Shearer Insanity

John G. Fletcher RIP

2012-01-29T19:15:00.000-08:00

I sadly note the recent death of my stepfather, John G. Fletcher. Like my father he had a doctorate in physics and had a long career at the Lawrence Livermore Laboratory. Unlike my father he quickly moved away from physics to work in the lab's computation department. Here is a 1983 video in which he talks about the lab's computer systems. And here are transcripts of interviews with him in 1993 and 1995 looking back at his career at the lab. Finally here is the wikipedia article on Fletcher's checksum which he invented.

He shared my interest in mathematical games and puzzles and continued to work on them after he retired in 1993. He submitted many solutions to IBM's monthly Ponder This puzzle from November 2001 through June 2011, before, during and after the period I was puzzlemaster.

I took the photo in 1991 at Big Sand Lake, near Park Rapids Minnesota, where his parents lived. I have fond memories of vacationing there in the early 1990s.

Moving on

2012-01-27T21:27:00.000-08:00

As any long term readers of this blog know I was laid off from my job at IBM's Watson Research Lab in Westchester New York about 3 years ago. I was out of work for a while but then got a job in central New Jersey which is about 90 miles away from my Ossining townhouse. This is too far to conveniently commute but I was reluctant to move as the job was originally temporary and I liked my townhouse. So I stayed in a motel during the week and returned to Ossining on weekends. But this wasn't ideal and since my position was made permanent early last year it seemed best to relocate. After a somewhat prolonged search I bought a townhouse near Princeton late last year and after some more delays I had my stuff moved last week.

This took three men two days. About 10 hours the first day to pack it up and load the truck, about 5 hours the second day to unload the truck (leaving the unpacking to me). I found the process a bit tiring. Not in a physical sense as I wasn't doing any of the work but somewhat emotionally draining as it marked a rather definite end to a big portion of my life. At least I didn't have to worry about the cost as my employer paid. Apparently quite a bit, hopefully a reasonable amount trickled down to the men doing the work.

Despite my doubts about moving I am settling in fine in the new place.

Kodak bankrupt

2012-01-24T06:50:00.000-08:00

Long ago I inherited small amounts of a few stocks from my great uncle. Over the years their fortunes have varied. The one that did worst was Eastman Kodak which last week filed for bankruptcy after years of decline. My investment wasn't actually a total loss (although I expect the shareholders will receive nothing in any reorganization) as Kodak had paid a dividend for many years and also spun off Eastman Chemical which while not doing so terrific itself isn't bankrupt. Still not one of my better investments.

While it is of course difficult when your main product dies it is a bit hard to believe that better management couldn't have salvaged something. It is a little hard for me to understand why the current CEO still his job.

Kodak should have had plenty of warning, while the early digital cameras were expensive and not very good their problems were clearly fixable while film was a mature technology without much upside potential. Which brings me to the subject of the Kindle Touch e-reader which I received for Christmas. I like it a lot despite an annoying user interface. The problems seem fixable and I expect over time that e-books will dominate the market.

One up on Wall Street

2012-01-16T15:29:00.000-08:00

I recently read "One up on Wall Street" by Peter Lynch (with John Rothchild, 1989). Peter Lynch was a very successful manager for Fidelity's Magellan mutual fund which he directed from 1977 to 1990. According to wikipedia he achieved an average annual return of 29% which is of course terrific. One might expect he could write a worthwhile book on personal investing but in my view this book is not it.

The main problem with this book is its premise (see pages 240-241 in the paperback edition) that with moderate effort following his advice the average person can expect to beat the market averages by 2-5% a year (so if the market averages 10% average annual return you can expect to achieve 12-15%). In my opinion this is totally unrealistic and potentially dangerous advice for the average investor. More realistically an individual investor should expect returns (before expenses) which roughly track the market. Of course if you aren't widely diversified you won't match the market exactly and might in fact achieve excess returns of 2-5% annually for some time. But these will probably just reflect good luck and be no more likely than lagging the market by an equivalent amount.

