Friday, December 31, 2004

Tsunami coverage: math of the Times, physics of the Post.

Almost all the best coverage of the tragic Indian Ocean tsunami that I've seen has been via the Internet. From the videos everyone wants to see, to scientific explanations.

But it's also given my hometown press a chance to show off its acumen.

From the Times' writers we get a display of the math instincts that lead people to become, well, writers...
At least a third of the dead were children, according to estimates by aid officials ... The realization began to emerge Tuesday that the dead included an exceptionally high number of children who, aid officials suggested, were least able to grab onto trees or boats when the deadly waves smashed through villages and over beaches. Children make up at least half the population of Asia...
Although if children are half the population, then a third of the casualties being children would seem to be a disproportionately low number rather than an "exceptionally high" one, opines

Meanwhile, the writers and editors at the Post show off how much they learned from watching Bill Nye the Science Guy...

The quake, which measured 9.0 on the Richter scale, was caused by the shifting of geological plates along a 600-mile area.

This changed the Earth's mass...

As the mass returns to normal, it moves back and forth, much like a church bell when struck by a tong, said Stony Brook geophysicist Teng-fong Wong....

The quake caused a shift in the Earth's rotation, as the change in the planet's mass altered the effect of the pull of gravity on the Earth.

But not to worry. The same thing happens in the summer and winter. It's harmless and it shouldn't last long.
That's a relief. But I'll feel better when we get our springtime mass and gravity back.

Correlation and causation.

We all know that witches do not cause crop failures.

But it may be that crop failures cause witches.

How can Gonzaga be only #21?

[If you're not into sports stats, skip this post]

Roland Patrick tips off whom he roots for by demanding to know how the Gonzaga men's basketball team, after compiling a 9-1 record while defeating the #16, #9 and #3 teams in the nation, and losing only to the #1 team on that team's own home court, can be ranked a lowly 21st in the ESPN/USA Today coaches poll.

What is it with those coaches? Favoritism, nepotism, not being a member of the right club, outright bribery?

Can we instead take an empirical, objective look at where Gonzaga should be ranked, free of the subjective human element?

Sports-stats geeks will say "sure!" Those who are interested (to obsessed) in measuring such things have developed two pretty effective methods of rating the relative strength of competitors (individuals or teams) as measured by ability to accurately predict outcomes of future contests.

The first of these is the Elo system, developed in the late 1950s by Dr. Arpad Elo, then at Marquette University, to rate chess players. The Elo system is based on the observation that a given chess player's performance over a number of games is normally distributed, so that when two players of different strengths meet the probable outcome of their games will be determined by the overlapping distributions. (More details)

The simple result is that on the 4-digt scale actually used in chess, a 0-point difference in rating predicts each player will score 50%, a difference of 100 points that the stronger will score 60%; 200 points, 75%; 300 points, 85%; and so on. Of course while ratings are used predict contest results, contest results are used to compute ratings.

The Elo system has proved surprisingly robust and has been adopted in a wide range of other sports and areas where competitive ratings are desired -- even to ranking universities and colleges on the basis of who chooses to attend them.

The second strength rating method is the Pythagorean system, first developed for baseball by Bill James. This resulted from James's observation that teams' winning percentages correlate very highly with their runs scored for/against ratios as run through a simple formula.

The Pythagorean system has proved highly adaptable too, working fine with football, basketball, and other sports where game outcomes are determined by scoring. In fact, scoring for/against ratios have shown to be a somewhat better predictor of future won-lost records than current won-lost records. Which causes fans of the Pythagorean system to say it is actually a better measure of how good a team is than its won-lost record. (Here's a calculator to show how strong your favorite team really is by scoring ratio.)

Elo system proponents scoff at that, saying the purpose of a contest is to win -- the World Series is won by the team that wins the most games, not the team that scores the most runs. So the Elo system, which considers only wins and losses, is a superior measure of actual performance ... and we head off into the sort of endless argument among sports-stats geeks that is surpassed for vitriol and inanity only by those among political partisans in election season.

Not that there's really a lot to argue about, because the two systems usually give very much the same result -- and when they don't, the difference derives usually not from the systems themselves but from sample size. If only a small number of games are being measured there's a big error factor in each computation, which can produce a big difference between them, which diminishes as more games are played. (E.g, the Elo system requires 20+ games for a reliable rating, which makes it useless for football although many insist on applying it there.)

FWIW, to me the Elo system is a better measure of a team's actual past achievement at what it is supposed to do, win -- though if I was wagering the mortgage money with my bookie on tomorrow's game I'd check the Pythagorean number against the betting line.

But back to Gonzaga. The obvious thing to do is to compare the coaches' poll giving Gonzaga its #21 ranking with objective, empirical Elo and Pythagorean rankings of its performance. And in this Internet-driven world that's easy to do as every sports-stat geek with an online connection seems to have his own personal variation of a rating system posted on his web site.

However, as the coaches' poll is published by USA Today we can go to computer ratings published by that very same newspaper: Jeff Sagarin's. Conveniently, Sagarin publishes both Elo and "Predictor" (his version of points-only Pythagorean) rankings for every team. Then rather than delve into some scholastic argument about which of the two is "best" he puts the two of them together to get his ranking.

His computer's impartial, impersonal, objective and totally empirical rankings for Gonzaga as of this writing: By Elo #2, by Predictor #44, combined for a final ranking of #22.

Should have stayed with the coaches' poll!

What does this mean? Maybe Gonzaga has overachieved or been lucky in winning a couple of those games, relative to its real strength as shown by its points differential -- some of its wins against lesser opponents apparently weren't very impressive. Or maybe it hasn't played enough games to reveal its real strength via points differential.

Most likely, with only 10 games played, it's just small sample size. Who knows where between #2 and #44 they should be ranked? Take a poll and find out.

Maybe there's a point here too that it's often not so easy in life to escape making a subjective judgment by resorting to quantified measures. Not much is simpler than quantifying a basketball team's performance, but when the best you can do is get an answer somewhere from #2 to # 44...

Update: Promptly after writing the above Gonzaga lost to Missouri, ranked #110 by Sagarin's computer. Maybe the coaches and the Pythagoreans had a point.

Thursday, December 30, 2004

You thought the 2004 federal deficit was $412 billion? How about $11.1 trillion, by the accounting rules the private sector uses.

[Update: The 2008 deficit.]

The U.S. government's official budget deficit was $412 billion for fiscal 2004. That's the number reported in the newspapers that everyone editorializes and op-eds about. It represents the net increase in the government's liabilities -- the new debt it incurred during the year, basically by issuing bonds to borrow the cash it needed to pay its bills.

But wait ... the Treasury has just published on its web site, albeit with very little publicity, the 2004 Financial Report of the United States Government. And in it we find a very different number for the amount of increase of the government's net liabilities during 2004.

This number is $11.087 trillion ... with a "t". And, yes, that's just for one year.

So two numbers are published by the Treasury for the same thing -- the increase in the government's net liabilities during 2004 -- with a difference between them of $10.7 trillion. How can this be?

The difference is that of governmental accounting.

The government computes its $412 billion deficit number using cash-basis accounting.

Cash-basis accounting is what individuals use. "Cash in" measures income, "cash out" measures expense, and the difference is net income or loss, nothing or little else counts.

But cash-basis accounting is illegal for all publicly owned corporations, and even for private businesses that have inventory or which accrue in any significant amount either liabilities or rights-to-income that stretch over more than one year.

The reason for this is obvious. Using cash-basis accounting a business could incur a legally binding obligation to pay $10,000 current value some time in the future in exchange for receiving a cash payment of $1,000 this year and book the transaction as generating $1,000 of income -- instead of a $9,000 net liability.

Thus, the Generally Accepted Accounting Principles (GAAP) used in the private sector require all public corporations and other entities that incur multi-year accruals in any significant way to use accrual-basis accounting.

Accrual-basis accounting recognizes the full current value of all future income that one obtains a legal right to receive, and of all liabilities one becomes legally obligated to pay. So if one receives $1,000 cash in exchange for committing to pay $10,000 in the future, a $9,000 net cost is recognized, rather than $1,000 of income.

As noted, the government requires that GAAP rules be used by all public corporations and all but the very smallest of other entities that have inventories or accruals -- except itself. The government reserves for itself the right to use cash basis accounting.

And it is such cash-basis accounting, cash in minus cash out, that produces the government's reported deficit figure of $412 billion. (And a rather dubious version of cash-basis accounting at that -- as the Financial Report itself notes, a better measure is $615 billion.)

But what about the government's accruals? What about the currently accrued future cost of the already promised benefits of Medicare, Social Security, military pensions, government employee pensions, and so on, all measured net against the accrued value of the future income taxes, Social Security taxes, Medicare taxes, and so on that have been established to pay them?

Well, for the last few years, as per a legal requirement pushed through Congress by fiscal reformers, the Treasury has published within its financial report, for informational purposes, an annual Asset and Liability Statement for the government that does follow GAAP rules, using accrual accounting. And this statement shows the government's net liability increasing in 2004 by $11.087 trillion -- a good 27 times more than the official budget deficit.

Looking at the "Overall Perspective" summary on page 11 (.pdf) we can see what this increase is composed of. The significant items:

Medicare: $9.609 trillion

Social Security: $0.812 trillion

Federal debt held by public: $0.385 trillion

Federal/veterans pensions: $0.182 trillion

(Note: Medicare and Social Security net liabilities are computed over 75-years -- not using an unlimited horizon under which they are much larger.)

