing creative, entrepreneurial innovators and risk takers, government tends to attract and nurture assembly-line bureaucrats and rent seekers.

Government is the wrong process for "wise" investment. Obama doesn't seem to understand this. His administration's malinvestments into solar, et al. are clear evidence of this. Aside from the fraud, there is a key problem with these types of investment. For the investment to be wise, it isn't sufficient to know what the actual technology of the future will be. As very difficult as that part of the task is, an equally challenging feature is getting the timing right.

Being too early to invest in even the right technology can still destroy resources; i.e., not be a wise investment. Imagine travelling in time to 1980 to invest in teaching HTML coding, manufacturing Boeing 787s or Airbus 380s, or building contemporary Whole Foods grocery stores in mid-western cities.

A famous investor adage is, "In the end I was right, I my timing was just too early." Another is that, "The market can stay irrational longer than you can remain solvent." We seem to be testing those two adages via government "investment" at an alarming rate.

What do you mean a multi-billion $ gov't program has problems?!?

How could this be? Back in the 80s a government program was hatched with the explicit goal of ensuring the poor had access to telephones and the implicit if originally unintended goal of making some firms profits while politicians felt good about themselves. Somehow it went awry. Well, the implicit purpose got out of hand enough that the program has crossed over into waste, fraud, and abuse land.

I asked how can this be? Exhibit 1 (the Baptists):

The Lifeline program—begun in 1984 to ensure that poor people aren't cut off from jobs, families and emergency services—is funded by charges that appear on the monthly bills of every landline and wireless-phone customer. 

Exhibit 2 (the Bootleggers):

The program, which is administered by the nonprofit Universal Service Administrative Co., has grown rapidly as wireless carriers persuaded regulators to let people use the program for cellphone service. It pays carriers $9.25 a customer per month toward free or discounted wireless service.

That's how.

I have personally seen this program in action from both sides: Poor consumers on a street corner under a tent signing up for a phone, and a newly rich entrepreneur rent seeker whose company signs up said consumers and then passes them on to a carrier or administers the telephone plan himself. And still somehow the program's illusory value carried it passed the media's suspicion for some time. I really don't know what it takes to sufficiently raise media suspicion--that would be valuable information.

This problem has more than just some good lessons in incentives including the classic B&B example. I think it also tells us something about how we think based on our reaction to the story (i.e., who we blame and who we pity).

If asked to list out the victims and culprits, who would go in which category? To me the victims are the people taxed to pay for this program and the poor consumers who the program intended to help--more on this second group shortly. The culprits are government officials who created the program especially those who helped craft its evolution to the current mess and the private firms who participated in the fraud--this extends to lobbying to expand/continue the program and encouraging or failing to properly discourage fraud.

Notice how I don't include the poor consumers in the culprit category. Not broadly at least. While certainly there were many who knowingly abused the system, I find it hard to put much blame on people in very difficult situations responding to incentives. In fact, programs like this can be a victimizing force in the lives of those it is designed to help. There are consequences to welfare programs, poorly designed or otherwise, and those consequences can include dependency. People in tough situations do not have the luxury of always taking the ethical high road. Just evaluating what is the ethical high road may be out of their reach.

Highly linkable

Robin Wiblin presents a strong challenge to the idea that most of us are moral realists.

Scott Sumner explains a bit about the multiverse and quantum mechanics using an economics framework.

Steve Landsburg picks up on a little deception by P-Kroog.

John Papola, the great rapper, offered a critique on the state of economics, which I generally agree with, and  Arnold Kling gives some additional thoughts.