So if you don't enjoy researching and picking stocks but want to be invested in the market the practical thing to is to invest in an index fund. This takes minimal effort and you should achieve the market return. Index funds are also relatively tax efficient. If you do enjoy picking stocks and have a bit of a taste for gambling then picking out and holding a portfolio of 20 or so stocks is fairly harmless as long as you don't trade too much and spread your picks around. Your expected return won't suffer, you can root for your stocks and you may get lucky and beat the market by a bit. And by managing your own portfolio you can adjust for your personal tax situation. Active mutual fund managers often only think about pretax returns and give up some after tax return by being too willing to take gains. Lynch in fact totally ignores taxes in this book.

A large part of Lynch's book consists of war stories, stock picks of his that did well or poorly. He has explanations and advice based on these examples but to me they just seem to illustrate the adage that it is easier to predict the past than the future. They don't appear to add up to a reliable method for beating the market going forward.

The book also come across as rather dated. References are made to looking up company information in local libraries which subscribe to the Value Line service but I believe this type of information is now widely available on the internet. And 1990 time frame stock picks are mostly of historical interest at this point.

So in summary I would skip this book.

Habit

2012-01-07T14:53:00.000-08:00

When I joined IBM I opened an account at a bank with a branch in Millwood. It was convenient as I could stop by on my way to work. When I got laid off I went on banking there out of habit although it was now considerably less convenient. About a month ago it rather belatedly occurred to me that my bank has many branches. I have since been using one in Croton and it is rather startling how much easier this is. It makes me wonder how much other suboptimal behavior I engage in out of inertia.

A Song of Ice and Fire

2012-01-02T06:29:00.000-08:00

I recently read the five existing books of George R. R. Martin's fantasy series, "A Song of Ice and Fire". It is perhaps better known by the name of the first book, "A Game of Thrones" (1996, 704 pages in hardcover). The following four books were "A Clash of Kings" (1998, 784 pages), "A Storm of Swords" (2000, 992 pages), "A Feast for Crows" (2005, 784 pages) and "A Dance with Dragons" (2011, 959 pages). As can be seen this is a very long series, over 4000 pages so far, and reading it represents quite an investment in time. Martin certainly has story telling talent and there are good things about the books. But overall I found the series seriously flawed and I can't really recommend it.

My first objection is to the overly ambitious scope of the story. It appears to me that someplace in the second book the author lost control and began multiplying characters and subplots beyond reason. I like a book or series to tie things together at the end and at this point this seems unlikely to happen.

A related issue is the way the series is written. There are numerous narrative threads and viewpoint characters and the books jump around among them. This is of course a common technique and is ok up to a point. But in my view this series has gone well beyond that point. Many of the narrative threads are largely independent and chopping them up and intermixing them just seems confusing and irritating to me. The problem is aggravated by the author's propensity for abandoning threads in cliffhanger situations rather than at natural stopping points which makes it harder for the reader to pick up the new thread.

My final objection is to the general tone and content of the series which is quite dark. The books assume a medieval level of technology (swords and crossbows) with some magical elements added. Considering what this period of human history was actually like it would have been unrealistic for the series not to have dark aspects. But the series emphasizes them in a way that I found off putting. It is not so much any one description of the strong mistreating the weak (often with sadistic cruelty) or of betrayal and treachery but the cumulative effect of many such descriptions over 4000 pages. When reading for enjoyment and entertainment I would prefer a bit less realism.

In my opinion the first book was the best. According to wikipedia the series was originally envisioned as a trilogy. I think Martin would have done better to stick with this plan. Authors sometimes have trouble coming up with satisfying endings to their stories. Greatly expanding the scope of the story postpones dealing with this problem but does not make it any easier.

So in summary, Martin is a talented writer and I certainly found parts of the books entertaining even compelling but ultimately I found the series disappointing. I am the sort of person with a compulsion to find out what happens next so I will probably read any additional books as they appear but if you aren't already invested in the series you might think twice about embarking on it.