To place these numbers in some scale, total US national income in 2004 was $10.3 trillion -- that was the total combined income of all individuals, businesses, everybody. So the 2004 increase in the accrued liabilities of the US government exceeded total national income.

Now I'll go far out on a limb here and make a prediction: Currently promised entitlements that increase the current-value liabilities of the US government by more than 100% of national income annually will prove to be unsustainable.

Promises will be broken, folks.

Where will they be broken?

Well, federal & veterans' pensions total only about 1.5% of the accruing liability, not enough to make a difference. And the bond debt owed to the public must be paid, because the Constitution mandates it.

That leaves all the promise-breaking coming in Social Security and Medicare. The 2004 growth in Social Security's current value liabilities of $812 billion by itself equaled 43% of total US government revenues in 2004 of $1.9 trillion. Pretty hefty!

But even that is dwarfed by the eleven times larger one-year increase in current value liabilities for Medicare: more than $9 trillion -- four times the budget of the entire United States government in 2004.

The unquestioned Big Daddy Mountain Gorilla of accruing budget-busting, government-bankrupting entitlement expenses is Medicare.

Spell it out: M_E_D_I_C_A_R_E. And remember it well whenever anybody mentions the words "budget deficit" to you. (Should anyone says "Bush tax cuts" in this regard, remember the difference in scale between perhaps $200 billion added to the public debt through bond issuances in 2004, and $9.8 trillion added in accruing Medicare and Social Security liabilities in just 2004. )

Now, the Treasury doesn't give page 11 of its Financial Report much publicity and politicians give it even less heed. The reason for this is evident -- the information it presents is rather awkward for everyone in Washington, in both parties.

In every election Democrats make hay by accusing the Republicans of planning to cut these entitlements, which are the Democrats' proud heritage and crowning achievement. (Just as if the Democrats will have any way to avoid cutting them if they are in power when all the promises come due).

Bush the Younger and the Republicans for their part have responded by flanking the Democrats on the left on the entitlement issue by creating their own mega-dollar totally unfunded addition to Medicare in the form of their prescription drug benefit. (Unfortunately, what the health of the national fisc needs is for the Democrats to get the idea of flanking the Republicans on the right here, but don't anybody hold your breath waiting for that.)

And, of course, if the government used accrual accounting there would never have been any surplus back in 1998-2001 for the Clinton people to claim they had created ... nor to release the bipartisan spending restraints that Congress imposed on itself during the post-Reagan deficit years -- which release resulted in the big surge of bipartisan vote-buying Congressional discretionary spending that started with the lead-up to the 1998 Congressional election, and over which both Clinton and Bush the Younger afterward presided very happily.

Then with the national debt clock spinning forward 20-odd times faster under accrual rules after 2001, Republican tax cuts would hardly have been so credible to the public ... so page 11 really is quite awkward for everyone in Washington.

But there it is nonetheless, in black and white, you can read it yourself.

If there is any good "less bad" news hidden in this financial statement, it is the new $6 trillion liability for the Medicare prescription drug benefit included in it. No, not that this new entitlement is good news for future national solvency (when you hear people criticize Bush for the mere $200 billion or so his tax cuts added to the public debt in 2004, feel free to correct them with the number for this.) Rather, it is that this $6 trillion is a one-time charge -- in the future only the growth in this number will accrue as a government liability.

So next year's annual increase in accrued government liabilities should be smaller less huge. Subtract $6 trillion from $11 trillion, then add growth on the resulting $5 trillion and on the cost of the prescription drug benefit too, and by "the back of the envelope" we drop back to an annual accural closer to only half of national income, or about twice the operating cost of today's entire federal government, and growing faster than national income. Only. And for anyone who thinks entitlement net liabilities accruing at that rate annually are much more sustainable ... well, I have some magic beans for sale. E-mail me.

Besides, who knows what new retiree entitlements our politicians will promise us all as they compete for votes in the next presidential election cycle? (Democrats were attacking Bush's drug benefit as being not nearly large enough even before it was enacted. Has any such new program ever not expanded rapidly?)

There's only one thing to be sure of: The government's existing promises of retiree entitlements will be broken -- you can bet your own retirement on it.

If you want to do something about it politically while there is still some (diminishing) time left to do so, before the great entitlement-funding fiscal crunch hits a decade or so from now, then accept this reality, consider the issues, make your own list of priorities among entitlements, and decide just how you want the promises to be broken. Choices here will make a difference.

Then get your opinion out in the world. That's why you have an Internet connection.

The retirement you save may be your own.

Wednesday, December 29, 2004

Where is all that "dark matter" hiding?

Unseen dark matter and/or dark energy comprise 85% of the universe, cosmologists say. But where is it hiding?

Not in caves, apparently. [via a football column]

Up in space, maybe? [via jane galt]

Well, duh. Who'd look for 85% of the universe in the bottom of a cave?

Even I coulda told you that!

Krugman memories ...

One year ago today:
"Al Gore's endorsement of Howard Dean was a momentous event..." [12/29/03]
Some while before that:

"I do not think of myself as an all-purpose pundit. I remember once (during the air phase of the Gulf War) seeing John Kenneth Galbraith making pronouncements on TV about the military situation, and telling friends that if I ever start pontificating in public about a technical subject I don't understand, they should gag me." [4/1/99]
Think of all we'd have missed if they had.

Time for all to get our 2005 calendars.

A small help in starting off the new year with the right attitude.

Hey, a coffee mug can help too.

When it's best not to return those disappointing Christmas gifts.
A dimwitted thief was arrested at a Long Island Radio Shack when he attempted to return roughly $2,200 in Christmas gifts — which he had stolen from the same shop, cops said yesterday.

Nassau County police busted Vincent Festa, 44, a contractor, late Sunday at an Oyster Bay Radio Shack as he tried to return $2,198.93 of stolen electronics equipment.

On Dec. 21, Festa stole the items — including a desktop computer, MP3 player, digital camera, 2.5-inch television, home theater system, phone, and digital memory card — from the same store, authorities said.

Employees recognized Festa and phoned police, who busted him in the shop... [NY Post]
If you don't have a receipt, don't even consider it.

Tuesday, December 28, 2004

Kinsley redux on Social Security

Michael Kinsley's restatement of his "logical proof" of why private investments in Social Security are a "certain failure" merely seems to repeat his first statement, rather than try to clarify or add anything to it.

As the gist of his argument seems unchanged I'll just link back to the prior answer given here (short and long versions) and ....

1) Repeat that it remains totally implausible that additional investment in stocks through private accounts of a mere $200 billion annually (as a theoretical top -- probably much less in reality) will "bid down" the yield on more than $33 trillion of stocks so much that anyone would even notice -- much less all the way down to the level of that on government bonds, as his "logical proof" dictates.

Can one really imagine that increasing investment by less than six tenths of one percent can have such a dramatic effect on stock prices?

2) Add something new to the discussion regarding bond prices and yields by pointing out that even purely logically it doesn't necessarily follow that borrowing today to fund future Social Security benefits will "bid up" bond yields at all, much less all the way to the level of that on stocks, as Kinsley's logical proof dictates.

This is because, as Alan Greenspan has stated, future promised Social Security benefits are a liability of the U.S. that already exist, and to the extent that the markets believe the U.S. will actually pay them, the cost of financing them logically should already be reflected in bond prices. In which case making these implicit obligations explicit by financing them today should make no difference at all. As the Chairman put it...

"A critical consideration for the privatization of social security is how financial markets are factoring in the implicit unfunded liability of the current system in setting long-term interest rates. ... If markets perceive that this liability has the same status as explicit federal debt, then one must presume that interest rates have already fully adjusted to the implicit contingent liability." [my emphasis]
This gets to the question of just how secure promised Social Security benefits really are. If they are truly as fully secure as many defenders of the status quo assure us they are, and the markets believe it, then funding those benefits today should have no effect at all on interest rates. After all, the government is already on the hook for all that money, so simply admitting it honestly shouldn't change anything.

On the other hand, if promised benefits aren't secure and are expected to be cut, then funding them today at promised levels would be an extra cost expected to bid up the current rate on bonds. But if promised benefits aren't secure, shouldn't the defenders of the status quo be honestly admitting that and openly addressing that as a problem? Yet they aren't.

This issue is discussed at more length in a recent post -- for here the point is that even strictly logically it is not necessarily so that borrowing today to fund future benefits will increase rates on bonds by anything like what Kinsley assumes must be the case.

(3) Repeat something important that Kinsley ignores. Even assuming that real investments only match the cost of paying down government bonds, a major benefit results from borrowing today to prefund Social Security benefits that will become due 30 years from now.

As noted before with data from GAO, by 2030 the government is expected to be under never-before-seen fiscal pressure with annual deficits rising towards 20% of GDP -- matching the size of the entire government today -- on the basis of current policies.

Now, say the government issues a $1,000 bond in 2005 that it will pay off over 30 years. It invests the money it receives from the bond in a portfolio of private investments worth $1,000. The return on the private investments just matches the cost of paying off the bonds, that is all. After 30 years the bond is paid off and the $1,000 in investments remain. Now there is $1,000 available to pay benefits in 2035 without the government having to increase borrowing or taxes during a huge fiscal crunch.

