## Wednesday, December 29, 2010

### Teacher Value

Last week Kevin Drum posted about a paper (pdf file, may be behind a paywall) by Eric Hanushek which estimates that a teacher one standard deviation above mean will improve the present value of a typical student's lifetime earnings by a substantial amount (\$20000 with one set of assumptions). If correct these estimates would justify considerable effort and expense improving the average quality of teachers. However as readers of this blog know I doubt teachers make much difference. This paper has not convinced me otherwise.

The paper's estimates depend on a number of extremely debatable assumptions. Even worse it appears to contain a blatant error. One reason teachers don't matter much in the long run is the measured effects they do have tend to be temporary, fading away with time. Hanushek recognizes this and defines (p 14-15) a depreciation variable theta. But he does not appear to realize the effects are cumulative. After n years the effects of a particular teacher (as measured by achievement tests) are reduced by a factor of (1-theta)**n. But Hanushek assumes (1-theta) of the effect is permanent. Since theta is estimated as .3-.6 this makes a huge difference in his calculations. So, even granting the assumptions in his model, correctly computed the effect of an above (or below) average teacher will be much less than claimed.

The cumulative nature of this effect is clearly stated in one of the papers Hanushek cites Estimating Teacher Impacts on Student Achievement: An Experimental Evaluation ((c) 2008 Kane and Staiger, p.4):

Finally, in the experimental data we found that the impact of the randomly assigned teacher on math and reading achievement faded out at a rate of roughly 50 percent per year in future academic years. In other words, only 50 percent of the teacher effect from year t was discernible in year t+1 and 25 percent was discernible in year t+2. ...

## Friday, December 24, 2010

### Highland Diner RIP

In the 90s I used to eat dinner regularly in the Highland Diner on Highland Avenue (Route 9) in Ossining. I have fond memories of the place. It appeared to be a venerable Ossining institution. The author John Cheever who lived in Ossining in the later part of his life used to hang out there. Cheever died in 1982 before I moved here but the restaurant still had pictures of him.

The restaurant changed hands about 10 (?) years ago. I continued to eat there sometimes but it was never quite the same. It has since operated under several names and owners but apparently (despite what appeared to be considerable expenditure on renovations) has struggled financially. Perhaps because one of the things I liked about the place, that it was rarely crowded, didn't change. Its latest incarnation was as the Olympic Diner but when I went to eat there last Saturday I found it closed. As with Charlie Brown's I had not noticed signs of distress (unlike an earlier incarnation which was open for a couple of weeks in the summer without AC before finally giving up the ghost). There were signs saying it would reopen with new management. Perhaps things will work out better this time. However I suspect the traditional diner business model is not as viable as it used to be and some changes may be needed. Which is always tricky as you may lose the old customers without getting enough new ones.

## Saturday, December 18, 2010

### Millennium Trilogy

I just read the Millennium Trilogy a series of three thrillers by the Swedish journalist Stieg Larsson. Obviously the books have been around for a while but only recently became available (without reserving them) at local libraries.

In my view the books aren't all that good. They are quite long (the first is 644 pages in paperback, the second and third 503 and 563 pages in hardcover) and seemed uneven to me dragging in places. The second book contained a number of implausible coincidences and a preposterous (even by the standards of the genre) escape from peril. The Lisbeth Salander character is quite unrealistic. Annoyingly she is portrayed (briefly, again in the second book) as a brilliant chess player by an author who clearly knows nothing about chess. The books are set in Sweden and contain a number of obscure local references. This is partly the fault of the translation, for example it would have been simple to give the approximate value of the Swedish kronor in dollars when it was first mentioned.

I wouldn't say the books are terrible. I did find them interesting in parts and I have certainly read worse. However I have also read many thrillers as good or better that have not achieved the same popularity. The ingredients of popular success are a bit mysterious. In this case I suspect Larsson's untimely death contributed as did the somewhat exotic setting (Sweden). Perhaps in some way the books resonate with a portion of the reading public. And of course once a certain level of success is achieved a snowball effect can take over.

In summary these are the sorts of books you might read on say an airplane flight if nothing better was available but not really anything I would recommend making a special effort to read.

## Saturday, November 20, 2010

### Charlie Brown's post mortem

Charlie Brown's troubles continued during the week as the parent company closed additional locations and then filed for bankruptcy.

The chain's problems can't be blamed entirely on the current economy. The former president and CEO, Russell D'anton (who had worked his way up from busboy), plead guilty this year to charges involving vendor kickbacks.

In retrospect if the only location (in Kingston NJ) that I patronized was typical it isn't too surprising the chain was in trouble. The building was far larger than needed for the current customer traffic and you would sometimes see clumps of employees standing around doing nothing. Restaurants seem to be a business where it is important to have an owner (or someone else who really cares about the bottom line) around a lot keeping an eye on things. Things seemed a little lackadaisical at the Kingston location.

## Monday, November 15, 2010

### Charlie Brown's

I went to eat at the Charlie Brown's Steakhouse in Kingston last night and found a sign on the door saying this location had been closed. A bit disconcerting as I had eaten there last week and seen no indications of distress. Apparently the chain is in trouble and closed numerous locations Monday. A minor inconvenience for me, a bit worse for the 1400 employees affected.

## Sunday, November 7, 2010

### Fall back

I tend to find DST confusing. Hopefully I have managed to adjust my clocks correctly although yesterday I was under the misapprehension that I was going to lose an hour instead of gain an hour.

## Monday, November 1, 2010

### Election 2010

Someone said the real power voters have in a democracy is to "throw the bums out" when they don't like how things are being run. Applying this principle I selected the Republican ticket when I voted by mail on Saturday. This may have been a bit irresponsible as some of the Republican candidates are uninspiring to say the least. But the nuttier ones have no chance so I don't have to worry too much about what they would do if they actually won.

As for the election overall, for what it's worth, my prediction is that the Republicans do well but under perform current expectations a bit. We will know soon enough.

### Giants win

I grew up in Livermore California and for a while as a kid was a fairly serious San Francisco Giants fan. As I recall I started following the team in 1963 (prompted by the Giants 1962 World Series near miss). After a few years I gradually lost interest. The Oakland A's arrived in 1968 and at some point I shifted my primary allegiance to them. In recent years I haven't followed either team much. Still I watched the last couple of innings of the World Series and was glad to see the Giants finally win.

## Saturday, October 30, 2010

### Route 9 reconstruction complete

I was pleased to read in Saturday's paper that the Route 9 reconstruction project through Peekskill had been completed. I was a bit surprised as the project had been ongoing for a couple of years and I would have guessed had a while to go. But when I drove up there it was indeed finished and looking pretty good. Well except for the construction zone signs which haven't been taken down yet.

## Saturday, October 16, 2010

### Benoit Mandelbrot RIP

Benoit Mandelbrot died last week. I had lunch with him a few times when I worked at IBM and found him pleasant enough although I could see why some of my colleagues thought he was a bit full of himself.

## Monday, September 27, 2010

### Yankees win

The Yankees won last night putting them in a good position to make the playoffs as their magic number is now one. But not quite as good as their radio announcer, John Stirling, kept claiming. He repeatedly declared that the Yankees now have thirteen chances to clinch (as they have six games remaining and the Red Sox have seven and any Yankee win or Red Sox loss eliminates the Red Sox). But there is a rather obvious flaw in this argument. This isn't the first time I have noticed that careful analysis is not Stirling's strong suit. It can become annoying. As with his mantra invoked whenever something slightly unusual happens that "you can't predict baseball".

## Sunday, September 5, 2010

### Thornton Hill

It appears Ossining has a new street, Thornton Hill. I was driving by the new Hawkes Crossing development and noticed it now has a street sign. So I walked over to check it out. The first six houses (phase 1) have been built and sold. Ten more (phase 2) further in were planned but I saw no indication they will be built any time soon.

The existing six houses look nice enough but I was a bit surprised to see they all have propane tanks. I am just a short distance away and have natural gas service which I would certainly consider a plus as a buyer. It would be interesting to know why they aren't on natural gas.

Added 10/8/10: Apparently the propane tanks are temporary, see first comment.

## Sunday, August 29, 2010

### Bridge not out

Speaking of government not working well, this isn't the biggest deal in the world but it is starting to annoy me. The Quaker Bridge Road Bridge repairs took longer than they were supposed but they were finished months ago and the bridge was reopened. It is time someone took down the sign.

## Saturday, August 28, 2010

### Public Servants

Matthew Yglesias responding to a rant about the DMV by Keith Humpheys makes a point with has also occurred to me. Namely that liberals who want a society with a bigger role for government should worry more about making government work well than they do. People are naturally reluctant to give more responsibilities to an entity that doesn't appear to be handling its current responsibilities well.