October Snow

2011-10-29T22:01:00.000-07:00

As predicted Ossining has received a substantial snowfall. It started snowing heavily around 1 PM Saturday and it appears we have gotten at least 6 inches. That amount this early is quite unusual. The power has flickered a few times but come back. Hopefully the snow will melt quickly.

The picture was taken from the small second floor deck on the back of my townhouse.

Yankees lose

2011-10-08T08:59:00.000-07:00

I was a bit sorry to see the Yankees eliminated from the baseball playoffs Thursday night. I used to root against the Yankees but I eventually realized that I enjoy listening to their games on the radio and when they lose in the playoffs they aren't on anymore. Also I prefer warm weather and associate it with the baseball season. So this is a reminder that winter is coming.

I don't have much to say about the games except to note that as usual the commentators are ignoring the importance of luck. The Yankees outscored the Tigers in the series 28 to 17 but lost 3 games to 2 because they lost all the close games while winning the blowouts. This is mostly likely explained as due to bad luck and not a lack of heart or character.

Goodnight Irene

2011-08-28T16:06:00.000-07:00

I was working on a post last Sunday evening about how tropical storm Irene wasn't that bad where I live. Then the power went out and stayed out for about a day. There had been a lot of rain early Sunday morning and the power had flickered a few times but stayed on. But apparently the wind on the backside of the storm was the final straw for the local power grid. So not quite as innocuous as I had thought. And some areas were hit worse of course.

The photo was taken Sunday morning after the rain had mostly stopped and shows water flowing over the top of the dam which creates the pond behind my condo. And over a service road in the background. This is not a normal condition but has happened before. It seems to have been fairly harmless and conditions quickly returned to normal.

Jefferson Valley Mall

2011-07-24T22:08:00.000-07:00

I visited the Jefferson Valley Mall for the first time in a while on Saturday. I was a bit startled by the amount of unoccupied space, clearly more than could be explained by normal turnover. This was particularly noticeable in the food court, a bad sign as it suggests customer traffic in the remaining stores is also down. Maybe this is just more evidence that the economy is still not very healthy. Or perhaps the mall has started to fail. Two other enclosed malls that I used to shop at when I worked at IBM, the Dutchess Mall and the South Hills Mall , fell on hard times and slowly died.

On the Brink

2011-05-30T21:31:00.000-07:00

I recently read "On the Brink" an insider's account of the recent financial crisis by Henry M. Paulson Jr. who was secretary of the Treasury in the last years of the Bush administration. I found it more compelling than Robert Rubin's memoir of his time as Treasury secretary under Clinton which I didn't manage to finish. I expect this is mostly because Paulson served in more interesting times (per the purported Chinese curse) as opposed to any greater literary talent on Paulson's part. The book largely consists of a day by day account from Paulson's point of view of the events of 2008. It comes across as reasonably honest, albeit self-serving. Paulson makes it clear that he often found the Democrats in Congress easier to work with than the Republicans. And Obama is depicted more favorably than McCain. Paulson seems well meaning but in over his head. He admits that although when he took office he had vague worries about some sort of impending financial crisis (because there hadn't been one for a while) he didn't see it arising in the housing market. Throughout the crisis he seems to have been in firefighting mode, dealing with each successive problem as it arose, and hoping for the best (which as the saying goes is not a plan). His signature Troubled Assets Relief Program (TARP) proved unworkable. Fortunately things eventually stabilized. Of course while it is easy to criticize Paulson in hindsight it is unclear that anyone else would have done significantly better. Perhaps this is why Obama did little to change course. Bernanke was retained as Federal Reserve chairman and Paulson was replaced with Geithner, New York Federal Reserve Bank President, who had worked closely with Paulson and Bernanke during the crisis.

So in summary this is a reasonably entertaining insider account which is weak on the big picture.