The cost of paying the benefit in 2035 remains $1,000 -- but the financing of it has been moved forward in time by 30 years to when it is much more affordable. Instead of the benefit being at risk in 2035 because Congress can't afford to raise taxes/borrowing yet more in the crunch to pay it, the $1,000 was raised when conditions were easier so the benefit it will pay is secure. This is not a good thing?

4) Note that Kinsley almost gets to a vital logical point that almost all defenders of the Social Security status quo dodge -- actually comparing options by considering the faults of the status quo as well as those they ascribe to whatever reform proposal they are criticizing -- but then he dodges like everyone else.

Many responders made a related point, "Compared to what?" Whatever its flaws, is privatization inferior to the current system, with its looming inability to keep its promises? ...

But privatization is not supposed to produce a net loss in anyone's retirement nest egg ...
... he proclaims, mistakenly deducing that it will do so -- but also, and more importantly, ignoring how the status quo is guaranteed to do exactly that.

The Social Security Administration's actuaries' say the average-wage individual who entered the work force in 1994 -- and so is in his/her late 20s or early 30s today -- will receive in benefits from Social Security 15% less than contributed to it through taxes over a lifetime. For high-wage individuals benefits will be as little as 50% of taxes.

And even these promised benefits are 30% underfunded. So if Social Security remains "paygo", with no investment returns supplementing it, then by the Iron Laws of Arithmetic the average-wage individual's return will drop to 40% less than taxes paid and the high-wage individual's return to 65% less. (In a paygo system a funding gap can be closed only by reducing benefits or increasing taxes, and both acts further reduce the ratio of benefits to taxes.)

Of course, this is the huge change in the nature of Social Security that defenders of the status quo -- including Kinsley, it seems -- never, ever want to mention.

Before the year 2000, all annual cohorts of retirees received from Social Security more than they contributed to it, with most receiving much more. After 2000 all annual cohorts of retirees will receive less than they contributed to Social Security, they will be made poorer by it on a lifetime basis, with this loss growing as the years pass.

So instead of saying ...

... privatization is not supposed to produce a net loss in anyone's retirement nest egg ...
... shouldn't Kinsley be saying...

... Social Security is not supposed to produce a net loss ...
... ? I'd think so.

And if he ever gets around to doing this, and admitting the size of the net losses Social Security is committed to produce, what will be his proposed remedy?

One remedy is private investment accounts. Even mere 2% accounts that earn the historical norm on private investments, when compounded for 40 years, can give most young workers positive net returns on Social Security -- and so save it as we know it. (And again, does anyone else really believe with Kinsley that increasing investment by less than 0.6% will drive such returns down?)

But without private investment accounts, how is this to be done, how will Social Security avoid making today's young workers poorer after making all prior generations richer?

This is the question Michael Kinsley didn't bother to consider, much less answer about the status quo when he said private accounts shouldn't reduce nest eggs. What about the status quo?

Even Sweden has 2.5% private accounts in Social Security for these reasons. It seems the Swedes haven't yet figured out the logical proof of how they can't work!

Swedish social policy -- too right-wing for Michael Kinsley and U.S. Democrats.

The real-life Scrooge wasn't such a Scrooge after all.

Roland Patrick points us to the story of the true-life Ebenezer in the Scotsman...
Dickens was in the capital to deliver a lecture to an audience of Edinburgh notables. He was wandering the city, killing time before the talk, when he visited the Canongate Kirk graveyard.

There, as revealed by his diaries, he saw a memorial slab which read: "Ebenezer Lennox Scroggie - meal man". The description referred to his main trade as a corn merchant. However, the author mistakenly translated it as "mean man".

Though he was shocked by the description, it gave him food for thought and two years later, art imitated life - or so the author believed...

The real "Scrooge", an Edinburgh merchant, could not have been more different from his literary counterpart ...

Scroggie was born in Kirkcaldy, Fife; his mother was the niece of Adam Smith, the 18th century political economist and philosopher....

Perhaps Scroggie’s most delightful claim to fame was the result of his dramatically halting proceedings at the General Assembly of the Church of Scotland, when he "goosed" the Countess of Mansfield during a particularly earnest debate...

No mention of whether it was as Christmas goose.

Monday, December 27, 2004

The end of blonde jokes?
Blonde Jokes To Be Banned?

Blonde jokes are set to be banned in Hungary after blonde women staged an angry protest outside parliament. The protestors handed in a petition claiming they were being discriminated against in every walk of life by bad taste blonde jokes.

Spokeswoman Zsuzsa Kovacs said: "Blondes face discrimination in the job market, in the workplace when they get a job, and even on the streets. People are banned from discriminating against Jews, or blacks, so why not grant blondes the same protection."

The petition was handed to the equal opportunities minister Kinga Goncz asking her to investigate whether jokes about blondes fall into the same category as religious discrimination.

The petition was just short of the 100,000 needed to force Parliament to debate the matter but Goncz's deputy who spoke to the crowd pledged the government would act to stop any discrimination. [Ananova]
As often in the fight for rights, things turn ugly...

Dark Side of Blonde Protest

Police say campaigners fighting for a ban on blonde jokes in Hungary turned violent in a protest outside a bar.

Hungary's Blonde Women's Movement marched on parliament to hand in a petition demanding MPs to outlaw blonde jokes. Police have now revealed that they also staged a protest outside a bar called Blondy that turned to violence when staff tried to move them on.

Bar manager, Laszlo Bolyocki, said: "Our bar is a new one and we didn't want to cause any offence with the name. But when we tried to get rid of the protestors they turned violent, and threw cakes and eggs at the windows and urged their blonde sisters working here to go on strike."

Blonde Women's Movement founder Krisztina Timar, 29, said: "This bar was using dumb blonde jokes to promote itself. It's thanks to stunts like this that people look down on us - and we have much worse chances of getting a job." [Ananova]

This could be the start of a movement. Who knows where this could lead?

To be young and bored in New Jersey.

Or, uncounted things to do with a green lawn-ornament Buddha. My personal favorite among the well-told VidLit tales. Maybe because I've been there. Though Yiddish with Dick and Jane is amusing too. [broadband recommended]

Lenin statute moved to ash-heap of history Nitra, Slovakia -- becomes an attraction.

Lenin Statue Homeless

A five tonne statue of Vladimir Lenin is making the rounds in Nitra as officials haggle over where it belongs...

"We have been looking for a place for the statue for a long time," Dagmar Bojdová, from Nitra town hall, said. "Some people think it should be melted down. But we never received such a proposal in writing. And I personally think that it shouldn't be destroyed. It's part of our past. It should be preserved for future generations."

While authorities search for an appropriate place, the Lenin statue stands in a yard next to trash containers and piles of garbage.

"When the statue was in the square, there wasn't as much interest as now," Ladislav Meszároš, of the maintenance service, said.

"People come here and take pictures of it. It's a local attraction." [Slovak Spectator]

Sunday, December 26, 2004

The World-Wide Population Bust.

The year 2005 will take us another year forward into the Global Population Bust. Unprecedented population decline has already started in Western Europe -- Italy may be viewed as the bust's "ground zero" with Germany not far behind -- and is now demographically inevitable over most of the world, including Asia in general and China in particular, with Japan leading the way on that side of the globe by a generation or two.

Absolute decline in total world-wide numbers won't begin for some decades yet, but as the population of tomorrow is limited by the number of young living today, one doesn't need a crystal ball to see into the future in this case.

Even the United Nations has switched from warning of the dangers of overpopulation to those of population decline, e.g. ...

United Nations projections indicate that between 1995 and 2050, the population of Japan and virtually all countries of Europe will most likely decline. In a number of cases, including Estonia, Bulgaria and Italy, countries would lose between one quarter and one third of their population. Population ageing will be pervasive, bringing the median age of population to historically unprecedented high levels...

In the next 50 years, the populations of most developed countries are projected to become smaller and older as a result of low fertility and increased longevity ...

Among the countries studied in the report, Italy is projected to register the largest population decline in relative terms, losing 28 per cent of its population between 1995 and 2050, according to the United Nations medium variant projections.

The population of the European Union, which in 1995 was larger than that of the United States by 105 million, in 2050, will become smaller by 18 million... [this publicizing this]

(The U.S. population is projected to continue growing at a modest rate due to its comparatively open immigration policy -- as immigrants both increase the population count themselves and have children at a higher rate than do native-borns.)

What we are seeing here is how the birth rate declines naturally with increasing material prosperity and a society's commercial development. In poor subsistence agriculture societies parents need lots of children to work the land and support them in their old age -- as there are no IRAs, employer pension plans or social security programs. And child mortality rates are high, so birth rates necessarily are as well. Ben Franklin, in his prescient demographic projections made in 1751 (intended to assure the mother country that it need not engage in protectionism against colonial manufactures) described the average American family as having eight children, of whom four survived.

But as a subsistence agricultural society develops into a wealthy commerce-based society children become much more of a financial cost to families -- while the time spent on them becomes an "opportunity cost" to parents, who obtain many new options to spend their time on other fun and rewarding things. And with declining child mortality parents need have fewer children born to see the family line continue. So the birth rate falls sharply, quite naturally.

This is hardly a modern development, nor a modern insight -- it has been well known throughout history. The noted economic historian Mark Blaug calls this "The universal rule of declining population growth in advanced civilizations, which dates back long before the present era".