## Wednesday, August 18, 2010

### Complexity theory update

I was asked in comments about the claimed P != NP proof I posted about last week. This NYT article has a reasonable summary of current opinion. Basically the "proof" appears to have some serious problems. Unfortunately the author may have trouble accepting this verdict.

As for what a proof would mean, the bare fact alone would not change much since many people already assume it is true. However it is likely a valid proof would depend on much greater insight into the theory computation than we currently have.

## Tuesday, August 17, 2010

### Housing markets

One of the Congressmen I find most irritating, Barney Frank, was in the news yesterday continuing to spout nonsense about the housing market:

“We’ve already abolished Fannie and Freddie,” he said, referring to the government takeover. “Yes, we waited too long to fix it. But the money is not being lost by anything they are doing now.”

This is simply wrong. As the article acknowledges the government is propping up the housing market by providing subsidized mortgages. But subsidized is just another way of saying money losing. Perhaps under the circumstances there is something to be said for this policy (although I oppose it). But pretending it is not costing the government money is dishonest. And they haven't "fixed" anything.

Also it is easy to underestimate the perverse effects of government subsidies. I might currently be in the market for a house but I am reluctant to enter a market in which I would be competing with people playing with government money, no money down government backed loans that they can easily walk away from if prices move against them.

## Saturday, August 14, 2010

### Butterfly Garden

I went walking in Pruyn Sanctuary again today. The highlight for me was the butterfly garden near the Route 133 entrance. Apparently a butterfly garden consists of plants chosen to attract butterflies. This one was quite successful today, the picture shows one of the many butterflies.

## Tuesday, August 10, 2010

### Alternating sequences

Last week I heard a talk by Richard Stanley in which he mentioned a version of the following problem. Define an alternating sequence as one in which the differences between adjacent elements are alternatively positive and negative. So 1,2,3 and 3,2,1 are not alternating sequences but 1,4,2,5,3,6 is. Consider random permutations of 1,2,...,n. We ask as n goes to infinity what is the expected length of the longest alternating subsequence? Note the elements of a subsequence do not have to be adjacent in the original sequence. You can think of a subsequence as what is left after you delete some elements of a sequence.

## Sunday, August 8, 2010

### Big news in complexity theory?

An HP researcher, Vinay_Deolalikar , is claiming to have proved that P != NP. This is of course a major result if correct. I would guess the odds are it isn't but an expert thinks it is worth taking seriously. I glanced through the preliminary version of the paper. It goes well beyond my superficial knowledge of complexity theory so I will defer to more expert opinion as to correctness. I expect this will be forthcoming fairly quickly.

## Sunday, August 1, 2010

### Labor markets

Matthew Yglesias writing about how more education can reduce the wage gap between skilled and unskilled workers by increasing the supply of skilled workers and decreasing the supply of unskilled workers:

There are a lot of things going on here, but one point to keep in mind is that progress in educational attainment is generally beneficial not just beneficial to the people who get the extra education. Insofar as more Finnish people acquire skills and learn to be cell phone company executives or furniture designers or Finnair pilots that’s (a) more income to be spent on goods and services produced by lower-skilled people and (b) fewer lower-skilled people to compete for those jobs. Consequently, the Finnish people who don’t upgrade their skills also benefit from the fact that other Finnish people have been upgrading. Consequently, the great expansion in educational opportunities in the 1870-1970 era helped produce prosperity even for people like Connie Freeman’s dad who didn’t necessarily personally acquire a great deal of education.

This makes a certain amount of sense. But of course when it comes to the effects of immigration on wages Yglesias no longer believes in the negative effects of increased supply predicted by simple models (or perceived by those directly affected).

## Thursday, July 29, 2010

### Libertarians

People sometimes mistake me for a libertarian. This is not the case. Like libertarians I value individual freedom. So in cases where increasing individual freedom does not impose unreasonable costs I will tend to agree with the libertarian position. However I am more likely than libertarians to see trade offs between individual freedom and other values. Both because I give greater weight to other values (such as order) and because I have a different (and in my view more realistic) picture of how the world works. So I don't oppose all restrictions on the market. As I indicated here I don't believe people have some sort of natural right to prey upon the stupid and I support reasonable measures to prevent them from doing so.

These thoughts were prompted in part by this post by Tyler Cowen in which he compares restrictions on high interest lending to restrictions on gay sex. In my view this is an example of the folly to which excessive devotion to libertarian principles can lead. There are in fact good reasons for regulating business transactions more heavily than the same actions in a non-commercial setting. And in fact we ban commercial gay sex (prostitution) entirely.

So I don't think loose usury limits are a major imposition on my freedom. And if they prevent some bad credit risks from getting loans? Well if I recall correctly Adam Smith thought this was a feature not a bug and I am not convinced he was wrong.

## Wednesday, July 28, 2010

### NYT AIDS story

I think the New York Times is a pretty good newspaper in general but this story on an AIDS prevention gel for women is just dreadful. It starts:

The best AIDS-prevention news in years was released here last week at a world conference on the disease: a vaginal gel, called a microbicide, that can be used without a man knowing it, gave women a 39 percent chance of avoiding infection with the deadly virus.

Thirty-nine percent is, obviously, not perfect, though the women in the South African trial who used the gel most faithfully did better, achieving 54 percent protection.

It is completely unclear what the 39% and 54% are referring to and this is not explained in the remainder of the story. I suspect this is because the reporter had no clue. But if he can't explain what these numbers mean they shouldn't be in the story.

## Sunday, July 25, 2010

### Missing the point

James Webb, a somewhat atypical Democratic Senator, recently argued that affirmative action should be limited to African Americans. Kevin Drum manages to completely miss Webb's point and responds by calling for replacing race based affirmative action with class based affirmative action. Whatever the merits of this position it is more or less the opposite of what Webb is arguing for. Webb is not objecting to race based affirmative action for blacks which he believes can justified on the basis of the injury slavery and its legacy did to blacks. Webb is objecting to extending affirmative action to groups with no comparable moral claim both because this is unfair to the groups not included and because it reduces the benefit to blacks. Drum's proposal would further remove affirmative action from what Webb believes is its only legitimate purpose and moral basis, alleviating the harm done by slavery.

## Sunday, July 18, 2010

### Progressive consumption taxes

According to Matthew Yglesias:

In terms of reform it, the frustrating thing is that everyone agrees that it would be better to have a progressive consumption tax than a progressive income tax. And yet, nobody does this and there’s no sign of a political move to do it. So if there were to be a major political push toward reforming the tax code, why not reform it all the way?

This sounds good (and would benefit misers like me greatly) but there is a problem. There is a quite plausible case that the root cause of our current difficulties is that people are trying to save too much. This can cause cuts in production (and layoffs) because people do not want to currently consume all that the economy is capable of producing. Or it can cause asset price bubbles and bad loans as the amount of savings exceeds the amount of worthwhile investment opportunities. If so a progressive consumption tax would just make things worse.

## Saturday, July 10, 2010

### Free money

A lot of people, some of whom should know better, seem to think that a low interest loan is the same as free money. Here Ezra Klein argues that the US government should take advantage of the current low interest rates to borrow a lot of money. This is not a good reason for individuals to borrow money and it isn't a good reason for the government to borrow money. If the money is going to wasted, as I expect most of it would be, a low interest rate doesn't help a lot.

## Tuesday, July 6, 2010

### Rounding error

Here is an easy math puzzle. Suppose we have 3 random variables a,b and c with c=a+b. We round a to A, b to B and c to C and want to know the chances that C=A+B. We need some more information for an unique answer. So for definiteness let a and b be random real variables uniformly distributed between 0 and 50. Let c=a+b and let A,B and C be a,b and c rounded to the nearest integer (it won't matter how .5 cases are rounded). Then we ask what is the probability that C=A+B?

This problem was inspired by the recent furor regarding the Research 2000 polling operation in which it has been suggested that Research 2000 was saving money by making up its poll results. However it is unclear if the above problem actually has any connection to the anomalies that have been found in the Research 2000 results.

## Monday, July 5, 2010

### Oil and Obama

I haven't been too critical of Obama's somewhat floundering response to the Gulf oil spill because in truth it hasn't seemed that there was really that much to be done. However one thing he (or his appointees) could do is make sure the cleanup effort is not being needlessly obstructed by government regulations and red tape. This story suggests this is not being done.

The Americans don’t have spill response vessels with skimmers because their environment regulations do not allow it. With the Dutch method seawater is sucked up with the oil by the skimmer. The oil is stored in the tanker and the superfluous water is pumped overboard. But the water does contain some oil residue, and that is too much according to US environment regulations.

In my opinion this regulation (intended to prevent pollution from ships flushing out their fuel tanks with water and the like) shouldn't apply to skimmers which are discharging cleaner water than they took in. It clearly doesn't make any sense for the current spill where the alternative to removing 99% of the oil is removing 0% of the oil. Apparently the Dutch skimmers have now been approved for use in the Gulf after a long delay. Hopefully this sort of thing is not actually a significant problem. However I have seen a number of claims to the contrary (most admittedly by people with axes to grind).

