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Andy Schwartz has penned the best analysis that I have ever read of the NCAA, its position as cartel, and the situation before it. Read it to understand the problem(s) and choose a side: Team Market (my group), Team Reform (the bootleggers and Baptists coalition of paternalist progressives and traditionalist conservatives), or Team Cartel (the NCAA today). I believe only Team Market is fully on the ethical and logical high ground. Team Reform's advocated position is not sustainable--the economic incentives will break it down as teams depart the model. Team Cartel might be sustainable in the medium term provided it can unconditionally win the multiple-front legal war it faces. I am being an optimist predicting that Team Market wins decisively and soon. I am simply being logical predicting that Team Market wins eventually.

Speaking of predictions, Randal O'Toole, the Antiplanner, discusses planning for the unpredictable as it relates to city planning and self-driving cars. And Mark Rogowsky makes some predictions about the business side of robo-cars, et al.

More predictions: Scott Sumner discusses some things that can't but will go on forever along with making some interesting predictions.

Here is a prediction that I will make in light of this excellent analysis (HT: Barry Ritholtz): Over the next 5 years hedge fund/alternative asset investment strategies will change A LOT while significantly falling out of favor among institutional money managers (anything outside of the retail brokerage level). I'll predict that in five year average fees are half what they are today and allocations are one-third lower. (UPDATE: To clarify, I am predicting that average fees collected are half as high in five years. If you think about how the average is affected, you'll realize this isn't as bold a prediction as it may seem.)

That's enough predicting for one post.

So Bryan Caplan has basically been following me around chronicling my strategy for success on my terms in life and in business.

Art Carden points out that while there are many negative aspects to poverty and most transcend time, fortunately a low income in absolute terms isn't one of them. Nothing gets you nothing . . .

I had the same reaction as David Henderson to this otherwise good personal finance article by Megan McArdle. People almost always misunderstand the tradeoff between 15 and 30-year mortgages as well as how to figure the cost-benefit of a refinancing decision. It's not about the time to payback on the closing costs and the likelihood of moving in the future. It is a comparison of two (or more) streams of cash flows discounted appropriately. Those other factors are just part of the input variables that must be included.

Like I said recently, the public doesn't understand inflation; Scott Sumner suggests the Fed may be coming around to understanding this and, hence, moving beyond inflation targeting.

WWCF: Sea To Shining Sea - Pot Freedom or Marriage Equality?

Which Will Come First?

50-State Legalization of Marijuana

or

50-State Licensing of Same-Sex Marriage

Let's be clear: both of these are coming and soon. Let's be clear as well on our position: it is a good thing. The magnitude of the first is substantially larger in terms of causing good. Ending this significant front in the evil War on Drugs will bear much fruit. The magnitude of the second is substantially larger in terms of indicating good. That society and its institutions are nearing a point of accepting and dare I say celebrating the choices and joys of others says volumes about where we have arrived morally and intellectually. Before we move on to the prediction side of this post, let me lay one more point down: one does not have to morally agree with either the use of marijuana or the act of homosexuality to still reach the moral conclusion that we (individually or through the government) have no right to use force to disallow either one. The first-best solution is for the government to play no role in either one of these peaceful activity/association.

It may seem obvious to some that a U.S. presidential candidate will campaign on legal pot for every chicken quite soon giving marijuana the upper hand. After all, the New York Times now supports it. Indeed as their new series puts it 37 states representing about 76% of the U.S. population current have liberalized marijuana laws. But in order for this race to declare a winner, the subject must be fully legal and recognized both within each state and federally. It is just a matter of time before Colorado or Washington residents see just how illegal marijuana still is within their borders. Oh, wait, it already happened...

Still, the trend is undeniable on the marijuana front. And when one looks at the state-by-state prohibition of state recognition of same-sex marriage, one sees significantly more opposition (see the chart at the bottom of the link). Yet, the trend here is both certain and strong. 

What really puts same-sex marriage ahead of the game is the fact that it has been scoring victories in the courts, and that really gets to the heart of this WWCF including why this isn't a fair fight. Marijuana is still the outcast. It is the humorous back story in the R-rated movie. Same-sex marriage is the lovable story line in the family-TV comedy. 