All the Devils are Here

2011-04-10T22:03:00.000-07:00

I recently read "All the Devils are Here" another book about the recent financial crisis by Bethany McLean and Joe Nocera. McLean was a coauthor (with Peter Elkind) of "The Smartest Guys in the Room" a book about the Enron debacle which I didn't particularly like . I thought this book was better. Although not as entertaining as the Michael Lewis book, "The Big Short", (which I read shortly before reading this book) it is wider in scope. And even more than the Lewis book it brought home to me just how bad the conduct of the rating agencies was. The rating agencies are often slow to react when a security they have rated starts to go bad sometimes waiting until a company is on the verge of bankruptcy to downgrade its securities. This is not good but is somewhat understandable as the agencies are being paid for the initial rating and keeping the ratings up to date for the life of the security is a lot more work. However the results of the agencies reluctance to revise their initial ratings downward were truly perverse when it came to rating synthetic mortgage securities whose components were already existing (and rated) mortgage securities. Wall Street found creating these synthetic securities profitable because the long side could be sold for more than the payment required to get speculators (like those in the Lewis book) to assume the short side. The long side was attractive to naive buyers because the rating agencies would give it a good rating. The short side was attractive to speculators to the extent that the ratings were obviously inflated. The ratings were obviously too high because it was the policy of the rating agencies not to revisit the ratings of existing mortgage securities even when they were included as components in newly created synthetic securities for which a new rating was being requested. So by including existing mortgage bonds which were obviously overrated (because the observed default rates on the underlying mortgages were much higher than the expected rates used to generate the original rating) but which the agencies had not downgraded one could create synthetic mortgage bonds which the agencies would rate highly but that a informed speculator could tell were very likely to quickly default and hence were actually worth little. So Wall Street firms like Goldman Sachs created such securities (sometimes with the assistance of shorts), obtained inflated ratings on them from the rating agencies, used these ratings to sell the long side to naive buyers and passed the proceeds (minus their cut) on to the speculators assuming the short side. The securities quickly went bad, the buyers lost most of their money and the shorts made a fortune. It is difficult to overstate the degree of willful stupidity on the part of the rating agencies that this required. And it is dismaying that they have suffered few ill effects from it.

The book has some faults, some subjects were treated more kindly than others in a way that left me wondering if this had more to do with how helpful they were to the authors than how culpable they were. And the book ends rather abruptly with the collapse of Lehman Brothers, some coverage of subsequent events would give a more complete picture of what happened.

In summary I think this is a better than average account of the roots of the financial crisis but I am hoping a more definite account will eventually be written after more of the dust has settled.

The Big Short

2011-04-02T20:17:00.000-07:00

I recently read "The Big Short" by Michael Lewis. It tells the story of some of the people who were able to foresee the end of the housing bubble and made a lot of money shorting (or otherwise betting against) mortgage backed securities. I thought it was pretty good.

In part this is simply because I find Lewis an entertaining writer, I also quite liked two of his previous books, "Liar's Poker" and "Moneyball". And I find the idea of making a lot of money by seeing through a bunch of lies appealing. However I also thought the book was an instructive, albeit somewhat narrowly focused, account of the recent financial crisis. It left me feeling I understood aspects of what had happened a bit better.

One of these aspects was the effect of misratings by the bond rating agencies like Moody's. These agencies were giving inflated ratings to complicated mortgage securities which naive buyers foolishly trusted. It was if the agencies were declaring $5 bills to be worth $10 and this allowed them to be sold for $10. Obviously this allowed the Wall Street firms assembling such mortgage securities to profit, and the larger the discrepancy between the agency ratings and the true values the larger the profits. So this encouraged the creation of the most misvalued mortgage securities. So much so that there was a shortage of actual lousy mortgages to assemble into these overvalued mortgage securities. However Wall Street got around this by constructing synthetic mortgage securities using credit default swaps. A credit default swap is like insurance on a bond, in exchange for periodic premiums you are paid off if the bond defaults. So selling credit default swaps (or writing such insurance) is like owning the bond you get periodic payments but lose a lot of money if the bond defaults. So by selling credit default swaps on overvalued mortgage bonds to mortgage market bears (like the people portrayed in this book) the Wall Street firms were able to construct the equivalent of these overvalued bonds which the bond rating agencies would again bless and which could also be sold at inflated prices to naive buyers.