## Saturday, June 19, 2010

### Freefall

Recently I have reading "Freefall" by Joseph Stiglitz, another book about the recent financial crisis. I haven't managed to finish it (and probably won't as it is due back at the library today) but will review it anyway.

I didn't like this book much. I found Stiglitz's style annoying. He is a liberal prone to taking partisan shots. He will say things like "We believed such and such but we learned we were wrong" where he doesn't really mean "we" but "crazy right wing Republicans". If Alan Greenspan writes a book confessing error that is ok but I don't like such confessions on behalf of others. Particularly since I doubt the real crazy right wing Republicans have learned much of anything and especially not what Stiglitz is claiming was learned.

On a more substantive note I didn't find the book very interesting. A rather conventional and predictable explication of what happened from a liberal perspective is mixed with what seem to me to be some often rather poorly thought out proposals for alleviating the problems.

For example on pages 103-104 Stiglitz writes:

The government (through the Federal Reserve) has been lending money to the banks at very low interest rates. Why not use the government's ability to borrow at a low interest rate to provide less-expensive credit to homeowners under stress? Take someone who has a \$300000 mortgage with a 6 percent interest rate. That's \$18,000 a year in interest (.06 x \$30,000[sic]) or \$1,500 a month, even with no payback of principal. The government can now borrow money at essentially a zero interest rate. If it lends it to the homeowner at 2 percent, payments are cut by two-thirds to \$6,000. For someone struggling to get along at twice the poverty rate, around \$30,000 a year, that cuts house payments from 60% of the before-tax income to 20%. Where 60 percent is not manageable, 20% is. And apart from the cost of sending out the notices, the government makes a nice \$6,000 profit per year on the deal. At \$6,000 the homeowner will make the payments, at \$18,000, he or she will not.

Stiglitz is proposing that the government give 2 percent interest only mortgages so stressed homeowners can payoff their existing 6 percent mortgages and drastically reduce their expenses. He further claims this will be a good deal for the government. This proposal is totally deranged.

First Stiglitz does not explain how someone with an annual income of \$30,000 obtained a \$300,000 mortgage. A likely explanation of course is a grossly fraudulent loan application (for example claiming an annual income of \$120,000). This is theoretically a serious crime and while it may be too much to expect such homeowners to go to jail, the government certainly shouldn't be bailing them out.

Second while it is true that the government can currently borrow money for 30 days at near 0 rates the government can't borrow money for 30 years (much less forever) without paying interest. Borrowing short and lending long is a classic recipe for trouble.

Third Stiglitz does not say how much the house is actually worth but, under current conditions, \$200,000 or less seems likely. Lending \$300,000 against a house worth \$200,000 to a homeowner with an annual income of \$30,000 is a really bad idea whether done by a bank or the government. At least for someone intending to profit as Stiglitz claims the government would.

Fourth it is hardly certain that the homeowner will be able to make payments of even \$6,000 a year. Property taxes and other expenses on even a \$200,000 house can be substantial and the homeowner may have other priorities. In any case the homeowner won't live forever at which point the government will own a \$200,000 home with \$300,000 mortgage not a desirable situation to be in.

Stiglitz goes on to claim that banks will be opposed to this sort of thing because they don't want the competition. In fact under current conditions the banks would be delighted to unload all their lousy \$300,000 mortgages on the government. Something like this is actually happening as the government is currently guaranteeing (through Fannie Mae, Freddie Mac and the FHA) lousy refinancing loans which are getting the banks out from under a lot of dubious loans. This is costing the government a lot of money (far more than the direct payments to the banks Stiglitz complains about in this book). Perhaps at some future point when all the bad loans are gone the banks will try to get rid of the government competition but not just yet.

So in conclusion I didn't find a lot of value in this book. Stiglitz has a economics Nobel prize and there are occasional indications in this book that he is capable of writing an interesting and worthwhile book. However I don't think "Freefall" is it. Give it a pass.

## Monday, June 14, 2010

### Paint problem

Here is a nice math problem I encountered recently.

N painters arrive at random positions around a circular fence. Each paints the section of fence between them self and the nearest neighboring painter. As a result of this curious procedure some sections of fence are painted twice and some are not painted at all. In the limit as N goes to infinity what fraction of the fence on average will be painted (at least once)?

Actually as originally posed the fence was not circular which doesn't change the limit but is not as easy to deal with.

You can also ask the same question for the case where each painter paints the section of fence between them self and the farther of the two adjacent painters.

## Sunday, June 13, 2010

### Census

Last weekend I finally got around to filling out and mailing in my US census form. It was actually pretty simple and I feel a bit guilty about causing the government to waste money trying (unsuccessfully) to contact me in person. The problem is there is no real incentive to handle this in a timely manner and many people don't . In my case a quite modest incentive would probably have been sufficient (although it didn't help to have the form due at the same time as my taxes). However designing a suitable incentive doesn't seem simple. It can't be too expensive as you couldn't exclude people who would have returned the forms anyway. And you don't want people submitting fraudulent forms. Perhaps entering people who return their forms on time (and don't opt out) into a lottery would be a cost effective incentive.

## Monday, June 7, 2010

### Teacher bashing

Yglesias asks why advocates of performance pay for teachers are accused of teacher bashing since presumably as many teachers would benefit as would be hurt. I don't think this is any great mystery. The basic premise of such plans is that many schools are currently "failing" and that this is mainly the fault of the teachers at those schools. This seems like teacher bashing to me and unjustified at that since the premise is false.

Yglesias does identify a way in which teachers have brought this upon themselves. Teacher unions like to argue for higher wages on the basis that teachers are very important. This naturally suggests that perhaps greater efforts to identify and remove bad teachers are justified.

But while turning union propaganda against teachers in this way may have its attractions the fact remains that the evidence is that within the range of teacher quality currently found in US schools teachers aren't very important to outcomes. And, contrary to Yglesias, measuring individual teacher quality is very difficult as random variation will swamp any plausible differences in quality.

So the likely effect of any merit pay system is greater anxiety and uncertainly for teachers as some are randomly labeled bad with little if any benefit to students. It is no wonder teachers are largely opposed.

## Thursday, June 3, 2010

### Buffett and Moody's

Warren Buffett has been taking some heat lately because he is the largest shareholder in Moody's and Moody's is one of the government approved rating agencies who greatly enabled the recent financial crisis with absurdly generous ratings for mortgage backed securities. While I don't think this has been Buffett's finest hour, I think some the criticism has been a bit overblown. Expecting people to be objective about matters in which they have a large financial interest is about as realistic as expecting parents to be objective about their children. As Buffett himself has said, "Don’t ask the barber whether you need a haircut.".

For my part I think the current system provides unacceptable incentives for corrupt ratings and needs to be drastically reformed. New York State requires me to get my car inspected every year. It does not allow me (as far as I know) to go to several inspectors and only pay the one who agrees to pass the car. Nor does it allow me while doing this to swap out all the parts in my car until I find the minimum configuration that will pass. It should be obvious that allowing this sort of thing is a bad idea but that is how the security rating system currently works.

### Hollywood Moon

I recently read "Hollywood Moon" by Joseph Wambaugh. Joseph Wambaugh is a former Los Angeles cop who has written a number of books (fiction and nonfiction) mostly about Southern California law enforcement. This is his latest book, a novel about cops working in Hollywood. Although it is the third in a series it is largely independent.

I found the book to be a somewhat uneasy mixture. Apparently Wambaugh still knows a lot of cops and they tell him stories, some of which he has incorporated into the book. Several of these stories are fairly amusing but they are a bit disconnected from the rest of the book. The remainder of the book is a fairly routine police procedural where a number of threads come together at the end. The ending was fairly grim and a reminder that police work is often not all that funny.

I didn't think this book was as successful as some of Wambaugh's other efforts such as "The Secrets of Harry Bright". Perhaps noteworthy is that the descriptions of cops griping about having to obey the law did produce in me some unexpected sympathy for liberal federal judges.

## Sunday, May 30, 2010

### Stock market returns

Lately Felix Salmon has been arguing against investing in stocks. Some of his arguments make sense, others not so much. Here for example Salmon claims in part:

A lot of people like investing in stocks because the stock market has, in the US, and over the past couple of generations, managed to outperform GDP growth. But that’s not sustainable over the long term. ...

This is one of those assertions which is superficially plausible but falls apart when you start to think about it. Consider for example a steady state economy where GDP is not growing. Does this mean stocks would have to return nothing? I don't see why. Stocks could pay say a 3% annual dividend while not increasing in value. Thus returning 3% a year. Which is more than zero.