The ultimate force driving same-sex marriage ahead in this race is that while it literally needs governmental approval to exist, marijuana only needs governmental tolerance (or impotency in the face of economic forces more powerful than puritanical desires). The fight for marijuana legalization relies much on the unseen (the benefits of ending prohibition). The fight for same-sex marriage relies much on the seen (the people denied benefits).

I give the edge to same-sex marriage and I predict we'll have both realized (nation-wide, state and federal) within a decade. Freedom wins! Freedom wins! Freedom wins!

Cross posted at Liberty.me.

Highly Linkable

I've been on some of these. Perhaps I should set a goal to eventually be on each one. See if you can spot the one Forrest Gump was on. There is also one that looks a lot like the one where Joan Wilder first got into trouble (but it isn't the one; that one was in Mexico posing as Columbia).

Let's hit these by author in this edition:

First, Don Boudreaux makes quick work of the childish argument "If perfection is so good, why isn't anybody perfect?" Next, he points out something cool about keeping cool this summer.

Megan McArdle hits all the notes on why we need to end the corporate income tax. One quibble: I completely disagree with her idea of replacing it with higher taxes on capital gains/income. There is no logical or moral reason to tax the same thing twice and in a way that encourages wasteful consumption--taxing savings and investment encourages consumption today that otherwise would not take place.

Speaking of consumption, Scott Sumner points out that one implication of Piketty's wealth tax ideas would be wasteful consumption. Moving away from consumption, let's discuss aggregate demand, which isn't just consumption as Sumner points out. I know a lot of smart people who don't understand that they don't understand this concept.

Next time you're aggregate demanding you might want to use the retail version of Uber as detailed by Erika Morphy.

Finally, Timothy Taylor discusses the government's arrival on the scene of "The Great Honey Bee Panic of the 21st Century" (title all mine) just as the market is done making short work of the problem.

How The Worms Might Turn

Political thought experiment/prediction: In an effort to stay politically relevant and viable, Republicans become the party steadfastly and openly defending the old-age entitlement state (Social Security, Medicare, et al.). Democrats visit the Wizard and come away with courage, a brain, and even a heart for those truly needy. They shun the process of robbing from the young and non-white to give to the elderly (especially white elderly who tend to be of above-median wealth). All the easier for Democrats as the programs undeniably become cash-flow insolvent.

The demographic trends for Republicans are not good. They are the newspapers of political parties as their supporting base is growing older (hence, dying off). We've already seen a glimpse how quickly this prediction's premise can play out.

Democrats are the cable television of political parties as their supporting base is somewhat locked in, but they continue to disappoint. They aren't seeing the growth either, but they've managed to avoid major depletion. This might change given a disruptive enough force (perhaps libertarians can drive a large enough wedge between cronyism and the Occupy sympathetic).

Trying To Understand Inflation

Scott Sumner makes the case that economists generally can’t agree on what inflation is, and even when they do, their understanding is at odds with the general population. Let’s explore this a little:

Imagine an economy with one laborer, me, one capital owner, you, two consumers, you and me, and two kinds of goods, apples and oranges. It takes me one hour to produce one apple and one hour to produce one orange. I can only work a maximum of 500 hours in total per year. I get paid one dollar an hour, but you get half of my wages (this makes it easier to introduce a monetary system into this fictional economy rather than having the capital owner retain the product--just assume after production the fruit is co-owned by you and me hence we "buy" it from the coop). Let's start with the price of apples at $1 and the price of oranges at $1. Another way of looking at it is to say the price of an orange is one apple and the price of an apple is one orange.

Fast forward to one year later where apples and oranges begin the year at the same price of $1 each (sticky prices) but then rise to $1.17 for apples and $1.05 for oranges (details how are below), my wage rate is still $1 per hour (sticky wages), but my productivity has increased whereby it only takes me 45 minutes to produce either fruit. In this story how can we meaningfully talk about "inflation"? Prices have risen, but so has productivity. In fact, productivity has potentially increased 33%. And wages are flat for the time being. None of these variables alone really tells the story. John Cochrane might say we’re on to something.