Another aspect was just how foolish these buyers were. Wall Street firms obtain their largest profits by taking advantage of their customers. Wall Street firms like complicated and illiquid securities because it is easier to sell them at inflated prices. So any naive buyer should never buy anything but the simplest, most liquid, most straightforward securities as otherwise they are almost certain to overpay.

There is a bit of a danger with an entertaining writer like Lewis that you will give undue credence to his point of view simply because he is such a good story teller. Lewis has been criticized along these lines but for the most part I think his books get the big picture (if not every detail) correct.

This book does portray its subjects sympathetically. One them was a hedge fund manager, Michael Burry. Many of Burry's clients were upset with him for using what they thought was to be a stock picking fund to make a massive bet against mortgage backed securities. Although this bet eventually turned out very well the clients were not actually being all that unreasonable in objecting.

In summary I liked this book quite a lot. However if you don't already know a bit about financial markets you may find it a little confusing in places and it is not a comprehensive account of the crisis.

A Random Walk Down Wall Street

2011-03-18T20:08:00.000-07:00

I recently reread "A Random Walk Down Wall Street" by Burton G. Malkiel. I had read an early edition (perhaps the first which came out in 1973) of this book long ago and liked it quite a bit so when I saw the "revised and updated" 10th edition ((c) 2011) in my local library I checked it out. I was a bit disappointed. While some material has been added the basic themes are the same and the ideas which were new and interesting to me when I first encountered them were considerably less so some thirty years later.

Which is not to say these ideas are wrong, I think the book has held up pretty well in that respect. Malkiel's main argument is that it is generally a bad idea to pay people to pick stocks for you because there is little evidence that there are professional stock pickers who consistently do any better than chance, throwing darts at the stock page in the newspaper being the traditional analogy. Which means they will tend to lag the market after you deduct their fees. There was and is considerable evidence that this is true. It isn't too surprising that the average performance of professionals is just average because professionals dominate the market so their performance as a group will not vary much from the performance of the market as a whole. However over any given time period some professionals will do well and others poorly. So perhaps we should just be sure to pick a manager who has done well in the past. Unfortunately (and a bit more surprising) the performance (good or bad) of portfolio managers shows little consistency over time. A manager might perform relatively well over a 5 or 10 year period and then relatively poorly over the next 5 or 10 year period. In fact the evidence is quite consistent with variations in performance being primarily due to luck and not differences in skill. This makes Malkiel's recommendation, low cost index funds, an attractive alternative to actively managed funds. As Malkiel points out in addition to their lower management fees index funds will also incur lower trading costs and will tend to be more tax efficient. And in fact index funds have grown greatly in popularity since the first edition of this book.

So why is it so hard to beat the market? One obvious possibility is that stock market prices being the weighted opinion of many intelligent and knowledgeable people are largely "correct" reflecting everything that is publicly known about a company's prospects. This is the efficient markets hypothesis (EMH). The EMH gets ridiculed a lot as the market's collective judgement sometimes seems quite far off the mark as with the bubble in internet stocks. However the EMH still seems like a reasonable explanation (even if it is not entirely correct) for why it is difficult to beat the market consistently as it is lot harder to identify market irrationality at the time rather than in hindsight.

One argument in the book that I didn't find entirely convincing is that riskier (with respect to nondiversifiable risk) stocks will have greater expected returns. This seems logical but Malkiel quotes a study which found otherwise and does not adequately explain why he doubts it.

In summary if you are unfamiliar with the case for index funds this book is probably a good introduction but more knowledgeable readers may find little new in it.