## Saturday, May 29, 2010

### Martin Gardner RIP

Martin Gardner died last Saturday . He wrote the Mathematical Games column in Scientific American from 1956 to 1981 and several books of collected columns (as well as many other books). I enjoyed his recreational mathematics works while growing up and they probably influenced me towards a career in mathematics.

### Dick Francis RIP

Dick Francis died a few months ago . He was a British jockey who became an author writing about 40 novels starting with "Dead Cert" in 1962. The novels were in the mystery/crime/adventure/thriller genre which I favor and often drew on his horse racing background. They were a bit formulaic but I liked the formula especially in the earlier books.

## Sunday, May 23, 2010

### Value creation

In my mortgage math post, I claimed that:

... The main incentive for making financial products complicated is to make them hard to value and thus easier to sell for more than they are worth. ...

A commenter responded in part:

Maybe I've just bought into the hype, but I was under the impression that, at least in some cases, the complex, derivative whole can be more than the sum of its simple, nonderivative parts, because different investors, due to their different circumstances, differ in their valuation of the derivative pieces.

I am not claiming that complexity never adds value (or that it is theoretically impossible or anything like that) just that in practice the apparent value added often turns out to have been illusory. And that this was the case for the mortgage backed securities that recently proved so problematic.

Another related problem with these products is that they turned out to have no effective defense against fraud in and/or misrepresentation of the underlying mortgages. The mortgage brokers who arranged the mortgages had no incentive to see that the buyer's income and credit rating and the appraised value and sales price of the property were accurately reported since the more inflated these values were the more they could resell the mortgage for. And the resale price directly impacted the broker's income since they could give a mortgage for \$200000, resell it for \$220000 (if the buyer's monthly payment would actually have supported the larger mortgage in the current mortgage market) and pocket the \$20000 difference. Again the rating agencies and buyers relying on the ratings didn't adequately allow for this effect which got steadily worse as underwriting standards completely collapsed during the housing bubble. Of course this could have been a problem with simple mortgage pools as well but I believe the greater distance between the ultimate buyer and the underlying mortgages made things worse.

## Friday, May 21, 2010

### Thailand

I thought this post about Thailand by John Hempton of Bronte Capital was interesting.

## Thursday, May 20, 2010

### U is for Undertow

I recently read "U is for Undertow" by Sue Grafton. This is the latest book in her alphabet series about Southern California private investigator Kinsey Millhone. The series started with "'A' is for Alibi" (1982) and "'B' is for Burglar" (1985) both of which I quite liked. I have read the rest as they came out but have felt for some time that the series has been gradually going downhill, an opinion that this book didn't change.

I am a little unsure of exactly why I haven't liked the later books as much but there are a few things I can point to. In the first book Kinsey is 32 in 1982, in the latest she is 38 in 1988. So the the setting of the books has increasingly diverged from the present. I generally prefer books that are set in the present (meaning the same time as they are written). Of course this is a problem with a long running series character but I think I prefer the alternative choice where the setting stays in the present and the character ages slower than normal people. Another consequence of this being a long running series is that a lot of back story has accumulated and tends to get repeated for new readers which I find tedious. Also the latest book is 403 pages while the first two were 215 and 211. This is a little misleading as the earlier books have more lines per page, still they are substantially shorter. I find established authors (Steven King for example) have a tendency to become excessively prolix, perhaps because they no longer have to listen to their editors. I think shorter is often better.

So in summary, like Iron River , this isn't a terrible book, but if you want to give this series a try I would start at the beginning.

## Wednesday, May 19, 2010

### Specter

I was surprised to read Josh Marshall feeling sorry for Arlen Specter in anticipation of his defeat in Tuesday's primary. I don't have anything much against Specter but it seems to me that there are lots of people more deserving of pity than an eighty old, five term Senator, defeated in a bid for a sixth term.

## Saturday, May 15, 2010

### Mortgage math

Matthew Yglesias discusses a simplified model of mortgage based structured financial products (CDOs and CDOs2) posted by Alex Tabarrok taken from a book by Robert Pozen. The model shows how structured finance can transform a collection of moderately risky mortgages into securities some of which are intended to be quite safe and others of which are intended to be quite risky by assigning defaults to the risky securities first. Not surprisingly if defaults turn out to be higher than expected some of the "safe" securities can prove risky.

Yglesias says "Importantly, this is not a scam. The math really checks out. ...". The math may check out but I think it is largely besides the point and these products were essentially scams. The main incentive for making financial products complicated is to make them hard to value and thus easier to sell for more than they are worth. Here the optimistic model assumptions which led to these securities being overvalued were not some unfortunate accident but a necessary part of the scheme. There is in fact no compelling reason to reassign the risk of defaults in this way. So if the complicated structured finance securities were valued correctly they would not be worth more than simple pools of their component mortgages meaning there would be no incentive to create them.

## Sunday, May 9, 2010

### Greece and Europe

It has recently become very apparent that expanding the Euro zone to include countries like Greece was a mistake . This mistake seems to me to be one of elevating form over substance, if you put Greece in the Euro zone this will somehow magically transform Greece into a country which belongs in the Euro zone. You see this thinking in other contexts, admitting this student to an elite university or placing this applicant in a demanding job will magically make them capable of performing well. As with Greece and the Euro things often don't work out, particularly when the risks are ignored.

## Wednesday, May 5, 2010

### Iron River

I recently read "Iron River" by T. Jefferson Parker. This is Parker's 17th book and I like him well enough to have read most (if not all) of them. However I have liked some of them more than others and this is one of the ones I didn't like so much.

The plot mostly concerns the efforts of a southern California ATFE agent, Charlie Hood, to stop the "iron river" of guns flowing south to Mexico. Hood and some of the other characters have appeared in at least one earlier book (although this book is largely independent). I don't think these books are Parker's best. Perhaps because they contain mystical elements and other unrealistic plot points. Or perhaps because they are more morally ambiguous than I generally prefer. Anyway this isn't a terrible book but there are authors I like better than Parker and books of his that I like better than this one.

## Sunday, May 2, 2010

### California insanity

Apologists for California's politicians sometimes blame the state's problems on its initiative process. I was never very sympathetic to this argument and am less so after learning via Kevin Drum that California, which you may have heard has budget problems, recently extended and expanded a tax credit bonus for home buyers.

Only two Assembly members and one senator voted against the bill.

It would appear the California legislature is full of pandering idiots and that this probably has something to do with the state's problems.

As well as being terrible public policy in general, the specifics of the programs are also objectionable. As can be seen here and here (pdf file) you have to jump through a number of hoops to actually collect the credit. So it disproportionately benefits agile insiders. And of course nonrefundable tax credits (like these) favor the rich.

## Saturday, May 1, 2010

### Health insurance vrs life insurance

The issue arose in comments as to whether the fact that the individual health insurance market doesn't work very well is a sign of economic inefficiently. Not by itself. Something is considered economically inefficiently only if there is a better way of doing it. While there are probably numerous ways the individual health insurance market could be made to function better, many of its problems are fundamental. Health care and insurance are just not a very good fit.

In my view the ideal insurable risk has the following features. There is a small risk of a large economic loss. The loss while large is strictly bounded. Most losses are total. It is clear cut whether the loss has occurred. Losses are easily computed and paid off in money terms. Losses are difficult to fake or arrange. Losses for different people occur independently. The true risk can be easily and accurately determined. The true risk is largely independent of whether the individual is insured. The insured individual does not have a significant advantage (compared to an insurance company) in determining the true risk. The true risk itself behaves predictably over time. It is possible to charge rates which reflect the true risk.

I think it should be fairly clear why these are desirable features. For example insured individuals and insurance companies don't trust each other. So the fewer things to argue about the better. Hence it is desirable that losses be rare and clear cut.

It should also be clear that individual health insurance (particularly as currently provided) is not a very ideal insurance product by these criteria. Life insurance on the other hand scores better. So it should be no surprise that the life insurance market functions better.

## Sunday, April 25, 2010

Not being a lawyer I can't give an expert opinion about the SEC's civil suit against Goldman Sachs. However a couple of Goldman's arguments seem pretty weak to me. First the fact that Abacus investment had been designed and constructed to perform poorly was obviously material to any potential buyer and Goldman's arguments to the contrary are nonsense. Second the fact that Goldman itself lost money on the investment is not important. Even if Goldman was stupid enough to invest knowing all the facts, this doesn't mean the other investors would have been equally stupid if they had been properly informed of all the material facts. And of course there is considerable evidence that Goldman's loss was due to a failed gamble that they could unload all of their share before the roof fell in and not because Goldman thought Abacus was a sound investment.

On the other hand there have been suggestions that, even if Goldman did not formally inform the buyers of certain material facts, the buyers were aware of them anyway. If this should be established it would certainly damage, perhaps fatally, the SEC's case.

One point I have not seen covered is what the rating firms were told. Presumably Goldman has the same duty to disclose material facts to them. Did they actually rate this stuff triple A knowing it had been constructed to fail?