If I recall correctly, Adam Smith wrote about it in Wealth of Nations and Gibbon did in the Decline and Fall of the Roman Empire. The Roman Emperor Augustus in the face of population decline among the prosperous higher Roman classes ordered them to have more children --providing the background for some fun plot turns in "I, Claudius".

The rise in population that accompanies economic development, such as we have seen in the last century, results not from high birth rates but from falling death rates. With economic development life expectancy rises and fewer people die. Life expectancy in the US today is nearing 80, in 1900 it was 47, and in Franklin's colonial times it was about 25 or less -- as it was near universally everywhere before the Industrial Revolution. When people begin putting off dying for so long, from an average age of 25 to 80, population rises!

But, alas, this lengthening of life expectancy is finite -- and when the limit is reached people begin dying together in large numbers. This, combined with a birth rate that has fallen sharply during the period of lengthening life expectancy, then leads to a population drop, such as is in the first stages of sweeping the world now.

The complete ignorance and disregard of this entire dynamic on the part of the Malthusian-Ehrlichian population growth catastrophists really should have just been a shameful embarrassment to them. I mean, even 1970s BBC tv show writers knew about it.

So when a respected scientist like E.O. Wilson writes in Scientific American...
The pattern of human population growth in the 20th century was more bacterial than primate.
... I wonder how he retains that respect -- and his self-respect. Or is he really saying that when bacteria expand into a richer field of nutrients their reproductive rate declines while the life span of the average individual bacterium increases?

And when Wilson goes on to try and scare us with...

The number required to attain zero population growth -- that is, the number that balances the birth and death rates and holds the standing population size constant -- is 2.1 (the extra one tenth compensates for infant and child mortality). When the number of children per woman stays above 2.1 even slightly, the population still expands exponentially. This means that although the population climbs less and less steeply as the number approaches 2.1, humanity will still, in theory, eventually come to weigh as much as Earth and, if given enough time, will exceed the mass of the visible universe.
... well, wow, that's every bit as intellectually impressive as the Japanese Ministry of Health and Welfare's prediction of when the Japanese people will go extinct due to their birth rate of only 1.4 per woman.

Yes, Wilson does skeptically note that birth rates have fallen in many places -- but comes up with an explanation expertly, wonderfully fitted to flatter the sensibilities of his university liberal peers -- while maintaining dire risk of population catastrophe. You see, it's because of ...
... the empowerment of women. The freeing of women socially and economically results in fewer children.
So kudos to liberals for preaching feminism and the empowerment of women. We are saving the world from itself! But beware...
Reduced reproduction by female choice can be thought a fortunate, indeed almost miraculous, gift of human nature to future generations. It could have gone the other way: women, more prosperous and less shackled, could have chosen the satisfactions of a larger brood...
Especially with all those unenlightened cultural conservatives still out there in all parts of the world, extolling the virtues of big families.

... Demographers of the future will, I believe, point out that on the other hand humanity was saved by this one quirk in the maternal instinct.
Humanity saved by a lucky quirk! That's a nice hand-wave dismissal of what's been known by the likes of Blaug, Smith, Gibbon, Augustus, novelists like Robert Graves and the BBC's tv-writers.

But no, it sure looks a lot more to me like basic economics in action -- children are much less necessary and much more expensive in a developed commercial economy, so people have fewer of them. Q.E.D.

Yet wait a minute! ... Does Wilson really believe that humanity has been saved due a lucky quirk in the instincts just of women? Not of men? Men have nothing to do with it?

If so, I want to ask a question of all the men of Wilson's Harvard community, starting with E.O. himself. To wit:

"How many of you Harvard men really want to have eight or more children as in Ben Franklin's day, and would actually have had them if your empowered women hadn't restrained you, refused, and prevented you from doing so"?

I expect the answer would be along the lines of "Precious darn few of us!", and suspect Wilson knows that darn well.

In which case, when Wilson speaks of people reproducing like "bacteria" what he's really saying is....

"We educated, enlightened, liberal western males of course have no problem restraining our reproduction to an admirable less-than-2.1 each. But all those third-world males will continue to reproduce like bacteria if we can't get their women to stop them..."

And what do we call that?

But I digress. This was meant to be just a short post pointing to two new essays on the world population situation recommended by David Brooks...
I've decided to create the Hookie Awards. Named after the great public intellectual Sidney Hook, they go to the authors of some of the most important essays written in 2004...

The global decline in fertility rates has likewise prompted some astonishing essays.

Phillip Longman published "The Global Baby Bust" in Foreign Affairs, noting that while we have images in our heads of throngs of unemployed young people in the Middle East, fertility rates are falling faster there than anywhere else on earth. Over the next half-century, Mexico's median age will rise by an astounding 20 years. By 2050, Mexico will be an older society than the United States.

Nicholas Eberstadt writes about what the graying population means for Asia in "Power and Population in Asia" in Policy Review. Eberstadt argues that it is better to get rich and then get old than it is to get old first. Thus, while Japan should be able to adjust to the new demographics, China will face huge problems. In China, the pension system is the family, but nearly a quarter of seniors will have no living son to rely on for sustenance.
If you're interested in this subject they're worth looking at -- and if you're not interested in it you'd have stopped reading this post long ago, I'd suspect, so there we are.

For the record, I'll note that my own favorite newspaper-type article on the subject appeared in the Times itself some while back, from which...

... If there is a ground zero in the epidemic of low fertility it would have to be in the northern Italian city of Bologna, where women give birth to an average of fewer than one child (in 1997, the number was 0.8). The city has more highly educated women than any other in the country. Produce is cheap, food is wonderful and living is generally easy.

The local population has dropped steadily for two decades, but 1,500 people turn 75 every year.

Fewer children and more elderly mean a greater need for health care programs and specialized housing and transportation. But that does nothing to encourage young couples to have families. This year the budgets for retirees and children are roughly the same in Bologna, a city of 375,000. Next year 5 percent will be shifted from the young to the old. And that will happen every year for the next decade as the city becomes filled with elderly and starved for children.

How did Italy, a largely Catholic country that has always been seen as the stereotypical land of big, close-knit families, attain the world's lowest level of fertility?

"Prosperity has strangled us," said Pierpaolo Donati, professor of sociology at the University of Bologna ...
"Prosperity has strangled us"? Not "empowerment of women has saved us from destruction"?

Maybe someone in the sociology department at Bologna should call in this message to the biology department in Cambridge, Mass.

Saturday, December 25, 2004

L. da Vinci's Christmas cards.

Merry Christmas.

Friday, December 24, 2004

Are promised Social Security benefits a real obligation of the US government, or are they not? Democrats say "yes!" as Democrats say "no!"...

Democrats will soon have to decide! Because right now, to fight the idea of putting private investments in Social Security, they are busy spinning two exactly opposite and contradictory arguments simultaneously. To wit:

#1) Promised benefits are so real, and so secure, that there's no need to do anything at all today to shore up Social Security for younger workers. The Social Security Trustees says there's a $10 trillion funding gap (current value) facing Social Security? Aw, what does that matter? Not only are promised Social Security benefits secure, they are a rock solid sure thing! E.g. ...

"Out of all the possible problems to address in America, Social Security is probably not even in the top ten. It's solvent for at least the next 40 years, and possibly the next 50, even if we do absolutely nothing." [emphasis in original] Kevin Drum.

"... liberals need to drive home the message that 'There Is No Social Security Crisis' ... Social Security is healthy and successful ... The president and the Republicans in congress are trying to scare the American people to destroy the most successful program in American history .... Even if we make no changes and the president's pessimistic assumptions come true, future benefits will be even higher than benefits are today." [my emphasis] Matt Yglesias

Promised benefits as a real and true obligation of the U.S. government can hardly get any more real than that.

But ... this creates a political problem for Democrats. Private accounts would today pre-fund benefits coming due in future decades, just like investments in a private company's pension plan pre-fund its future pension obligations.

However, the Democrats want to argue politically that pre-funding is just a big extra expense that will make the budget situation worse, impair the government's balance sheet and harm its credit standing. (The New York Times leads the way.)

Their problem when making this argument is the A-B-C rules of accounting: pre-funding a real future liability is not an expense. In fact, to the contrary, doing so by borrowing funds to be reinvested at a rate higher than the borrowing cost is routinely done to strengthen one's balance sheet and improve one's credit rating.

When General Motors recently did exactly this -- by borrowing $14 billion through a bond issuance to prefund its pension plan with investments that earn a higher rate than the rate it pays on the bonds -- it was praised, not condemned.

And all the millions of people who have taken out new low-rate home loans in recent years to pay off old higher-rate loans and consumer debt have done effectively the same thing -- taken on a new debt to fund an old, pre-existing debt at a favorable rate differential.

Have they all made themselves poorer by doing so? In the amount of the new debt they've taken on? Of course not. The only way one could claim such a thing is by claiming that their old, pre-existing debt ... wasn't real! They didn't really have to pay it, so funding it in advance was a cost with no benefit.

Sure, if General Motors doesn't have to pay its future pension obligations, then debt taken on today to finance them doesn't do so and is just an extra cost. And if you don't have to pay on your mortgage and credit cards in the future, then pre-funding them today at a favorable rate that you actually will pay is an extra expense that costs you money. Sure!