And if a monetary authority (an entity that controls the supply of money such as a central bank) targets "inflation", we start to see big problems. David Beckworth tells it better and more thoroughly than I can.

Picking up on one of Beckworth’s claims, we can see from our hypothetical apples and oranges economy that it will look like the supply of money needs to be loosened when in fact it needs to be tightened to allow total spending in the economy (nominal GDP) to be maintained.

Let's assume in the first year I produce 300 apples and 200 oranges, and then you and I each separately purchase/consume 150 apples and 100 oranges. Total spending in year 1 is $500 (500 fruits at $1 each). 

[here comes the yada, yada, yada...]

In the second year I produce 360 apples and 240 oranges taking just 450 hours to do so thanks to my enhanced productivity which leaves time every day to pretend I'm Rip Van Winkle while on the clock (you'll see below why I would stop working at some point short of maximum output--360 and 240 are somewhat arbitrary numbers). My total wages are $500 still since I'm still getting $1 per hour for 450 hours of labor and 50 hours of napping. You still get half of my wages, but additionally the central bank gives you $100 and me $75 (out of thin air) so as to maintain the monetary authority's desired ~2% inflation target in the face of a 33% rise in productivity* ($175 is about a 35% increase over the $500 monetary base). I have $325 and you have $350. As we attempt to make our purchases of apples and oranges presumably to get at a similar consumption arrangement as before (half of each type of fruit for each of us), we bid up the price of each good somewhat so that the market can clear and in the process we change the consumption arrangement some. Your greater purchasing power allows you to bid up your slightly preferred fruit, apples, a little relative to oranges. The prices settle at $1.17 for apples and $1.05 for oranges (these prices are arbitrary in the example—just one of many ways the math will work out). You walk away with 190 apples and 121 oranges while I get 170 apples and 119 oranges (just one of many possible outcomes). This makes total spending in period 2 $675 [$1.17 x (190+170) + $1.05 x (121+119)].

We can summarize the economic situation: Total spending, "nominal GDP", is up dramatically (35%) while the "real GDP" is only up 20%. The monetary authority wanted only about 2% price inflation but got a 15% level. The economy could potentially be producing 11% more fruit than it is actually producing. The Cantillon Effects of you getting $100 and me only $75 from the central bank may be unrealistic and are not central to the story. I believe there is something to it and it can have distributional effects as it does here (both in the price change and ultimately the quantities of apples and oranges we each get to enjoy). Don’t get lost in this, though; it is not the central theme—rather understand that inflation is a murky subject and policy based on it can have severely adverse consequences.

It was my expectation of the central bank's inflation targeting which led me to shirt instead of producing more--I happened to stop at 360 apples and 240 oranges. The high rate of money supply growth was a negative shock to my purchasing power. I should have seen my $1 per hour going further as the price of apples and oranges came down in nominal-dollar terms, labor-hour terms, and substitute-good terms (apples for oranges and vice versa). If instead of targeting inflation the central-bank targets nominal GDP to rise about 5% such that nominal GDP should be about $525 in year 2, prices will be allowed to fall and my purchasing power because my wages are sticky will be rising; hence I will be incentivized to produce closer to the the economy's full potential. In which case I will be doing a lot less shirking. Year 2 would look more like this: I produce close to 667 total fruit, the money supply increases about 5% rather than 35%, the prices of apples and oranges each fall about 25% (a 33% productivity increase implies a 25% price decrease) but is offset some with the 5% increase in money supply, and the economic distortions are minimized. Happily ever after . . .

*The key here is that the central bank doesn’t completely understand the increase in productivity, and it realistically wouldn’t. In a more realistic, fluid economy what they would see would be falling prices or at least downward price pressure for apples and oranges. Productivity gains would equally be disguised as underemployment (after all, I am napping). The feedback loop keeps telling them to fight deflation—i.e., increase the money supply.

Highly Linkable

America is under attack. Literally thousands of people are invading from our exposed southern flank. We must summon great courage to repel this threatening force of . . . oh, wait. It's children. This is perhaps a tipping point in the clustered calamity that is our xenophobic immigration policy, our lack of coherence in dealing with people in need (you can't cry "amnesty creates moral hazard" when the moral hazard is an economic boon), and our inhumane and uneconomic and tyrannical drug war. Luckily, one Grumpy Old Man is here to provide wisdom.