## Saturday, April 24, 2010

### Brinton Brook Sanctuary

Saturday I walked in the Brinton Brook Sanctuary , another park with walking trails a few miles from my condo, which I had never visited. It is owned by the same organization which owns the Pruyn Sanctuary where I walked last Saturday.

I thought it was pretty nice. The trails are generally wide and well marked which I like. They do go up and down a bit towards the back (northeast) part of the property. The photo shows Brinton Brook Pond. According to the signs the pond was created so ice could be cut and stored in the winter for use during the remainder of the year

## Sunday, April 18, 2010

### Supping with the Devil

There is an old proverb about supping with the devil which "[advocates] caution when dealing with dangerous or malevolent persons" which last week's civil fraud suit against Goldman Sachs brought to mind. Without going into the legal merits of the case, it is just an extreme example of what has been long apparent. Namely that Goldman Sachs (and similar big financial institutions) make big profits by taking advantage of naive customers. Given this it is a mystery to me why people voluntarily deal with them. Some dealings are hard to avoid, if you need to sell a million shares of IBM or convert a hundred million dollars to euros you will need to deal with a large financial institution. But this sort of basic financial service is not where the exorbitant profits are being made. They are being made with exotic financial products (like the one which is the subject of the suit) which one could easily do without. So why be the sucker in the game? As I said it is a mystery to me.

### Bailout Cost

Last week I was annoyed by this NYT article which attempts to minimize the cost of bailing out the banks. The article is annoying because the accounting is misleading, as the article itself later acknowledges some important costs are being ignored. For example Fannie Mae and Freddie Mac, the government mortgage companies, have been making lots of lousy loans in order to prop up the housing market. This is an indirect means of bailing out the banks and the resulting loan losses should be included in the bailout cost. Similarly for things like the home buyer tax credit. There is no reason for the NYT to be parroting administration propaganda about how little this fiasco is going to cost the taxpayers.

## Saturday, April 17, 2010

### Pruyn Sanctuary

With the nicer weather I have started taking walks again. Saturday I walked in the Pruyn Sanctuary which is just a bit east of Millwood. Although it is fairly close to the IBM location where I used to work, I had never been there before. I like exploring trails for the first time and since I may be moving out of the area it seems like a good idea to check out local trails which I have not previously visited.

I entered from the Route 133 entrance. Parking appears limited but it was not crowded today. The Sanctuary offers a varied mix of swamp and upland trails in a fairly compact area. The picture was taken from a boardwalk and shows Gedney Brook meandering through Gedney Swamp.

## Sunday, April 11, 2010

### Taxes done

I finished and mailed my federal and state income taxes yesterday. As I mentioned earlier I used Turbotax for the first time this year. I found the program a bit frustrating. One thing the ads about Turbotax finding deductions and credits that you might have missed ignore is that Turbotax is also quite good at finding taxes and penalties that you might have missed. Apparently my W2 showed IBM had failed to withhold a small amount of Medicare tax. I would never have noticed this myself and I doubt the government would have chased me for the small amount but Turbotax added it right in. And I would never have realized that New Jersey really expected me to pay them \$10 if Turbotax hadn't kept trying to sell me their New Jersey state return feature. The rules for people with income from several states are really quite obnoxious. This will be a bigger problem for me this year as I am living in New York and working in New Jersey. I have new sympathy for professional athletes who have to deal with many state returns. Perhaps I should rethink my support for state's rights.

### Duke wins

I was rooting for Duke in the NCAA finals and was happy to see them prevail in an exciting game. I thought the Duke strategy of deliberately missing a free throw when up by two with a couple of seconds left in the game was a bit dubious. However the Duke coach apparently explained in effect that he was convinced his team would choke in overtime and he would rather lose to a lucky shot at the buzzer which has a certain perverse logic.

## Sunday, April 4, 2010

### Spring arrives

As usual the weather improved considerably during March. I was happy to see winter go. I took the top photo last weekend. The yellow bush in the center is one of the first things to bloom in the Spring. The three parallel pipes below the road are new and will hopefully prevent more scenes like in the bottom photo taken a couple of weeks earlier.

### Health care costs

I was asked in comments what I meant by my claim that health care costs too much in the the United States. Basically I mean health care providers are paid more than is justified by the services they provide. This overpayment has several causes. Inefficient provision of services, provision of services of little or no real value and overpayment of health care workers like nurses and doctors. This is relative to other advanced societies. See for example figure 4 in this source . The United States spends more (as a share of gdp) than other rich countries on health care but does not achieve notably better outcomes.

### Health care and equity

As I see it there are two equity issues with health care. What extra health care assistance, if any, the government should provide to the poor and/or the chronically ill? In both cases I believe some assistance is reasonable but that it should not be an unlimited entitlement.

Poor people have less ability to buy lots of goods and services, food, clothing, housing etc. I don't see why health care should be any different. It may be reasonable for the government to provide a floor but I don't see any reason everybody should be entitled to the best possible health care any more than they are entitled to the best possible food or housing. And I think people should have the same freedom to spend more or less on health care that they have for spending on other things like clothing or cars.

My thoughts about the chronically ill are similar. People are fortunate and unfortunate in many ways and I don't think it is the job of government to attempt to compensate for all misfortune. Particularly when this is an open ended entitlement that can be impossible to fulfill no matter how much is spent. There are many chronic medical conditions that can be alleviated but not cured. I think some government assistance is reasonable for people with costly medical conditions but that it should be subject to a cost-benefit analysis and limited to cases where substantial benefit for reasonable cost is possible. My thoughts here are similar to my thinking about education for "special needs" children. In some cases school districts end up spending more on a single "special needs" child than 100 normal children. I don't think such disproportionate spending is reasonable and I don't think it is reasonable in the case of medical care either.

Note medical care is subject to decreasing marginal returns. In other words the more you spend the less each additional dollar will buy in terms of increased quality of life. So cutting medical spending does not affect outcomes much when you are in the flat part of the curve as we are.

## Sunday, March 28, 2010

### Default choices again

It turns out I gained \$2.40 because of the default choice I complained about last week. So I guess this isn't the biggest deal in the world. I am still annnoyed however.

### Health care reform passes

Although I had thought it was dead, the Democrats this week managed to pass their health care reform package.

I don't like the bills as they basically establish a massive new welfare entitlement program. I don't like welfare in general and this is a particularly inefficient form of welfare as most of the benefit will accrue to the health care industry rather than to the poor, who given a choice would largely spend the money on other things. In my view the main problems with health care in the US are that it costs too much and that it is over utilized. The bills will make both of these problems worse.

Some Republicans have been whining about the process by which the bill was passed which seems silly to me, given that the Democrats have significant majorities in the Senate and House and control of the White House, it is reasonable that they should be able to pass this package, wrongheaded as it may be. And one should remember it was the Republicans disastrous performance when they were in control which directly led to the current Democratic majorities.

Also much of the Republican opposition seemed off point to me. If you accept that no American should ever be denied any health care treatment because of cost it is hard to construct a plan that doesn't have most of the problems of the Democrat's package. Hence Romney's embarrassment over the fact that the program he helped establish as Governor of Massachusetts was not all that different. I don't accept the above principle but this doesn't appear to be a position that politicians are willing to argue.

## Saturday, March 20, 2010

### Investment Choice

As noted in the previous post I have signed up for a savings plan at my new job. I am putting the money into an inflation indexed bond fund. It seems to me that the ongoing large budget deficits create an inflation risk which is worth hedging against. And the alternative choices aren't all that appealing.

### Default choices

There has been considerable discussion in recent years about encouraging people to make better choices by providing appropriate default choices. I was mildly sympathetic to such policies but my first encounter with them has proved extremely annoying. I signed up for a savings plan with my new employer and was given no opportunity to make an initial selection from the investment choices. So my first payment ended up in a default selection which I would not have chosen and which has some risk of loss. This is unlikely to cost me a lot of money as I have now changed the destination for future payments and exchanged the existing account to my desired choice. Still I will be mad if I lose any money at all because of this. And I am now warier of the arguments for paternalistic default choices in general.

## Saturday, March 13, 2010

### Public Pensions

Last week I saw another article about the dishonest and irresponsible ways many states and other public entities handle their defined benefit pension obligations. Clearly some reform is needed. I believe a simple and effective reform would be to prohibit public entities from offering defined benefit plans at all as they have repeatedly proven their inability to manage them. This might seem a bit drastic but I believe lesser changes are likely to be ineffective as there are too many ways to game the accounting for defined benefit plans and this makes it too tempting for politicians to promise benefits today without adequately financing them.

Note public employees could still be given generous defined contribution plans. But it is unlikely they would be as generous as current plans as the costs would be harder to hide. This doesn't bother me as I don't think anyone is entitled to compensation based on dishonest accounting.