Which gets us to the second and opposite argument from #1 that the Democrats have just started spinning....

#2) The government has no obligation to pay promised Social Security benefits -- and Social Security's finances are so bad that it is obvious that it won't pay them all. Thus, pre-funding those benefits is a net expense -- a true additional cost we can't afford -- because otherwise the government isn't really going to pay them.

Am I the only blogger to note Krugman's curious recent description of Social Security's promised benefit schedule as: "nothing more than a suggestion to future Congresses"?

Hello?? Reading that I asked myself: is this the first public hint of a new spin coming?

Well, one didn't have to wait long for the full-fledged argument to arrive. A new position paper from the CBPP by Jason Furman, William G. Gale, and Peter R. Orszag, explicitly argues that -- contrary to the accounting rules that apply to General Motors and everyone else -- the government's pre-funding of its future liabilities should be considered a cost, an extra current expense.

Now many, including Nobelist Milton Friedman and Federal Reserve Chairman Alan Greenspan, have pointed out the simple fact that the unfinanced benefit promises of Social Security -- its $10 trillion dollar funding gap -- actually comprise an "implicit debt" of the U.S. government that is every bit as real as its existing "explicit debt" to the extent the government actually intends to pay those benefits.

Thus, the act of recognizing the implicit debt on the books by making it explicit has zero real effect on anything. It is just recognizing reality.

That's a simple enough idea. But Fruman, Gale, and Orszag reject it outright regarding Social Security, saying...
[Some argue that] borrowing to establish individual accounts would merely create "explicit debt" today (in the form of new Treasury bonds) in exchange for "implicit debt" that the federal government has already incurred (in the form of benefit promises to future Social Security beneficiaries that exceed the future revenues that Social Security will receive under current law). They argue that these two types of debt -- "implicit" debt and "explicit" debt -- are essentially the same, and that converting implicit debt to explicit debt thus is not an increase in overall debt and need not be included in the budget.

This argument is seriously flawed, however. The two types of debt are decidedly not the same, and converting implicit debt into explicit debt could worsen the nation's fiscal outlook and would reduce the government's fiscal flexibility...
But how are they different?
... "implicit debt" associated with future Social Security benefit promises does not have to be financed in financial markets in coming decades ...
One decade, singular. Starting around 2016 benefits will be financed by the financial markets in a big way, as Congress will have to start raising the funds -- through additional taxes or more borrowing -- needed to redeem $5 trillion of bonds in the Social Security trust fund. That's compared to a national debt compiled all throughout US history of $4.4 trillion as of today. And this will be occurring just as Congress will have to raise even much more than that to finance Medicare.

Indeed, this is a major argument for pre-funding Social Security benefits with real economic investments today -- to reduce the need to raise funds for them 20 and more years from now when the nation will be in an unprecedented fiscal vise. As has been noted in more detail previously.
.... and might not have to be financed even after that, because the implicit debt could, and likely would, be reduced through future policy changes... [my emphasis]

In 1983, Social Security faced a large implicit debt; benefits would soon exceed the revenues to pay them and would continue to do so indefinitely. Congress and the President acted -- they changed Social Security benefits and taxes and did so without borrowing new money -- and the implicit debt was substantially reduced.
Yes, it was, by significantly cutting benefits. Taxes were increased too by a closely matching amount, so the funding gap then was closed 50% by cutting benefits and 50% with tax hikes. But the economy was healthy then, and there was ample room to raise taxes.

In 2030, as Congress is in the midst of raising $5 trillion of new taxes to pay Social Security benefits and much more than that in additional taxes to finance Medicare at the same time, where will be the room to cut the ever rising implicit debt -- it grows every year -- by raising taxes??
The same is likely to occur with regard to future unfunded Social Security promises...
"Likely" to the degree of being a sure thing.
Once explicit debt is incurred, by contrast, and Treasury bonds are issued, the government is stuck with the debt...
The point!

Fruman, Gale, and Orszag -- and Krugman -- are making a clear and outright statement that they don't want the government to become "stuck with the debt" of owing promised Social Security benefits! That would increase their real cost, because under the status quo after the cost of financing them hits the financial markets around 2016 it is "likely to occur" that Congress will reduce them.

While if the implicit Social Security debt is made explicit through privatization, Congress will actually be "stuck" with meeting its promises!

So it seems in the coming debate Democrats have a choice of taking one of these two positions as their argument against privately-owned investments in Social Security...

A) "There's no need to shore up Social Security with privatization because payment of future benefits is already a rock solid certain sure thing!"

OK -- but in this case they can't argue that pre-funding those benefits is any kind of "cost." To the contrary, if those benefit obligations are real and will be met, then, as per Friedman and Greenspan, making the implicit debt they represent explicit in the form of government bonds makes no cost difference. And prefunding them with real economic investments, as per General Motors, is beneficial. Even more so for the U.S. than GM, in light of the chance to alleviate the U.S.'s coming fiscal crunch of the 2030s.


B) "Borrowing to pre-fund promised Social Security benefits, making the implicit Social Security debt explicit, will only add to the fiscal debt of the U.S., and so worsen the government's fiscal position during the foreseeable fiscal crisis of a generation from now."

OK -- but then they have to admit they are planning, intending and expecting to not pay a goodly share of the Social Security benefits promised for after 2016. Because the only way that making an implicit promise explicit increases its cost is if you are expecting not to keep it as long as it is merely implicit -- but find yourself stuck with it when it becomes explicit.

So the Democrats have a choice. Which will they choose?

Personally, as a matter of intellectual honesty, I'd certainly choose B. Whenever somebody tells me they are sure that Social Security benefits will come through the great fiscal crunch of the 2020s and 2030s unchanged, because they are fully secured by all that bond debt that the government owes to itself in that trust fund, I'm tempted to offer to sell them a bridge and some magic beans I own.

But I think most Democrats are going to have a hard time buying into B. They've spent generations making election year hay out of accusing Republicans of trying to cut Social Security benefits. Now, with Republicans moving to make Social Security obligations explicit, and to give workers property rights in them, the Democrats are supposed to respond with: "No, that's fiscally irresponsible! You all know that your benefits will have to be cut after 2016. You've all known that all along, of course, right?" I don't see it.

I won't take it seriously until I see Krugman & Co. get Ted Kennedy, Nancy Pelosi, and Harry Reid to stand up on the podium and say it out loud: "You all know we can't afford to increase the cost of your Social Security benefits by making an explicit promise to pay them. Oh, c'mon! Then we'd actually have to..."

Yes ... and I'll want to see Kevin Drum and Matt Yglesias signing on board with this argument too.

Thursday, December 23, 2004

For the record: In case you wonder what our busy President and busy Congress are busy doing...

Office of the Press Secretary
December 21, 2004

On Tuesday, December 21, 2004, the President signed into law:

H.J.Res. 102, which urges the Secretary of the Interior to: (1) recognize the 60th anniversary of the Battle of Peleliu; (2) work to protect the historic sites of that battlefield; and (3) establish commemorative programs honoring the Americans who fought at those sites;

H.R. 480, which redesignates the facility of the United States Postal Service located in Albany, New York, as the United States Postal Service Henry Johnson Annex;

H.R. 2119, An Act to provide for the conveyance of Federal lands, improvements, equipment, and resource materials at the Oxford Research Station in Granville County, North Carolina, to the State of North Carolina;

H.R. 2523, An Act to designate the United States courthouse located in Savannah, Georgia, as the Tomochichi United States Courthouse;

H.R. 3124, An Act to designate the facility of the United States Geological Survey and the United States Bureau of Reclamation located in Boise, Idaho, as the F.H. Newell Building;

H.R. 3147, An Act to designate the Federal building located in Ogden, Utah, as the James V. Hansen Federal Building;

H.R. 3204, the "Benjamin Franklin Commemorative Coin Act," which requires the Secretary of the Treasury to mint coins in commemoration of the tercentenary of the birth of Benjamin Franklin;

H.R. 3242, the "Specialty Crops Competitiveness Act of 2004," which ensures an abundant and affordable supply of highly nutritious fruits, vegetables, and other specialty crops for American consumers and international markets by enhancing the competitiveness of United States-grown specialty crops;

H.R. 3734, which designates the Federal building located in Roswell, New Mexico, as the Joe Skeen Federal Building.;

H.R. 3884, which designates the Federal building and United States courthouse located in San Antonio, Texas, as the Hipolito F. Garcia Federal Building and United States Courthouse;

H.R. 4232, which redesignates the facility of the United States Postal Service located in Kingwood, Texas, as the Congressman Jack Fields Post Office;

H.R. 4324, which amends chapter 84 of title 5, United States Code, to provide for Federal employees to make elections to make, modify, and terminate contributions to the Thrift Savings Fund at any time;

H.R. 4620, which confirms the authority of the Secretary of Agriculture to collect approved State commodity assessments on behalf of the State from the proceeds of marketing assistance loans;

H.R. 4807, which designates the facility of the United States Postal Service located in Rio Vista, California, as the Adam G. Kinser Post Office Building;

H.R. 4829, which designates the facility of the United States Postal Service located in Kingsville, Texas, as the Irma Rangel Post Office Building;

H.R. 4847, which designates the facility of the United States Postal Service located in Longboat Key, Florida, as the Lieutenant General James V. Edmundson Post Office Building;

H.R. 4968, which designates the facility of the United States Postal Service located in Rosine, Kentucky, as the Bill Monroe Post Office;

H.R. 5360, the "American History and Civics Education Act of 2004," which authorizes grants to establish academies for teachers and students of American history and civics;

H.R. 5364, which designates the facility of the United States Postal Service located in San Diego, California, as the Earl B. Gilliam/Imperial Avenue Post Office Building;

H.R. 5365, which treats certain arrangements maintained by the YMCA Retirement Fund as church plans for the purposes of certain provisions of the Internal Revenue Code of 1986; and

H.R. 5370, which designates the facility of the United States Postal Service located in Boulder, Colorado, as the Donald G. Brotzman Post Office Building.