Amos Walker

2011-02-20T08:18:00.000-08:00

I recently read "Amos Walker: The Complete Story Collection" and "The Left-handed Dollar" by Loren Estleman. Amos Walker is a fictional Detroit PI introduced by Estleman in a 1980 novel ("Motor City Blue"). "The Left-handed Dollar" is the latest of 20 novels (many of which I have also read) in the series. I found it typical, solid but in my opinion somewhat below the level of the best in the genre. I liked the short story collection a bit more. It collects the 32 previously published Walker short stories and adds a new story and an introduction by Estleman (totaling some 600+ pages). I found the stories curiously addictive, it was tempting to read just one more (sort of like potato chips). I generally don't like short stories that much but a series of short stories like this is a bit different in that it is sort of like a very episodic novel. I found I rather liked the form. The early PI writers Hammett and Chandler wrote numerous short stories which I also liked when collected but the short story seems to have largely fallen out of favor since (for market reasons with the decline of the pulp magazines).

The stories have some faults and aren't for everybody. As is traditional in the genre they exhibit a rather dark view of human nature which didn't bother me but some readers might find a bit wearing particularly when repeated for 600 pages. The plots sometimes don't hold together if you think about them too much. Walker is prone to sociological asides which I sometimes found bizarre and others might find offensive. And I didn't like the way the stories were ordered. Estleman says in the introduction that they are arranged roughly chronologically but they still jump back and forth in time a lot which I found a bit jarring. I would have preferred a strict chronological order. However I liked the collection and if you also like PI stories (of the traditional "hard-boiled" variety) you might give it a try.

Chuck Tanner RIP

2011-02-13T21:41:00.000-08:00

As I was driving home Friday night I heard on the radio that Chuck Tanner had died . I was a bit sad to hear this as I had followed his career from a distance since playing a game of postal chess with him long ago when I was a teenager and he was a minor league baseball manager. Shortly thereafter he had made the jump to managing in the big leagues where he was moderately successful including leading the 1979 Pittsburgh Pirates to a World Series Championship.

I believe our game was in one of the Golden Knights tournaments. About the only detail I remember is that at one point he wrote something about not liking the fact that in chess you could concentrate for hours and than spoil a game with a small oversight and I had made some reply about dropping a pop up in the ninth inning.

Grading Teachers

2011-02-06T20:07:00.000-08:00

This post is a follow up to my earlier post criticizing a paper, "The Economic Effect of Higher Teacher Quality", by Hanushek in which I address an issue raised in the comments.

Evaluating teachers based on how well their students do academically is difficult because teachers aren't (currently in the US) the only or even the most important factor in student success. So to properly measure the effect of teachers you first have to account as best you can for the other important factors. This is typically done by constructing a model which predicts how well a student will do based on everything besides their current teacher and then comparing this to their actual performance. This prediction will assume in effect that their current teacher is average. Any difference in actual performance is then attributed to the teacher being above or below average (depending on whether the student did better or worse than predicted). Clearly this will be very unreliable for a single student but the hope is that when averaged over many students the errors will tend to cancel out allowing differences in teacher quality to be detected.

What do these models look like. The most important factor in how well a student does is the characteristics of the student themself. This means things like how smart they are (in terms of IQ), how well educated their parents are, what their household income is etc. Such differences among students are far more important in predicting how well they will do academically than differences among their teachers. Since we are generally interested in evaluating the effect of a teacher over a school year another important factor is how well the student has done previously. If you are evaluating a third grade teacher and at the beginning of third grade a particular student is 4 months above their predicted grade level this must be accounted for when predicting where that student will be at the end of third grade (assuming an average teacher). Empirically students doing better or worse than expected at the beginning of a school year will still be doing better or worse than otherwise expected at the end of the school year but not by as much. So for example the student 4 months ahead of their predicted grade level might be expected to be 2 months ahead of their predicted grade level a year later. Similarly a student 4 months behind might be expected to be 2 months behind a year later. Models typically account for this by including a decay factor r so a student x months ahead of their expected grade level at the beginning of a school year will be predicted to be r*x months ahead of their otherwise expected grade level at the end of the school year. Note such models predict the difference n years later will (r**n)*x, this is a consequence of iterating the model predictions.