### Fool's Gold

Last week I read "Fool's Gold" by Gillian Tett. This is another book about the recent financial crisis focusing on J. P. Morgan (now part of JPMorgan Chase). I didn't find it all that worthwhile. Much of it just recaps recent events with little new information if you were paying attention at the time. And if you weren't paying attention it isn't really a good history because its coverage is too spotty.

It also follows the careers of a few bankers who were together at J. P. Morgan in the 1990s devising innovative financial products. Again I didn't find this very interesting. The sketches of the bankers were not detailed enough to bring them alive for me or make me care much what became of them. The most interesting part for me was the material about Jamie Dimon who was not originally part of J. P. Morgan but became head of JPMorgan Chase after several mergers. But it suffers from the impression that Tett, like many journalists, has gained access by implicitly promising favorable coverage. None of the subjects are treated at all harshly and Dimon in particular is depicted favorably.

So while the book is readable and sometimes entertaining I don't think it contributes much to understanding the recent crisis.

## Sunday, March 7, 2010

### Toyota

As a long time satisfied owner of Toyota cars I am a bit surprised by the company's current difficulties. Personally I am not convinced there is anything serious actually wrong with the cars. Which of course makes it difficult for Toyota to fix them.

## Saturday, March 6, 2010

### Scapegoats

Apparently President Obama has endorsed the recent mass firing of the teachers in a Rhode Island school where students are performing poorly. This is not too surprising since in his book "The Audacity of Hope" Obama claimed to believe that teachers are the most important factor in student performance. Which would make it logical to blame their teachers when students perform poorly. However in the real world teacher quality (within the range commonly found in the United States) hardly matters. Student performance is primarily determined by characteristics of the students themselves and secondarily by the characteristics of their classmates.

So while I believe it can be absurdly difficult to fire individual teachers for gross misconduct I am sympathetic to making it difficult to fire teachers in cases like this where teachers are being blamed for things they have little influence on. Of course this is a difficult case for the teacher's unions to make as if teachers don't matter much there is not much reason for them to receive premium pay.

## Saturday, February 27, 2010

### Storm report

I was a little apprehensive about driving back to Ossining from central New Jersey Friday night in view of the late week storm . However the drive proved easy as the major roads were OK and traffic was less than normal. I287 was fine with little evidence of heavy snow. Once over the Tappen Zee bridge into Westchester there were a few problems but nothing too bad. For some reason the usual ramp to the Saw Mill was closed but I was able to find an easy alternative. And the sticky wet snow had caused fallen branches which encroached on the right hand lane of the Saw Mill in a few spots but the center lane was fine.

My condo seemed to have received about a foot of heavy wet snow. The picture shows a tree across a nearby road. Fortunately it didn't block my way home.

### Tax simplification

Yglesias claims that:

... It would be fairly simple for the IRS to mail people “pre-completed” forms, subject to the taxpayers’ review and correction. Rich people would still want to hand their documents over to an account for analysis, but for normal people you’d just read the thing over and sign. ...

I believe that this is wrong, it would not be in fact "fairly simple". To complete even a simple return correctly you need to know the taxpayer's marital status and number of dependents. I don't believe the IRS currently has a reliable independent way of determining these facts. For a slightly more complicated return you need to know the amount of property tax paid which again I don't think the IRS knows.

Even for things like wage, interest and dividend income which the IRS theoretically knows as it receives W2 and 1099 forms things are not so simple. At one time the IRS was not matching many such reports with actual returns filed. Perhaps things are better now but I suspect the mismatch rate is still too high for the IRS to reliably fill out returns.

And of course to mail you your return the IRS would have to know your current address. Considering the periodic stories about unclaimed refunds for taxpayers the IRS is unable to locate this seems dubious.

If Yglesias wants to make the income tax less annoying he should concentrate on simplifying the rules, many of which make no economic sense.

## Sunday, February 21, 2010

### Free Credit Reports

I just ordered my government mandated annual free credit reports for the first time. I tried to do this a few years ago when they initially became available but gave up when I was unable to do it online. This time I was able to get the Equifax and Experian reports online. Transunion's I had to order to be mailed to me after fighting through an incredibly obnoxious automated voice recognition system. Hopefully it will actually be mine and be sent to my address.

There wasn't much of interest in the Equifax and Experian reports, just information on the one credit card I have. I had heard that utilities sometimes provide payment records to the credit bureaus but apparently mine don't.

I have no idea how one credit card account in good standing would translate into a FICO score.

### Music videos

Until recently my only exposure to cable TV was in motels or hotels while traveling as I didn't subscribe. Fifteen or twenty years ago there were cable TV channels which seemed to mostly play music videos. But some years later I couldn't find music videos on cable any more. Does anyone know why they went away?

## Saturday, February 20, 2010

### Credibility

I recently read "The Secret Sentry" by Matthew M. Aid. I won't be giving a serious review of this book but I will note it contains an egregious error. On page 179 in connection with the 1983 Beirut marine barracks bombing the book states "... The resulting explosion was massive, the equivalent of twenty thousand pounds of TNT detonating, giving it the sorrowful distinction of being the largest nonnuclear explosion in history. ...". This is of course wrong. Wikipedia provides a list of large non-natural non-nuclear explosions many of which involved the equivalent of much more than 10 tons of TNT. Three rather well known examples are the Halifax Explosion , the Texas City Disaster and the Port Chicago Disaster each of which was upwards of 100 times as large. There have been many other lesser explosions which were still bigger than the marine barracks explosion. It is hard for me to understand how someone could make such an error and it is the sort of thing that in my eyes severely damages the author's credibility in general.

## Sunday, February 14, 2010

Although chain restaurants in Westchester were required to start posting calorie counts for their menu items some time ago I hadn't actually eaten in a restaurant with calorie counts until yesterday when I visited a MacDonalds. One of the arguments the restaurants unsuccessfully made against the law was that it would make their posted menus crowded and confusing with which I have to agree. It is not surprising to me that early indications are that the law is having little effect. The counts did reinforce a point that I had only recently become aware of, the MacDonalds dollar menu is a really good deal from a food as fuel point of view. So I had three McDoubles instead of two Big Macs, more calories for about half the price.

## Saturday, February 13, 2010

### Stephen Carter's novels

Stephen Carter is a black academic who also writes novels. As I recall I rather liked his first, "The Emperor of Ocean Park", which I read several years ago. I recently read his latest, "Jericho's Fall", which I thought was ok. This inspired me to locate and read his other two novels, "New England White" and "Palace Council". Unfortunately I found both to be seriously flawed. The books reminded me a bit of "The Da Vinci Code" by Dan Brown . Both authors have some writing talent in the sense of getting you to keep turning the pages but have problems with the bigger picture. They also have conspiratorial world views and weird obsessions which can make it hard to maintain suspension of disbelief. And they both seem prolix. As a result I found myself liking the books less and less as I read through them. I like novels to make sense when considered as a whole and I don't think these books are very satisfactory in that respect. So in my opinion these books can be safely skipped.

## Sunday, February 7, 2010

### Feeling poor

Turbo Tax has a feature that compares your return to the US averages (for 2007). I was a bit disconcerted to see the average salary and wage income reported to be \$420,000 and the average tax paid reported to be \$190,000. This seemed quite high and in fact appears to be wrong. According to this (table 1) the correct values are about \$60,000 and \$8,000. Apparently Turbo Tax was comparing to the top 5% (or so) of returns, not all returns. So my poverty is only relative.

## Saturday, February 6, 2010

I think Yglesias misses the point here :

I have a condescending attitude toward this op-ed. Of course I think my views are correct and based on fact and reason. If I thought my views weren’t correct and based on fact and reason, I would adopt different views—correct fact-and-reason based ones. Does Alexander really think that conservatives don’t think their views are correct? Does Alexander not think his own views are correct? Not based on fact? Not based on reason? I’m not sure it’s possible to be condescending enough to this op-ed.

Of course people think their beliefs are correct or they would change them. But people differ in how confident they are that they are correct. People who think political issues are obvious and clear cut are more apt to consider their opponents evil rather than simply mistaken. Which makes them more inclined to try to crush opponents rather than convert them. Obviously fanaticism is found on both ends of the political spectrum but I think liberals have greater tendency than conservatives to see political struggles as battles between good and evil.

## Friday, February 5, 2010

I have recently gotten some comment porn site spam in what appears to be Chinese which I have deleted after complaints. In the future I will automatically delete comments which I can't read which means anything not in English.

## Sunday, January 31, 2010

### Hiatus

Blogging will likely be less frequent for a while as I begin my new job .

## Saturday, January 30, 2010

### Autopsy

Perhaps health care reform is not quite dead but additional delays are likely to be fatal. I believe Yglesias is correct that the sudden collapse of support is a sign that many Democrats were not very enthusiastic about reform. Hence the lack of urgency and delays chronicled in this TPM timeline . Support for reform in general has always been greater than support for any specific reform proposal making it easy to underestimate how difficult it will be to pass a specific proposal.