That is all

What Arnold and the California legislature have done.

How come I hadn't heard about this? Was there an election or something knocking everything else out of the news?


Gov. Arnold Schwarzenegger signed a bill barring necrophilia. Officials said the law would help prosecutors who had been stymied by the lack of an official ban on the practice.

"Nobody knows the full extent of the problem," said Tyler Ochoa, a professor at Santa Clara University School of Law. "But a handful of instances over the past decade is frequent enough to have a bill concerning it." The new law makes sex with a corpse a felony punishable by up to eight years in prison. [NY Times]

But enquiring low-brow East Coast minds want to know: how often had prosecutors been stymied, and what kind of "handful of incidents"?

The Times is too proper and coy to report such things. But you know that the uncensored truth ( in the form of the original news wire report it bowlderized) is out there on the Internet...

"Prosecutors didn't have anything to charge these people with other than breaking and entering. But if they worked in a mortuary in the first place, prosecutors couldn't even charge them with that," Ochoa told Reuters news agency.

The state's first attempt to outlaw necrophilia, in response to a case of a man charged with having sex with the corpse of a 4-year-old girl in Southern California, stalled last year in a legislative committee.

Lawmakers revived the bill this year after an unsuccessful prosecution of a man found in a San Francisco funeral home drunk and passed out on top of an elderly woman's corpse... [Reuters]


OK, so is California finally catching up with civilization? Or is this just another step in the Republican campaign to suppress alternative lifestyles?

Either way, it beats naming post offices.

Wednesday, December 22, 2004

Defenestration of self

I don't think I'd jump out the window of a top-floor room of the Palace Hotel in New York City even if I did have a parachute and video camera. No matter how daunting the room service bill. What if I landed in the middle of Madison Avenue?

Though for a special view of the night-time lights of Manhattan...
[broadband advised]

Globalization at Christmas

The global economy caught in the last-minute holiday crush:

Why is it impossible for parents to buy hot-demand new PlayStation2?

Because a month ago an oil tanker became jammed in the Suez Canal, closing the waterway for the first time in 40 years and blocking several cargo ships bearing containers of electronic toys bound to stores for the holidays. The trade publication EuroGamer calls the situation "grave".

Sony has reacted in globalized terms by chartering Russian-built Antonov cargo planes to fly to China and pick up game consoles from the factory, then ferry them to the United States and European Union. Each plane can hold 40,000 PlayStation2 consoles, but apparently even deliveries of 40,000 consoles per plane will not meet Christmas demand....

Imagine trying to explain to Chinese peasants living in shacks whose tin roofs are held in place by stones that children in the United States are crying because a global airlift cannot bring them video games quickly enough...
[The things one can learn from a football column!]
Such are the effects of globalization. If America was self-sufficient in video games then a tanker accident 5,000 miles away wouldn't deprive American children of their favorite new electronic toys at Christmas.

On the other hand, those new electronic toys might have all the game-playing power of my old TRS-80. And the Chinese who have escaped poverty by going into the electronics export business would still be back in their tin-roofed shacks. So we're better off as things are after all.

How about the Wall Street Bull as a Christmas present?

For another or yourself -- get your $5 million out now...

"The Charging Bull" - a massive bronze sculpture famously deposited outside the New York Stock Exchange before the start of business in December 1989 - is up for sale.

The only conditions are that a deep-pocketed buyer instantly must donate the 7,000-pound tourist favorite to the city. It must also be kept in Bowling Green Park, where authorities eventually transplanted the bull because it lacked a permit for Wall St.

"It ... must stay there," said sculptor Arturo Di Modica, who created the bull as a symbol of hope following the 1987 stock market crash.

"Love the bull," declared Di Modica, who delivered the piece before dawn on a flatbed truck. "Respect the bull."

And pony up for it, too. The starting price is $5 million ...

The piece has become a destination for out-of-towners, who straddle the bull and take it by the horns. "All over, they talk about 'The Charging Bull,'" Di Modica said in a telephone interview from Italy. "I created something incredible."

Even if he unloads his pet project, Di Modica said he still plans to pay weekly late-night visits to the bull. "It's my strength," he said. "It's my life." [NYDN]

It'll be $5 million more of his life after he gets your money, with The Bull staying exactly where it's been all along, nothing changed.

Whose Christmas present will this be? "Love the Bull!"

Tuesday, December 21, 2004

Season's Greetings from Britain's NHS.

The mother country's National Health Service presents a holiday animation, The Twelve Sexually Transmitted Infections of Christmas.

If a college kid had created this I'd have chuckled and moved on, but as it was paid for with taxpayer funds the link is provided as a public service -- at least for anyone in the Sceptered Isles.

Warning: May not be suitable for prudish Americans easily offended by humorous holiday animations about sexual diseases.

See what all we Americans have missed ever since we didn't get Hillary-care?

In anticipation of Michael Kinsley's new & improved proof that Social Security privatization can't work.

Michael Kinsley reports being impressed by the blogosphere's response to his previous claim to have presented "mathematical proof" that privately owned accounts in Social Security can't work. But he alerts us that a new and improved proof is coming...
"I won't bore you with my mathematical proof that Social Security privatization can't work. Not quite true: I will bore you with it, but not until next week... [though] I'll be hard-put, next week, even to summarize my own argument, let alone discuss those of others, in the space available to a columnist."
Yet I don't think space will be the issue. For if the new proof tries to support the same claim as the old one -- that new private investments in Social Security will "bid down" returns to stocks, so it will be mathematically impossible to get the higher returns from stocks that privatization schemes rely on -- then no matter how long it runs it will have the same fundamental problems as the old one.

To recap, here's the gist of the Kinsley argument to date:
My contention: Social Security privatization ... is mathematically certain to fail. Discussion is pointless.

To "work," privatization must generate more money for retirees than current arrangements....

Greater economic growth requires either more capital to invest, or smarter investment of the same amount of capital. Privatization will not lead to either of these.

If nothing else in the federal budget changes, every dollar deflected from the federal treasury into private social security accounts must be replaced by a dollar that the government raises in private markets. So the total pool of capital available for private investment remains the same....

If the economy doesn't produce more than it otherwise would, the Social Security privatization bonus must come from other investors in the form of a lower return.

The money newly available for private investment will bid up the price of (and thus lower the return on) stocks, while the government will need to raise the interest on bonds in order to attract replacement money... [emphasis added]
And thus the return on stocks will fall, that on government bonds will rise, and the higher return on stocks relative to that on bonds that is needed to make privatization schemes work will disappear. As he said: "Q.E.D."

Ah, but for this claim to prove itself as true it must first jump two hurdles...

1) One can't talk "mathematical proof" without considering actual quantities and scale.

Privatization proposals talk about investing the likes of $2 trillion in private accounts over a decade or so. Call that $200 billion a year. And that amount would not be entirely invested in stocks any more than the full balances of all IRAs and 401(k)s are. But for argument's sake let's assume a new full $200 billion is invested in stocks through privatized Social Security accounts each year.

The market capitalization of the New York Stock Exchange is $12 trillion. (I've looked it up since last mentioning the subject). But that's just one stock exchange. The capitalization of the world's major stock exchanges combined exceeds $33 trillion (if anything in this world is globalized the financial markets are, and return isn't going to plunge in one without doing so in others -- and, of course, diversified private investment accounts can invest anywhere). Moreover, their capitalization is growing at a long-term average rate of about 4%, over a trillion dollars a year.

Now, $200 billion equals less than 0.6% -- six tenths of one percent -- of total stock market capitalization (and that percentage will decline as time passes).

So hurdle-to-jump #1 is:

How is it plausible that increasing demand for stocks by all of six tenths of one percent will produce an historic change in the pricing and yields of stocks? For that matter, how will it produce one big enough for anyone to even notice?

2) The economy is not static, no matter what one assumes.

For argument's sake again, let us assume that some measurable increase in the price of stocks does occur to measurably reduce the yield on them, due to the increase in demand for them arising from new private Social Security accounts.

But we can't stop there! How will businesses react to that?

Well, since they now can sell shares for more -- for a higher price, while paying lower dividend yields on them -- they will sell more shares. This is just the law of supply and demand: increase in price brings an increased quantity of product to market. If you increase the amount that companies can get for selling stock shares, they will be happy to print and sell more.

Lower yields on stock shares make it less expensive for companies to issue new stock to finance new productive investment -- just exactly like lower yields on bonds make it less expensive to issue new bonds for the same purpose.

Thus, with higher stock prices and lower yields on them, productive investments that were uneconomic for firms previously become profitable, and so will be financed with new stock issuances. Real economic investment increases.

