A low-hanging fruit rant

Re: The Great Stagnation

I've been thinking about low-hanging fruit from changes in political economy. I mean this as a constructive group of points, ideas, questions  . . . I don't mean to go off on a rant here, but nevertheless . . .

There still seems to be low-hanging fruit when we look at certain aspects of government policy. Tax code simplification and ending the war on drugs are two great examples. Immigration expansion and school competition (where tax dollars follow parental choices) would be two others. I'm not saying these would be or should be politically a snap--obviously they are not--but consider simplifying the tax code:

• Where are the environmentalists on simplification of the tax code? Why can't we free up these resources (labor is the huge one and as we know our precious time is the one resource environmentalists tend to disregard, but still)? 
• Why can't we get liberal, conservative, libertarian, Democrat, Republican, et al. to agree on this? It can be as progressive as you like. Let me concede to your desire for an intrusive, expansive, colossal government. Just don't make me use a spoon to dig your ditch.
• How can we not defeat the vested interest on this issue? If your business plan depends on tax policy (tax lawyers and accountants, MLPs (to a degree), some charities, realtors, et al.), you are not adding value to society. 
• The bootleggers and Baptists on preventing tax code simplification would be those who want to punish others aligned with those who want to advance their own special, vested interest. I'm not sure which group is the bootlegger.

My point is that these changes would be affect massive improvement to society. The magnitudes are strong. There are still low-hanging fruit if we will just pluck them. 

You've got to know when to hold 'em

As an investment professional, I run into what I will term "the gambling analogy" a lot. Clients often use it, and in many cases investment professionals will as well. I'll admit it is sometimes tempting as it is intuitively appealing. However, I believe it is flawed reasoning in at least four respects. I will get to those shortly.

Specifically, the gambling analogy is made anytime someone refers to investing as gambling. Often times it is applied exclusively to stocks somewhat because conventional wisdom holds that bonds don't go down in value or at least aren't subject to massive volatility . . . Doh! Doh! Doh! You'll hear the analogy referenced as an off-the-cuff explanation when a stock investment suddenly loses value, "we knew it was a gamble . . . ." You'll hear it as a point to avoid "risky" investments, "I don't want to gamble with this money." You'll hear it as categorical excuse for risk taking, "Life is a gamble. You could die driving to work."

The last one should be the easiest to defeat. Life is not a gamble. The lottery is. You cannot strike it rich driving to work. Life is risky, but risk does not equal gambling. Of course gambling can be a risky activity, and the magnitude and nature of that risk can vary greatly.

We've got to disentangle risk and gambling. Risk is nuanced and subjective. Gambling should be more concretely definable. For example, while it can be descriptive, it is sloppy in a serious conversation to define a long-shot as a gamble. To understand why let's get a working definition of gambling and examine a popular form of the activity.

Let's define gambling as playing a zero-sum game against an advantaged host (aka, "The House") with an expected value that is slightly negative for the player(s). This game offers highly likely, small losing outcomes and highly unlikely, large winning outcomes for the player(s). A common example would be a slot machine. But is a slot machine really a good way to describe say the stock market? It may be, but in a way counter to the intuitive use of the gambling analogy.

Since I continue to allude to how it is inappropriate to apply the gambling analogy to investing, here explicitly are the four ways taken specifically from the point of view of the investment professional:

1. Many people have moralistic beliefs that frown upon or strongly oppose gambling per se. Using the gambling analogy would be counterproductive if not insulting with this group.
2. In a gambling setting the player or gambler typically is taking on an exceptionally more extreme risk/return tradeoff than an investor.
3. Gambling is at least monetarily a zero-sum game while investing is not.
4. The investor is The House.

The first point is self evident. The second can be seen clearly in comparing your 401(k) plan and the Powerball lottery. The third relies on an understanding that investing is the act of allocating capital. When a capital allocator like myself matches people with wealth to people with good ideas, more wealth is created on average. That leaves the fourth point.

Let's look at the total return of the S&P 500 since 1975 as seen in the chart below. 

Because total return has a compounding effect, we'll need to look at the chart in log scale as below. That way it will compare logically (apples-to-apples) to what I'm about to show next.

Now let's see how that compares to a slot machine. To do so I went to the always helpful and informative Wizard of Odds. The great and power wizard breaks down a very typical slot machine here. Using that information, I was able to construct a slot-machine simulator in Excel. To get an analogous comparison to our investment in the S&P 500 above, I examined starting with a bankroll of $1,000 playing this $.25-coin slot machine two coins at a time. Here is what that looks like from the player's perspective using one randomly generated set of play (for those of you who don't believe that slot machines work using random numbers with independent draws, The Wiz has some lessons on slot machine myths and facts for you): 

But what if we flip it and look at it from The House's point of view? 

Ah, there it is. Remember the definition of a gamble before where I said, "This game offers highly likely, small losing outcomes and highly unlikely, large winning outcomes for the player(s)"? From The House's perspective we would say, "This game offers highly like, small winning outcomes and highly unlikely, large losing outcomes." And now you see my fourth point. Slow and steady wins the investment race.

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. 

Did you ever have to make up your mind?

My daughter asked me a random but intriguing question tonight in the form of a game. She said,

I'm going to name two things. Whichever one you choose, you have to give it up for life. The other you can have as much as you want. Coffee or Wine?

I approached this seriously. I was amazed at how difficult the decision was. I'm saying yes to one and letting the other one ride--FOREVER! Weighing my options involved considering substitutes. I chose wine meaning I give it up while keeping coffee. For me beer and liquor are better substitutes for wine than tea and other beverages are for coffee. This would no doubt involve changes. I'm glad it was only a hypothetical.

One thing interesting to me was how I chose the less regulated and more tolerated drug, caffeine, over the more frowned upon alcohol.

Also interesting is the fact that my reasoning guiding my decision is the same reason why the best restaurant choices are found in the biggest cities, why Lebron James makes more money than Russell Westbrook who in turn makes more money than the best school teacher in the country, and why Bayer aspirin costs more than generic aspirin--substitutability matters.

Highly linkable

Recently on our visit to Cape Cod as we passed the only drive in on the Peninsula, the Wellfleet Drive-In Theater, my wife and I wondered why more drive ins or drive in like spots hadn't found spontaneous crowds with the help of Twitter and Facebook. Seems like an easy and trendable enough idea. At one of the many abandoned drive ins or against a large, plain building or in a large storm drain, a group gets together to watch a movie. Of course if you choose the storm drain, you'll need a fast car to get out of there like greased lightning if a flash flood erupts. High-enough quality projection equipment is surely cheap now. Well, maybe this is why we don't see more creative ideas like this.

Things are bigger in Texas including the oil booms.

Poverty got you down? Steven Landsburg has the answer to your prayers. A lesson in the practice of faith-based (or magic-based) economics.

And don't miss Remy's take on the NSA scandal.

No Great Stagnation: Celebrity Escort edition

That title should get some search hits . . .

In the vein of argument against Tyler Cowen's Great Stagnation story, I offer this low-hanging fruit. Among the many, many things my grandfather kept from his many, many travels to the State Fair of Oklahoma were two new car brochures. One is for the 1983 Chevy Celebrity and the other is for the 1984 Ford Escort. These were once considered automobiles worth of use by famous and heroic investigative reporters. Today they are . . . I'll let you judge for yourself. Enjoy!

PS. I know the Tempo ≠ Escort exactly.

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 . . .