Hanushek uses such a model in his paper but does not appear to understand the implication noted above that any good or bad effects of for example 1-3 grade teachers will have largely decayed away by the time their students leave school and enter the work force. Hence as I noted before he does not appear to be correctly computing the predicted economic effects based on his own model assumptions.

Enron

2011-01-16T20:50:00.000-08:00

I recently read "The Smartest Guys in the Room" by Bethany MacLean and Peter Elkind a 2003 book about the rise and fall of Enron Corporation which went bankrupt in late 2001. I found it a bit disappointing. I already knew the general outline of the Enron story, how Enron had used shady accounting methods to appear successful for a time until inevitably it all came crashing down, and I don't feel this book added much to my understanding of what happened. Nor did I find the author's recounting of the history all that entertaining. The book is quite long (400+ pages) and at some point the stories of greed and stupidity become repetitive and boring. It reminded me of the saying about not being able to "see the forest for the trees" . I would have preferred a much shorter book that concentrated more on the big picture and less on the sordid details.

So in summary unless you have an insatiable demand for stories of business professionals behaving badly I would skip this book.

Teacher Value

2010-12-29T22:40:00.000-08:00

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. ...

Highland Diner RIP

2010-12-24T14:27:00.000-08:00

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.

Millennium Trilogy

2010-12-18T09:48:00.000-08:00

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.

Charlie Brown's post mortem

2010-11-20T21:00:00.000-08:00

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.

Charlie Brown's

2010-11-15T20:55:00.000-08:00

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.

Fall back

2010-11-07T07:55:00.000-08:00

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.

Election 2010

2010-11-01T23:46:00.000-07:00

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

2010-11-01T20:53:00.000-07:00

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.

Route 9 reconstruction complete

2010-10-30T21:05:00.000-07:00

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.

Benoit Mandelbrot RIP

2010-10-16T19:41:00.000-07:00

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.

Yankees win

2010-09-27T06:17:00.000-07:00

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".

Thornton Hill

2010-09-05T21:20:00.000-07:00

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.

Bridge not out

2010-08-29T00:01:00.000-07:00

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.

Public Servants

2010-08-28T22:44:00.000-07:00

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.

Complexity theory update

2010-08-18T05:12:00.000-07:00

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.

Housing markets

2010-08-17T20:28:00.000-07:00

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.

Butterfly Garden

2010-08-14T18:38:00.000-07:00

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.

Alternating sequences

2010-08-10T20:53:00.000-07:00

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.

Big news in complexity theory?

2010-08-08T21:49:00.000-07:00

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.

Labor markets

2010-08-01T21:17:00.000-07:00

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).

Libertarians

2010-07-29T21:35:00.000-07:00

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.

NYT AIDS story

2010-07-28T21:49:00.000-07:00

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.

Missing the point

2010-07-25T21:01:00.000-07:00

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.

Progressive consumption taxes

2010-07-18T20:49:00.000-07:00

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.

Free money

2010-07-10T19:28:00.000-07:00

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.

Rounding error

2010-07-06T21:35:00.000-07:00

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.

Oil and Obama

2010-07-05T21:04:00.000-07:00

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).

Freefall

2010-06-19T09:24:00.000-07:00

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.

Paint problem

2010-06-14T21:13:00.000-07:00

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.

Census

2010-06-13T20:51:00.000-07:00

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.

Teacher bashing

2010-06-07T21:19:00.000-07:00

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.

Buffett and Moody's

2010-06-03T21:16:00.000-07:00

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

2010-06-03T20:35:00.000-07:00

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.

Stock market returns

2010-05-30T20:15:00.000-07:00

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.

Martin Gardner RIP

2010-05-29T17:09:00.000-07:00

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

2010-05-29T16:58:00.000-07:00

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.

Value creation

2010-05-23T08:48:00.000-07:00

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.