This is exactly the benefit of increased savings that Kinsley assumes isn't supposed to exist when he makes the assumption: "If the economy doesn't produce more than it otherwise would". Yet with rising stock prices and declining stock yields it is unavoidable that investment increases! Real investment and the real productive economy grow faster.

Hey, this is exactly why economists of all political stripes are constantly saying the US savings rate is too low -- because they want to produce this effect to spur the productive economy!

Moreover, of course, this very increase in the supply of stock shares due to increased demand for them will offset much of that increase in demand for them. And this in turn will act as a countervailing force to check and prevent any dramatic increase in the price of, and decline in the yield on, stocks. This is why the term "equilibrium" is important in economics.

So hurdle-to-jump #2 is:

How does Kinsley propose to enforce his assumed "steady state economy", where these feedback equilibrium effects don't occur, as his model specifies?

We can only wait and see how his new & improved proof meets these challenges.

And, hey, we can only hope that private Social Security accounts will have a significant enough effect on stock prices and total investment to have these effects!

For the record, Kinsley's full earlier column and this little corner of the blogsphere's rather longer comments on it -- including a couple of other points that Kinsley doesn't consider but which seem relevant around here -- are a few posts back.

But the above seems like it will remain the gist of things, unless he changes what he is trying to prove.

Monday, December 20, 2004

The difference between men and women:

Where we want to place our heads.

The "Boyfriend Pillow" for women and "Lap Pillow" for men are popular sellers in Japan. Is it too late to order for Christmas? [BBC]

"That'll be $100 or 10 days in jail."

Did you ever wonder about those sentences for minor offenses that consist of a choice of paying a few bucks or going to jail? Who would choose jail? I always assumed they were left over from the old days when a few bucks were worth more...

Husband chooses jail to escape nagging wife

A henpecked German has chosen to do time in jail rather than pay a parking fine to get away from his nagging wife.The 47-year-old man, from Itzehoe, faced a £55 fine - or 10 days in prison if he didn't pay up.

Police in the town said they were stunned when the man rang up and asked them to come and pick him up from his home. "He said he couldn't stand the constant bickering at home with his wife and was looking forward to a bit of peace and quiet in jail," said a police spokesman. [Ananova]

... but maybe they have a social purpose after all.

Sunday, December 19, 2004

Why urban public schools fail: Department of Insane Job Protection.

NY Post (not on line):

Axed teachers still get $23 million from New York City

New York City is spending $23 million a year to house teachers in regional offices as they await the outcome of disciplinary procedures against them, Mayor Bloomberg said yesterday.

He claimed the city is forced to keep paying the 310 or so teachers -- in some cases for years -- because the union contract prohibits the city from moving quickly to resolve allegations against them.

The average salary of the teachers is $70,000 and the amount paid to them is enough to run a high school of 3,000 students.

"For $23 million a year they sit around doing nothing", Bloomberg said on his weekly radio show. "We can't put them in a classroom, but we have to keep them."...

The mayor referred to the front-page story in yesterday's Post about a music teacher at Franklin K. Lane high school accused of having a three-year affair with a student that started when she was 14 years old ... The teacher, Barry Shenker, has been assigned to a regional office in Queens -- sometimes called a "rubber room" -- and will collect full salary until disciplinary procedures are completed, which may take years.

"One of the things we've said to the teachers union is, 'Give us the ability to expeditiously, not over one or two years, get rid of bad teachers'."

United Federation of Teachers president Randi Weingarten said the union is open to the idea of suspending without pay teachers accused of egregious behavior, but insisted there must be a fair process. She said she has proposed a plan to expedite grievance hearings but the city has rejected the offer. Her plan called for the city and the union to appoint a special master to hear cases within six months of being reported...
Ah, so to the union six months to hear the case of a teacher alleged to be having sex with a student is expedited.

Imagine having a child of your own in a private school to which you are paying $12,000 per year tuition -- what taxpayers pay per student to the NYC public schools -- and that you and other parents learn a teacher there is having an affair with one of your daughters.

So you approach the school principal and ask what will be done. And the principal replies: "I and the teacher's representative will get together to pick someone to look into the facts in six months..."

On Thursday the Post reported that a Bronx chemistry teacher spent an estimated 12 years in "rubber rooms" since 1989 -- awaiting outcomes of numerous disciplinary charges. He was found guilty earlier this month of harassing students at the Bronx High School of Science...
Oh, well, I guess compared to 12 years, six months is expedited!

In a letter to principals this week, Schools Chancellor Joel Klein said the process for firing incompetent teachers is "entirely broken", with "Kafkaesque" procedures protecting the unfit ...
The Chancellor is very right that this is not just about being unable to fire a few teachers who are grievous offenders. It's about lack of accountability for basic standards of fitness and performance all the way through the system -- as was previously related here in the words of a NYC public school teacher in much more detail. With that reality, it's hardly surprising how these cases happen over and over.

Oh well, at least when school system employees are caught not doing nothing when that's what they are actually supposed to be doing, they can be fired. Go figure.

Follow-up: An inner-city high school with a 98% graduation rate that spends about half as much per student as New York public schools is described by Diane Ravitch.

Saturday, December 18, 2004

Next, the Presidential Spelling Summit.

WASHINGTON - President George W. Bush and Office of Management and Budget Director Joshua Bolton talk to conferees, above a misspelled sign, at the White House Conference on the Economy in Washington, December 16, 2004... [Reuters]

"The economy is in good hands ... They don't have to spell, they only have to count ... The economy is in good hands ... They don't have to spell, they only have to count ..."

Friday, December 17, 2004

What Krugman forgot to mention about the cost of private accounts in Social Security.

Paul Krugman remains on leave from his book leave to continue waging war against private investments in Social Security through his column.

Alas, in today's installment he can do no better than trot out the tired old bogey man of "high fees", with the tired old examples of Chile (always a bogey man for those on the left) and Britain. Hey, from my own clip files I see that these very same talking points are at least ten years old -- from back when the Advisory Commission of 1994 was examining private investments in Social Security. Golly, for the money it's paying him can't the Times get anything more timely, or more convincing, from the great economist?

Anyway, three observations...

[] First: Britain's own Tim Worstall puts it to Krugman for grossly misrepresenting the situation in the British retirement system.

[] Second: While I don't know if Krugman is any more reliable about Chile, I'd anyhow suggest that regarding US Social Security reform the situation in the US is rather more relevant. After all, it's not like we don't have any existing private investment programs operating in the US! What's the situation here?

I looked things up when this canard was flying around a couple years ago, it was like this...

* The Federal Thrift Savings Plan was managing private accounts with a 0.1% expense rate -- good enough for government employees!

* Vanguard was charging 0.2% for index mutual funds -- and I know that Fidelity is charging less than Vanguard now.

* The mean administrative cost for Standard & Poor's 500 Index mutual funds was 0.4% .

* The average administrative cost for private-sector, multi-employer defined contribution plans was 0.8%, according to the Department of Labor.

And the mere 1% that Krugman brags about Social Security charging for running a big checkbook, while managing no real assets, was higher than all of them.

By the way, rather than cherry pick a couple examples that might even be bogus, wouldn't it be sounder for Krugman to generally survey the experience of the 20-odd nations that have established some version of personal social security accounts so far?

I mean, why not mention how Sweden today is happily living with 2.5% private investment accounts in its social security plan?

Possibly because it might give the impression that Swedish social policy is too right-wing for US Democrats?

[] Third: While Krugman shows such concern over how high expenses might reduce the returns to workers in private Social Security accounts, he somehow fails to mention the outright negative returns for today's young workers that are guaranteed by Social Security.

The Social Security Administration's actuaries say every annual cohort retiring after 2000 will get less back from Social Security than they put in, with those entering the work force in 1994, ten years ago, getting back as little as a 50% -- taking a 50% loss.

Moreover, if the current paygo structure stays in place then the Iron Laws of Arithmetic will result in them getting back as little as 35%, a 65% loss!

Krugman warns that private accounts are expected to earn an average of only about 4%, and after expenses positive returns will be even less ... that's bad!

But bad compared to what? Compared to a status quo that gives outright negative returns to everyone, up to minus 65% ... that's good???

Hey, if he's so concerned about getting workers a decent return on contributions, why didn't he note this? ;-)

Yes, markets are risky and brokers are greedy. But to guarantee negative returns over a period as long as 40 years, no market can do that -- that takes a government.

Update: It seems Krugman made a number of even bigger mistakes and misrepresentations, that are happily pointed out by his stalking nemesis.

Saving away...

Steve Kelley

Thursday, December 16, 2004

An answer for Michael Kinsley about Social Security -- made in four points, with a question going back to him.

Back around 450 B.C. the Greek philosopher Zeno of Elea famously produced his logical proof that the swift-footed Achilles could never overtake even the most torpid of tortoises that had the smallest of head starts on him in a foot race.

Michael Kinsley now similarly claims to prove that benefits provided by private investments in Social Security can never overtake those provided by the tax-and-transfer status quo, using logic as rigorous and as well supported by empirical observation as Zeno's.

We present Mr. Kinsley's own words, trusting that if his L.A. Times wishes to enforce its copyright privileges as to them it will do so first against other blogs with readerships much larger than this one.

Disregarding smaller issues, we will respond with four points.

Kinsley writes...

My contention: Social Security privatization is not just unlikely to succeed, for various reasons that are subject to discussion. It is mathematically certain to fail. Discussion is pointless.