## Friday, January 29, 2010

### Bipartisan

What does it mean for an initiative to be bipartisan? In my view it means it has majority support from both parties. Perhaps this is too stringent but it should at least have substantial support in both parties. But this is not what the Democrats mean when they talk about bipartisan. They are not proposing true compromises that would be supported by a majority of Republicans, instead they just want to attract a small number of Republicans in order to put a Democratic initiative over the top. This might be a sensible strategy but it is not in my view a bipartisan strategy.

### Principal reductions

Felix Salmon asks why banks are reluctant to modify loans rather than foreclose and concludes:

Why are the banks behaving like this? I think the obvious answer is the right one: they’re holding these loans on their books at much more than they’re really worth, and they can’t afford to take the write-downs which would accompany principal reductions of roughly the same magnitude as the decline in housing prices. This kind of head-in-the-sand behavior can only possibly work if housing prices suddenly rebound in the next couple of years, and that ain’t gonna happen.

The obvious alternative explanation is principal reductions generally are not in the banks best interest. Most people with underwater mortgages will not in fact default. So writing everyone down to market value is a loser for banks, the amount they may gain by avoiding foreclosures is outweighed by the losses on the mortgages that would have been paid in full.

And I think the harm caused by foreclosures is being exaggerated. Foreclosures are associated with falling market values but this does not mean they cause falling market values. Instead falling market values cause foreclosures.

There has been a lot of talk about keeping people in their homes but in many cases everyone is better off with a quick and clean default.

## Thursday, January 28, 2010

### SOTU

I didn't watch President Obama's State of the Union speech but I did read the transcript . On the whole it seemed competent enough but I doubt it will change many minds. Some random comments on excerpts follow.

To recover the rest, I've proposed a fee on the biggest banks. (Applause.) Now, I know Wall Street isn't keen on this idea. But if these firms can afford to hand out big bonuses again, they can afford a modest fee to pay back the taxpayers who rescued them in their time of need. (Applause.)

This sounds reasonable but as I understand it Obama also wants the banks to pay for the bailout of GM and Chrysler which seems less so.

Tomorrow, I'll visit Tampa, Florida, where workers will soon break ground on a new high-speed railroad funded by the Recovery Act. ...

I don't understand the liberal fascination with high speed rail which is expensive and pointless. As I understand it this is a multibillion dollar project to build a high speed rail line between Orlando and Tampa. It seems like it would a lot cheaper and more flexible to buy a few buses.

... where prosperity was built on a housing bubble ...

Here Obama acknowledges there was a destructive housing bubble but elsewhere in the speech appears to think it would a good thing if housing prices returned to bubble levels.

... And that means building a new generation of safe, clean nuclear power plants in this country ...

Nice to see some good words for nuclear power.

... That's why we're working to lift the value of a family's single largest investment –- their home. The steps we took last year to shore up the housing market have allowed millions of Americans to take out new loans and save an average of \$1,500 on mortgage payments.

Why try to preserve bubble prices? It is expensive and likely futile in the long run.

This year, we will step up refinancing so that homeowners can move into more affordable mortgages. ...

Again this is a subsidy for housing by keeping mortgage rates artificially low. This is the thinking that got us into trouble.

... And it is precisely to relieve the burden on middle-class families that we still need health insurance reform.

This is disingenuous. The current reform proposals are largely a massive new welfare program which will primarily benefit the poor. It is hard to see how this will relieve the burden on the middle-class.

... And we should continue the work of fixing our broken immigration system -– to secure our borders and enforce our laws, and ensure that everyone who plays by the rules can contribute to our economy and enrich our nation.

This sounds good.

## Tuesday, January 26, 2010

### Wine errors

Felix Salmon discusses cases where people order expensive bottles of wine by mistake and receive an unexpected bill for thousands of dollars. He is strangely unsympathetic ("... you have no one to blame but yourself ...") considering his position when people accidentally trigger exorbitant bank fees. In my view it is the restaurant's responsibility to make sure people know the price when it is out of line with the rest of the meal. Especially since expensive wine is basically a scam (people can't distinguish expensive wines in blind taste tests).

I don't actually know the legalities if someone refuses to pay (based on a sincere misunderstanding). There was no contract because there was no meeting of minds (mutual agreement on terms). I don't know what courts do in such cases, where the transaction can't be unwound, perhaps try for an equitable resolution of some sort.

## Monday, January 25, 2010

### Abortion and rape

Liberals sometimes claim to not understand why some people who generally think abortion should be illegal are willing to make an exception in rape cases. For example Kevin Drum :

... I still don't get the rape and incest exception, though. If it's murder, why is it OK to murder children born of rape or incest?

This is a bit muddled, a fetus doesn't become a child until it is born. And if abortion is legal in rape cases then it isn't murder as murder is a legal term for certain unlawful killings. Statements that abortion is murder are really claims that killing a human fetus is analogous to killing a human child or adult and should be illegal for similar reasons. But these reasons are not sufficient for society to make all killing illegal, in exceptional cases such as self-defense killing is allowed. So there is no logical reason society cannot allow some abortions to be legal as well when outlawing them would also impose an unjust burden as is arguably the case for rape.

## Sunday, January 24, 2010

### New job

I have accepted the employment offer which I received last month. I will begin work Monday, February 1. It appears best I say nothing more about the specifics of the job. It will likely leave less time for blogging.

## Saturday, January 23, 2010

### Individual mandate

Apparently the most unpopular part of the Democratic health care reform proposals is the individual mandate. Kevin Drum claims:

And the least popular feature? The individual mandate, by a landslide. It's even less popular than the \$900 billion cost, which is pretty remarkable. Unfortunately, the whole plan falls apart without a mandate, so there's not much we can do about that. Just learn how to explain adverse selection to your relatives when you're trying to sell them on the plan, OK?

However it would be easy to devise plans without an individual mandate. The requirement for a mandate is the consequence of the following liberal beliefs about health insurance.

1. Everybody should be covered.
2. Everybody should pay the same rate.
3. Everybody should receive the same, gold plated, coverage.

The primary reason liberal plans have a mandate is that liberals want everybody to be covered whether they want to be or not. Without a mandate some people will choose not to buy insurance. The number of such people is greatly increased by incorporating the other liberal beliefs in designing plans. Charging everybody the same rate means some people are being greatly overcharged making them more likely to want out. Similarly some people who would voluntarily buy cheap insurance will balk at being forced to buy expensive gold plated plans.

There are numerous ways to encourage people to voluntarily buy insurance compatible with basic economics. Such plans would not lead to everybody being covered but neither will a plan that can't get through Congress.

## Friday, January 22, 2010

### Coldest days

In terms of historical averages (for White Plains ) the coldest days of the year around here lie in the range January 16-21. After a cold start of the year the last week or so hasn't been bad. Still it is nice that temperatures are now rising on average.

The hottest days are a bit more than six months later from July 29 to August 13.

## Thursday, January 21, 2010

### Edwards

Thursday, John Edwards belatedly admitted paternity of his mistress's child. Edwards had sought the 2008 Democratic nomination for President while carrying on an affair with Rielle Hunter .

To me, the most interesting part of this story was the extreme reluctance of many mainstream media organizations to cover it. It is a reminder of how narrow the range of "respectable" opinion can be and how cowardly the news media can be about covering any story that might offend the establishment.

## Wednesday, January 20, 2010

### Post-mortem

In the aftermath of the Republican victory in the Massachusetts Senate special election health care reform (HCR) appears in deep trouble. Many Democrats were never very enthusiastic about HCR but didn't want to openly oppose it. Hence its long and tortuous path through Congress to date. But it is hard to see a path to passage at this point although a simulacrum of life may remain for while as no one wants to be the one to declare HCR officially dead. Of course I have been mistaken before about HCR's chances.

If HCR does fail this will be pretty bad for the Democrats. In my view it was a mistake for the Democrats to make HCR their main priority. They would have been better off passing some incremental changes (like extending COBRA) while concentrating on the economy and financial reforms. Unfortunately it will be difficult to change course at this point. They have thrown away a lot of political capital for nothing and the window for passing strong financial reforms may have passed. This would have been easiest accomplished at the height of the crisis when the banks needed government help to survive. Now the administration has no leverage. Nor do they seem all that determined, perhaps because Obama just isn't that interested in the economy.

## Tuesday, January 19, 2010

### Brown beats Coakley

I was pleased to see Scott Brown defeat Martha Coakley in the Massachusetts Senate special election. The Democrats changed the rules for filling a Senate vacancy after Kennedy died. This was the second such rules change motivated by considerations of partisan advantage since 2004. Yglesias defended this here :

... But when you have a state whose state legislature is firmly and forever in the hands of one political party, the smart thing is for the legislature to be constantly changing rules based on short-term considerations. ...