Now obviously these products were being created because they could be sold for more than their cost. Cost being the amount required to purchase the underlying mortgages plus the fees and overhead required to create and sell the derivative securities. So investors in these securities did think value was being created. But they were mistaken. The buyers were relying on the credit ratings of the securities and these ratings were optimistic. This is not too surprising. The people creating these securities could test a million different ways of reassigning cash flows to create derivative securities, examine the resulting ratings (they had access to the rating company software) and pick the assignment that gave the highest combined value to the derivative securities created. Now if the ratings had been perfect this would not have been a problem but of course the ratings were far from perfect and this procedure found the cases where the ratings were most inflated (whether from model flaws or actual bugs in the software). The security buyers didn't adequately discount for this effect and thus overpaid. I believe any actual value created was generally less than the extra overhead costs so that these securities had little real reason to exist and will largely disappear now that buyers are more wary.

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.

Thailand

2010-05-21T22:15:00.000-07:00

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

U is for Undertow

2010-05-20T20:56:00.000-07:00

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.

Specter

2010-05-19T21:07:00.000-07:00

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.

Mortgage math

2010-05-15T22:00:00.000-07:00

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.

Greece and Europe

2010-05-09T08:19:00.000-07:00

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.

Iron River

2010-05-05T20:22:00.000-07:00

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.

California insanity

2010-05-02T08:13:00.000-07:00

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.

Health insurance vrs life insurance

2010-05-01T23:11:00.000-07:00

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.

Goldman case comments

2010-04-25T20:55:00.000-07:00

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?

Brinton Brook Sanctuary

2010-04-24T21:11:00.000-07:00

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

Supping with the Devil

2010-04-18T08:14:00.000-07:00

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

2010-04-18T07:58:00.000-07:00

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.

Pruyn Sanctuary

2010-04-17T22:16:00.000-07:00

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.

Taxes done

2010-04-11T08:52:00.000-07:00

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

2010-04-11T08:29:00.000-07:00

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.

Spring arrives

2010-04-04T12:48:00.000-07:00

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

2010-04-04T12:27:00.000-07:00

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

2010-04-04T11:48:00.000-07:00

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.

Default choices again

2010-03-28T01:09:00.000-07:00

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

2010-03-28T00:28:00.000-07:00

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.

Investment Choice

2010-03-20T23:37:00.000-07:00

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

2010-03-20T22:53:00.000-07:00

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.

Public Pensions

2010-03-13T23:55:00.000-08:00

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

2010-03-13T08:00:00.000-08:00

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.

Toyota

2010-03-07T00:34:00.000-08:00

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.

Scapegoats

2010-03-06T23:53:00.000-08:00

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.

Storm report

2010-02-27T22:41:00.000-08:00

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

2010-02-27T22:00:00.000-08:00

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.

Free Credit Reports

2010-02-21T08:05:00.000-08:00

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

2010-02-21T07:53:00.000-08:00

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?

Credibility

2010-02-20T09:24:00.000-08:00

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.

Dollar menu

2010-02-14T07:11:00.000-08:00

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.

Stephen Carter's novels

2010-02-13T23:48:00.000-08:00

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.

Feeling poor

2010-02-07T08:21:00.000-08:00

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.

Crusaders

2010-02-06T23:23:00.000-08:00

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.

English please

2010-02-05T16:29:00.000-08:00

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.

Hiatus

2010-01-31T00:42:00.000-08:00

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

Autopsy

2010-01-30T23:54:00.000-08:00

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.

Bipartisan

2010-01-29T23:11:00.000-08:00

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

2010-01-29T01:27:00.000-08:00

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.

SOTU

2010-01-28T00:04:00.000-08:00

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.

Wine errors

2010-01-26T22:16:00.000-08:00

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.

Abortion and rape

2010-01-25T21:57:00.001-08:00

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.

New job

2010-01-24T23:55:00.000-08:00

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.

Individual mandate

2010-01-23T22:30:00.000-08:00

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.