What's the worst low-carbon energy alternative? The answer, my friend, is blowing in the wind . . .

Russ Roberts and Mike Munger discuss many steps forward, while Megan McArdle laments one step back.

This is a subtle, (should be) obvious, and great point by Art Carden on the minimum wage debate. If you don't get this, you are truly living in economic, ivory tower fantasy land.

Sticking with Art, here is his attempt at Bryan Caplan's challenge to pen how conservatives are often quite authoritarian. Sex, drugs, rock & roll, war, and so much more. Bryan made the case that liberals (more appropriately named progressives) are quite authoritarian. I strongly agree with both, and one thing that stands out to me is how much more blatant conservatives tend to be in their acts of authoritarianism.

Sticking with art of a different sort, Sumner makes two excellent points about the city of Detroit's apparent art wealth--namely that Detroit can dig out some by selling some assets and that it is the reasonable thing we should expect but some find it hard to apply this logic when dealing with a government entity.

Investing Is Not A Sport

Investing using the sports mindset will leave you saying, "I've made a huge mistake." And it doesn't just take something as colossal as buying real estate in Iraq circa 2002. It is little decisions made all along the way. Examples:

• Buying a stock and then watching its day-by-day or even minute-by-minute performance. This includes trying to explain every fluctuation in price. Most of what goes on over short periods is random noise. This is actually true of sports as well, but it is part of the allure of sports. However, following your investments' gyrations will lead to poor decision making and potentially heart failure.
• Falling in love with a stock. You aren't a fan, you're an investor. You're making an educated evaluation of the asset's value. She's a beauty, but don't fall in love. She's one in a million and there are bound to be plenty better. 
• Thinking that you "obviously" should have purchased some asset that recently had a great run. There is nothing obvious before the fact in investing. That "couldn't miss" real estate deal undoubtedly had tremendous downside risk that just didn't happen to play out. Remember, the reason you're even thinking about it is because it happened to be a winner. "If only I'd had money back circa 2002-03, I would have gobbled up Apple stock." Yeah, Apple's comeback was about as obvious back then as the 2004 Red Sox's comeback against the Yankees in the ALCS right before Big Papi stepped up to the plate in the bottom of the 12th. In hindsight the winning outcome seems logical and likely because it is the winner. We don't have to fully create the narrative as to how it could come to be. Reality has done that for us, but there were many, many other possible outcomes. Often some of these were individually more likely than the actual outcome. 
• Getting wrapped up in performance rather than process. We choose teams and individuals to root for based on a lot of reasons many of which are based on past performance. But successful past performance in investing means buying yesterday's winners--a strategy that doesn't correlate very well with future investing success. Good investing is about finding a good process. That process should generate future investing success.
• Talking yourself into taking a lot more risk than you should simply because the risk started small. Remember this amazing lucky break cum colossal mistake? You are never "playing with house money". 
• As a related point, if you find yourself playing in the equivalent of the championship game, realize that you are mistaken. Investing doesn't work that way. You don't accrue your way into a large reward/low risk situation. Investing is about choosing a risk/reward mix over the long term.
• Sitting a turbulent/uncertain/rough period out on the sidelines. There are no sidelines in investing. Cash is an asset. The mattress, safe deposit box, and interest-free checking account are all examples of investments--albeit, very poorly performing ones. The game is still going on whether you are playing a highly active role or trying to avoid all volatility. Inflation is constantly trying to eat away at the value of your net worth. And ALL periods are turbulent, uncertain, and rough. 

Perhaps golf offers the closest analogy to investing: your performance is largely independent of others' performances, your choices imply the risk/reward mixture (laying up versus going for the green), there is a cumulative effect between actions, the course you choose to play should be dictated by your abilities and your knowledge of the course will affect your performance, about the best you can hope for is a little better than "par", discipline is more rewarded than ability, etc. But even this analogy runs into strong limitations. Investing is always continuously cumulative. You never get to start a new round or new hole. Knowing how to successfully invest relies more heavily on learned skill than raw ability.