Perhaps it wasn't so smart after all.

## Monday, January 18, 2010

### Bundling

People sometimes complain about being forced to buy cable TV channels they don't want because they are typically sold in bundles. Here is Felix Salmon. These people seem to be under the delusion that if for example the bundle price for say 50 channels was \$25 per month then the a-la-carte price would be \$.50 per channel. But that is not how volume pricing works, the individual prices would be higher and any consumer savings would have considerable cost in the form of fewer channels available. A-la-carte pricing is the sort of thing that mostly sounds good only because people don't understand how it would actually work out in practice.

## Sunday, January 17, 2010

### Brown vrs Coakley

The special election for Ted Kennedy's former Senate seat takes place next Tuesday. Republican Scott Brown is running against Democrat Martha Coakley. The Democrat would normally be heavily favored in Massachusetts but the race appears to be competitive . In fact currently on Intrade Brown is favored by about 3-2. I think I would bet on Coakley, mostly because I want Brown to win and betting on Coakley would be a form of hedging. If Brown won I could think of the bet as the equivalent of a campaign contribution and if Coakley won I would have my winnings as solace. Also at those odds it doesn't seem like a bad bet although I know little about Massachusetts' politics.

## Saturday, January 16, 2010

### Turbotax Deluxe 2009

I have always done my state and federal income taxes manually. However this year I decided to try Turbotax. I had hoped to receive it in time to figure my final estimated tax payment (due January 15). However due my procrastination and refusal to pay more for expedited shipping I didn't receive it until Saturday so I had estimate what my taxes would be manually anyway.

Having now received it I can report my first impressions. I got the Deluxe version which includes 1 state return and federal efile.

To start I found the data entry a bit awkward as it assumes you have all your W-2, 1099 and similar forms in front of you and it is not always clear how to proceed if you don't. And when I tried to import my dividends received from Quicken it lumped them all together which is not correct. It also kept trying to sell me a fancier version to handle investments although I think this is unnecessary.

Another problem is my 2009 taxes are affected by my 2008 taxes. If I had used Turbotax last year this would presumably have been no problem but as it is I had to enter a lot of data from 2008 including data from worksheets. This would have been easier if Turbotax had given the location (page numbers) of the worksheets.

In general it seems that I may not save all that much time. Having done my taxes manually for many years I know which calculations to skip as they won't save me money. However Turbotax has me spend time figuring credits that I ultimately don't qualify for. Of course it could turn out I have been overlooking something for years. On the other hand Turbotax seemed overly willing to assume a state tax refund I received was taxable income.

So my initial impressions are a bit negative. Of course my mood was not improved by learning that the AMT is going to be a considerably larger hit for me in 2009 than it had been in previous years.

## Friday, January 15, 2010

### Zero at the Bone

I recently read "Zero at the Bone" by John Heidenry. This is a true crime account of the 1953 kidnapping and murder of Bobby Greenlease, a 6 year old boy, by two alcoholic losers who were quickly caught and executed. I did not find it very worthwhile.

In part this is because of the depressing subject matter. The two perpetrators, Carl Austin Hall and Bonnie Heady, are completely unsympathetic planning to kill the little boy from the start. Heady's role was to remove the boy from his school by posing as his aunt. Hall killed the boy and then sent ransom demands to his parents eventually collecting a \$600000 ransom. Hall didn't enjoy the money long as he quickly drew attention to himself and was arrested. As was Heady who seems to have been in a drunken stupor for most of their time on the run. Nor are the police very appealing only catching Hall after being tipped and then apparently stealing half the ransom.

But it is also because the author does not tell the story in a very interesting manner spending far too much time for example in a tedious recounting of Hall's exact movements after he collected the ransom and before he was caught.

So in summary this is a not very enthralling account of a lurid but ultimately not very significant crime. Give it a pass.

## Thursday, January 14, 2010

### The Myth of the Rational Market

I recently read "The Myth of the Rational Market" by Justin Fox. This book is largely a history of the development of academic models of the stock market. I found it interesting although perhaps a bit long. I was already familiar with these models in general terms which probably made the book easier to follow.

As the book notes models are simplifications of reality. As such they are never completely correct but may nevertheless be useful. However you must be aware of their limitations. Unfortunately financial modelers often have excessive faith in their models and this can lead to problems. One common problem is failure to properly take tail risk into account. Tail risk is the risk from rare events. Because the events are rare they are easy to ignore but this can be dangerous as one bad day can wipe out several profitable years. This is especially a problem with new financial products that don't have a big experience base to reveal problems.

Another problem is a preference for mathematically elegant models even when they don't match reality. For example modeling stock prices is easier if you assume they move continuously but real stock prices sometimes jump discontinuously. A continuous model can still be useful but you shouldn't forget that stock prices don't always move continuously. Unfortunately academic economists have a tendency to fall in love with their models and come up with elaborate explanations for why apparent discrepancies with the real world are illusory. As with strained claims that real world bubbles don't exist because their models don't predict them.

The recent financial crisis has left financial modelers somewhat discredited. Although as the book observes the problems were primarily outside the stock market which has been the primary focus of academic work. I don't think the answer is to throw out models entirely but to be more cautious in relying on them. Particularly when they are being used to sell new financial products.

## Tuesday, January 12, 2010

### Ruthless default again

Last month I posted my thoughts on ruthless default concluding that, where legal, it is not particularly wrong.

Megan McArdle continues to argue the anti-default position. I found her arguments muddled and unconvincing.

First her list of pro-default arguments omits the main one, that it can be a legal way of saving yourself hundreds of thousands of dollars. A moral obligation has to be pretty strong to compel you to give up that much money and I don't see the case here. Note it doesn't make any sense to default if you are just a little bit underwater, this is only an issue for people who are way underwater. If you are happy with your home how much over market value would someone have to offer to get you to move? Quite a bit for me and I believe most other people.

Additionally many of McArdle's arguments against other pro default arguments don't make a lot of sense to me. For example:

All well and good, except that if you are walking away from a mortgage simply because the house is underwater, you have no authority to punish them. After all, the reason it was stupid to lend money to you is not that they were lending money to someone who probably couldn't pay it back; you can. The reason that it was stupid to lend money to you is that you're a deadbeat--a foolish deadbeat, who thought that house prices are a magic route to free money. That's not something they could reasonably have been expected to know. Also, "banks need to be punished for being almost as stupid and greedy as I am" doesn't have much of a ring to it.

But of course it is not foolish to obtain a loan on favorable terms. If house prices went up you got the profit, if they went down the bank took the loss. Heads I win tails you lose is not a foolish bet for me. And it is in fact stupid for banks to lend on such terms.

McArdle continued:

Moreover, those cheerleading such behavior seem to be under the misimpression that this will somehow be targeted at banks that made stupid loans. But the people who are walking away simply because the price dropped are not going to distinguish between good, sound credit unions with a conservative loan book, and big, greedy pension funds and charity endowments that bought residential mortgage backed securities. They're going to walk away from anyone holding the loan on a house where the price has dropped by more than the downpayment--which in places like California and Florida, is probably any house purchased between 2004-2007, no matter how conservative the underwriting.

Of course it is targeted at banks that made stupid loans. Which most non-recourse loans that don't require a substantial down payment are. And as I noted above people won't walk away just because they are a little underwater. This is especially true where a substantial down payment was required. Since people are reluctant to take losses they are a lot less likely to default when it means forfeiting a substantial down payment. So banks with conservative underwriting will have fewer borrowers walk away and they will lose less on the ones that do.

McArdle also claimed:

Okay, first of all, nothing would have stopped people from writing awful loans at the height of the bubble, because they didn't think the loans were going to go bad like they did. ...

This is nonsense. A legal requirement of 20% down would have stopped a lot of bad loans. Just as margin requirements prevent a lot of bad loans against stock.

McArdle also argued:

Except that banks would probably flood DC and state capitols with lobbyists trying to change the rules. There hasn't really been much value, up until now, in changing the recourse rules--I mean, banks probably prefer one to the other, but it's not their top priority, because people almost never default on their house unless things are so dire that there's no hope of recovering much anyway. If that changes, tougher rules become a top priority--and eventually, they'll probably get them, if the alternative is tougher underwriting, higher interest rates, and bigger downpayments.

First nothing is changing, people have always been willing to walk away when it was legal and greatly to their advantage. They didn't do so in great numbers in the past because banks maintained sensible underwriting standards. Second even if more people defaulting leads to changing the law (which I think is unlikely) this is not a moral argument against defaulting. You are not morally obligated to refrain from taking advantage of a tax provision just because if too many people take advantage of it the provision will be changed.

In summary McArdle asks people to voluntarily refrain from exercising legal options potentially worth hundreds of thousands of dollars for nebulous moral reasons. I don't understand why anyone would expect this to happen.