Monday, April 21, 2014

Capital in the Twenty-First Century

I recently read "Capital in the Twenty-First Century" by Thomas Piketty (translated by Arthur Goldhammer).  This long (685 pages) 2013 book by a French economics professor has become popular in liberal circles.  However in my opinion it isn't very good.

The book can be summarized as follows.   Around 1900 wealth was large (in terms of years of annual income) and concentrated (unequally distributed) in France and similar nations.  By 1950 wealth was smaller and more evenly distributed but then became to grow larger and more concentrated again.  The author projects further increases in the years ahead, takes for granted that something needs to be done about this and proposes a worldwide tax on capital.

The historical part which traces the distribution of wealth from 1800 or so to the present is of some interest but could have been presented much more concisely.  Piketty concedes that economists in 1900 or 1950 would have been unwise to expect to be able to accurately predict the future distribution of wealth but then undaunted makes his own predictions.  I see little reason to give them much credence.

Piketty's main policy recommendation is a worldwide graduated tax on wealth.  His arguments for this aren't likely to convince anyone not already favorably disposed.  He professes to be concerned about wealth becoming concentrated in a few large inherited fortunes but much less drastic steps would prevent this.  For example requiring large estates be split at least 10 ways (that is no single heir could inherit more than 10%).  This would fairly quickly disperse large fortunes.  As Piketty acknowledges simply abolishing primogeniture has had such an effect.  

In contrast it appears likely that Piketty's wealth tax would not simply cause wealth to be spread more widely but instead would cause wealth to be diverted into consumption which would over time substantially reduce the amount of wealth.  It is unclear why Piketty thinks this is a good idea.  Piketty's predictions rely on the claim that there are few diminishing returns to wealth, that it is possible to productively employ ever increasing amounts of wealth.  So what is the benefit of a poorer society with less wealth available to increase labor productivity?   

Piketty attributes the problems of current (and former) actually existing wealth taxes to difficulties arising from trying to impose such a tax in a single country.  Hence his proposal for a worldwide tax.  But the difficulties could also be attributed to the compromises required to get a wealth tax enacted and these would only increase if you had to get the tax enacted worldwide.

The book seems unfocused and much too long.  Which makes it harder to identify the key points.  Among other things Piketty rambles on about the novels of Austen and Balzac at considerable length.   Which he cites as sources for the claim that around 1800 it was difficult to live a decent life without access to inherited wealth.  Whatever the truth of this it has little relevance to today's conditions where anyone in the top 10% of labor income is doing fine.

Piketty makes some curious claims, for example on page 432 that:

... In the long run, unequal wealth within nations is surely more worrisome than unequal wealth between nations.

This seems debatable to say the least.  But perhaps Piketty is more bothered by the few people who are much richer than he is than by the billions who are much poorer. 

In summary I found this book hard to get through and I don't recommend it.  If you are interested reading a few reviews seems like a less painful way to pick up the main ideas.

Sunday, April 20, 2014

User Interfaces

I stopped in a supermarket on my way home Friday night and when I was checking out the clerk erroneously scanned my single item in with the stuff the customer ahead of me was buying. I would have expected this to occur fairly often and be easy to fix but apparently a manager was required and none was immediately available. Meanwhile another line opened up so I was able to switch and complete my purchase but the unfortunate customer ahead of me was still waiting as I left.

This seems like a surprisingly poor design particularly for something as heavily used as supermarket scanners. Of course you need to be careful not to provide options that make it easy for the clerk to steal but I don't see the risk in allowing the clerk to cancel the last item scanned. I suppose it is possible the clerk just didn't know the procedure for fixing the mistake but I got the impression that the problem was they lacked the authority which seems like bad design.

Monday, April 14, 2014

2013 Taxes

This year I got my taxes done a whole day early.  Hopefully things will go better than last year.  My state refunds took months to arrive and then it turned I had made a mistake on my New York return and had to file an amended New Jersey return. 

This year I have already made one mistake.  I realized shortly after submitting my federal return electronically that it was missing a form.  Fortunately this didn't affect the amount of the refund I am due so I just stuck the missing form in the mail to the IRS but it was still aggravating.  I consider this mistake partly TurboTax's fault as it gives you an option to skip things you aren't ready to do yet but then doesn't always remind you in the review phase that you may not be finished.  So you should be careful about starting your return before you have everything you need.

I had some of the same issues with TurboTax as in previous years and noticed another problem.  In the review phase it summarized my effective federal tax rate for 2013 and previous years but computed it incorrectly for 3 out of 4 years.  For 2010 and 2011 it failed to add in the AMT and for 2013 it failed to add in the Obamacare investment income surtax.

I gripe about TurboTax a lot but it really doesn't make much sense to try to do your taxes manually if they are at all complicated.  The Obamacare surtax has just added another layer of pointless complexity.          

Wednesday, April 9, 2014

Vox and Falkenblog

I have added Vox, where Matthew Yglesias is now writing, to my blog list.  This is Ezra Klein's new venture which he left the Washington Post to start.  Another of their writers is Brad Plumer.

I recently discovered Falkenblog by Eric Falkenstein, a 1994 economics PhD who has held a variety of finance jobs.  I won't be adding this blog to my list as he stopped updating it last September to avoid any conflicts with his latest job.  Also he can come across as a bit of a crank particularly when he moves away from finance to post on things like politics or evolution.  And he has a Yglesias level propensity for typos and other careless errors which can make him hard to understand.  Nevertheless I found some of his finance posts quite interesting and plan to comment further on some of his major themes which include missing risk premiums, low volatility investing and relative utility functions.

Sunday, April 6, 2014

Fifth Third Bancorp v. Dudenhoeffer

The Supreme Court heard arguments Wednesday in the case Fifth Third Bancorp v. Dudenheffer.  The case concerns the obligations of the managers (fiduciaries) of a employee stock ownership plan (ESOP) when they have some evidence that the company stock is a bad investment.  The defendants (Fifth Third Bancorp) want a rule that it is presumptively prudent for a ESOP to buy and hold company stock.  This seems sensible to me.  Some (by which I mean one or more) of the Supreme Court Justices seemed concerned about establishing a special rule for ESOPs but I see this as an application of a more general rule that it is presumptively prudent for fiduciaries to obey instructions.  It is common for defined contribution retirement plans to allow participants to direct how their contributions are invested.  Naturally some participants will make better decisions than others but I don't think it is practical (or sensible) to require a fiduciary of such a plan to routinely independently evaluate (and possibly overrule) the participant's instructions.   

There is a complication in the current case in that the negative information was "inside information" which it can be illegal to act on.  The plaintiff's lawyer appeared to be arguing that even if the defendants could not legally act on the information they could nevertheless be liable for failure to act.  The government lawyer appeared to concede that the defendants could not be held liable for obeying the law but were obligated to do everything they could without breaking the law.  Considering the rather unclear state of insider trading law this would put fiduciaries in possession of inside information in a very difficult position.  In particular the government claimed that although you could not legally sell on the basis of inside information you could legally stop buying.  Perhaps this is actually the law (although some Justices noted no lawyer from the SEC had signed off on the government brief) but it makes no logical sense.  As I understand it employees are allowed to participate in stock purchase plans in which a fixed percentage of their pay is regularly used to buy company stock even if this means they are sometimes buying when in possession of favorable inside information.  The idea is they are not buying because of the favorable inside information.  But if you allow them to suspend purchases when in possession of negative inside information this rational disappears.  Now all of their purchases are based in part on inside information, namely that there is no pending undisclosed bad news.  Thus giving them the sort of insider advantage that the prohibition against inside trading is supposed to prevent.

Tuesday, March 18, 2014

Blog Roll Changes

I have removed Moneybox from my blog roll as Matthew Yglesias is no longer writing it having left Slate to join Ezra Klein's new venture with Vox. I have wanted to include Kevin Drum's blog for Mother Jones for some time but was unable to get the link to function properly.  It now seems to be working so I have added Drum.  I have also returned Nate Silver to my blog roll as he has finally completed the move from the New York Times to ESPN with the launch of the new FiveThirtyEight site Monday.  Like Drum (and others) I am not too impressed with the new site so far but hopefully it will get better.  

Saturday, March 15, 2014

My Bondage and My Freedom

I recently read "My Bondage and My Freedom" by Frederick Douglass.  Douglass was born a slave in Maryland around 1817.  He escaped to the North in 1838.  This 1855 book (the second of three autobiographical works by Douglass) largely consists of an account of his years as a slave in Maryland (where he moved between the Eastern Shore where he was born and Baltimore).  It also contains a less comprehensive account of his life as a free man (including a 21 month trip to Great Britain) and in an appendix excerpts from abolitionist speeches and letters of his.

I found the account of his years as a slave interesting and worth reading.   For the most part I (as a layman) also found it credible although a little caution is in order as a book like this is to some extent abolitionist propaganda.  But Douglass comes across as a reasonably objective observer, noting for example that some of the mistreatment of slaves he reports was not typical (which of course was of little help to a slave who unluckily found themself at the mercy of an exceptionally bad master).  And in truth the case against slavery doesn't really need embellishment, the facts are bad enough.

One point about which I am a little doubtful is Douglass's repeated claim that harsh treatment of slaves was rational and necessary from the perspective of the (amoral) slave owner, that any leniency would just encourage thoughts of rebellion (or escape).  This seems to have been true for Douglass himself but I wonder to what extent he is rationalizing what could be seen as lack of gratitude for relatively good treatment.  Or perhaps I am just reluctant to let go of the fantasy that if I had owned slaves I would have been such a fair and generous master that I would have inspired loyalty.

I was also a little puzzled by of Douglass's seeming lack of interest regarding the identity of the (white or nearly white) man who was his father.  Perhaps he really didn't care but I wouldn't be too surprised if this was a bigger concern to him than he lets on.

I found the account easy to read and the language and style surprisingly modern (to the extent that I looked for and found a statement that the 1969 Dover edition I read was an unaltered reproduction of the original).  I found the rest of the book less interesting, it could be skipped without losing too much.

In summary I found this book to be pretty good and a useful reminder that even the life of a relatively privileged slave in the old South left a great deal to be desired.