The usual case against privatization is that (1) millions of inexperienced investors may end up worse off, and (2) stocks don't necessarily do better than bonds over the long-run, as proponents assume.But privatization won't work for a better reason: it can't possibly work, even in theory. The logic is not very complicated.

1. To "work," privatization must generate more money for retirees than current arrangements. This bonus is supposed to be extra money in retirees' pockets and/or it is supposed to make up for a reduction in promised benefits, thus helping to close the looming revenue gap.

2. Where does this bonus come from? There are only two possibilities: from greater economic growth, or from other people.

3. Greater economic growth requires either more capital to invest, or smarter investment of the same amount of capital. Privatization will not lead to either of these.

a) If nothing else in the federal budget changes, every dollar deflected from the federal treasury into private social security accounts must be replaced by a dollar that the government raises in private markets. So the total pool of capital available for private investment remains the same.
Point 1: The above is actually rather similar to Zeno's error -- ignoring change on change (calculus makes Achilles the odds-on favorite).

Kinsley assumes that new private accounts will be funded entirely with new government borrowing. This is not necessarily so -- but for argument's sake lets run with it.

Kinsley is correct then in saying that on day one "the total pool of capital available for private investment remains the same". But if future market returns exceed those on government bonds by anything like the margin in historical experience, then it is trivial to demonstrate that even such private accounts can substantially increase the pool of investment capital in the future.

A simple example: Assume that over the next 40 years a diversified portfolio of real economic investments earns an average of 4 points more than US government bonds -- less than the historical difference and substantially less than the figure used by the 1994 Social Security Advisory Commission when it analyzed the likely effects if market investments were held in private accounts or by the Social Security trust fund.

Now say $1 from Social Security payroll tax today is invested in the private account of a young worker that will earn that return. As a result, the government must borrow $1 more.

All annual cohorts of retirees retiring after 2000 will receive back from Social Security benefits less than they paid in through payroll taxes, using the federal bond rate as the discount rate -- that is, compared to if their taxes had been invested in government bonds.

But let's be generous to Social Security in this instance and say our young worker will get back 40 years from now exactly as much as he put in: the return of $1 invested in a federal bond. (This simplifies our calculations.)

With a 4-point higher return $1 invested in a private account becomes worth about 4.5 times as much a $1 invested in federal bonds after 40 years. Using the bond rate as the discount rate we'll simplify our numbers by just calling these $4.50 and $1 respectively.

So our now retirement-age worker emerges $3.50 (350%) ahead of where he would have been with the status quo -- having $4.50 in his account instead of $1. Let's say the government now taxes his $3.50 gain at a 50% rate. Our worker is left with $2.75 -- a positive return, and a 175% improvement in his situation -- while the government obtains $1.75.

The government can then use $1 of this to pay off the bond it issued 40 years previously, and retain $0.75 that it can spend in lieu of other taxes or savings, reducing its deficit and creating an unambiguous net addition to national savings.

In fact, the net $1.75 gain to the worker compared to the status quo system at year 40 also is an addition to national savings, and an increase in "the total pool of capital available for private investment", to the extent the worker did not reduce other personal savings by an offsetting amount.

So, compared to our paygo system which will produce a $0 addition to national savings 40 years from now (at best), borrowing and investing $1 in this scheme produces, in addition to a larger benefit for the worker, an increase in national savings of from $0.75 to $2.50. Now, multiply that by $200 billion or so borrowed and invested annually for perhaps a decade and see what's possible in the real world.

(For a an example in more realistic detail using data from the Social Secuity Adminstration actuaries see a previous post.)

Now, some people have a disbelieving emotional reaction at this, like it is some sort of magical free lunch that can't be so. Yet it is only basic finance. In the private sector we see this all the time as a matter of course.

Last year, when General Motors did exactly the same thing by borrowing $17 billion at low market interest rates to finance its pension funds which invest at a higher rate, it was lauded for "shoring up its balance sheet" and making its retirees' incomes secure.

Michael Kinsley did not write "That's impossible!", and the New York Times' editors did not write, "Using bogus accounting General Motors is merely adding to its already excessive debt burden". Yet General Motors' transaction was on much less favorable terms than the government's would be -- paying higher rates on its borrowing and owing higher returns to retirees on their pension funds.

If the government today incurs $1 of borrowing to save $1.75 current value of future borrowing cost -- and to increase future national savings by up to $2.50 current value -- this is a gain, for it just as for General Motors.

The only way not to see it as a gain is to not consider the government's promises of Social Security benefits as a real financial obligation of the government, just as real as General Motors' pension obligations -- which off of some comments I've seen certainly seems to be the case among a number of defenders of the status quo. Yet who among them would openly admit that? Would Ted Kennedy?

But I digress ... that will be for another post.

Mr. Kinsley continues....

b) The only change in decision-making about capital investment is that the decisions about some fraction of the capital stock will be made by people with little or no financial experience. Maybe this will not be the disaster that some critics predict. But there is no reason to think that it will actually increase the overall return on capital.

4. If the economy doesn't produce more than it otherwise would, the Social Security privatization bonus must come from other investors, in the form of a lower return.

a) This is in fact the implicit assumption behind the notion of putting Social Security money into stocks, instead of government bonds, because stocks have a better long-term return. The bonus will come from those saps who sell the stocks and buy the bonds.

b) In other words, privatization means betting the nation's most important social program on a theory that cannot be true unless many people are convinced that it's false.

c) Even if the theory is true, initially, privatization will make it false. The money newly available for private investment will bid up the price of (and thus lower the return on) stocks, while the government will need to raise the interest on bonds in order to attract replacement money.
Point 2: Here is the rock quicksand upon which Mr. Kinsley builds his church.

If significantly higher returns will continue to be provided by private market investments compared to government bonds -- as has always been the case throughout history -- then the potential benefits of private investment are undeniable.

So those returns must not be allowed to continue to exist!

What is the mechanism that will eliminate them? All the new money invested through private Social Security accounts will "bid" down the return on stocks to the level of that on bonds, eliminating their higher return.

I hesitate to be so rude as to say this is "nuts" ... so let's just say that, like Zeno's conclusion that tortoises cannot be outrun from behind, it is anti-empirical in the extreme.

Various plans to create 2% private accounts generally propose to invest between $1 trillion and $2 trillion in private accounts over a decade. Let's say $2 trillion, or $200 billion a year.

The last time I looked the New York Stock Exchange's capitalization was $15 trillion -- and $200 billion of that is all of 1.3%. So ... Kinsley is claiming that increasing investment in stocks by all of 1.3% will drive down the return on all stocks to the level of that on government bonds??

Except even that's not right! First, private accounts can invest in anything -- and remember, anything, even government bonds, beats the negative return given by Social Security to today's young -- so, of course, we would expect many people to invest in bonds as safer investments as retirement age approaches. As in fact they do in IRAs and 401(k)s.

Also, some who have stock holdings in taxable accounts may prefer bond holdings in their retirement account for diversification -- something also often seen in IRAs and 401(k)s. And some who feel they already have ample savings will reduce savings outside of their retirement account to offset increases in it. All told, we can expect on net that much less than $200 billion annually would be new investment in stocks -- perhaps $100 billion.

Moreover, the New York Stock Exchange is only one stock market. Nothing is more globalized than the financial markets, and the rate of return in one stock market isn't going to go down without that in all of them doing so. Major global stock markets have a combined market capitalization on the order of $45 trillion.

So is Kinsley really declaring that increasing stock investments by $100 billion annually -- all of 0.2% of global stock capitalization of $45 trillion -- will drive the return on stocks down to the level of that on government bonds???

I'm sorry ... that's plain nuts.

Hey, private retirement accounts like IRAs and 401(k)s have had an inflow of $11 trillion over the past two decades -- far more than is proposed to go into privatized Social Security accounts, and that inflow started when markets were a generation smaller that today's.

Did those investments "bid down" return on stocks to anything like the level on government bonds?

That empirical observation, like the sight of all those tortoises in racing winning circles, should tell us something...

d) In short, there is no way other investors can be tricked or induced into financing a higher return on Social Security.

5. If the privatization bonus cannot come from the existing economy, and cannot come from growth, it cannot exist. And therefore, privatization cannot work.

Q.E.D.? Obviously, I think not -- and let's carry things a bit further by considering two more points that Kinsley does not.

Point 3: The US is heading for a massive fiscal crunch about 30 years from now, as illustrated by this projection from the government's General Accounting Office....

... discussed in a prior post. Most of that surge upward is due to the cost of Medicare and Medicaid, but a good $5 trillion of it is due to the cost of financing Social Security benefits through the redemption of trust fund bonds.

Now, for argument's sake, let's take as true the proposition that borrowing now to finance future liability will be a wash in cost terms, producing exactly $0.00 net savings current value.

Even so, looking at that chart, is it not true that even if the only effect of such a transaction is to move the tax/borrowing cost of benefits (say one or two trillion dollars worth) forward in time from after 2030 to before 2015, a substantial fiscal benefit occurs?

You know ... finance when the financing is easy -- not when it is impossible.

And if one one dollar of borrowing today can save more than one dollar of taxing and borrowing after 2030, isn't that an even more substantial benefit?

Point 4: Finally, Kinsley makes the habitual logical mistake that all Social Security status-quoers seem to be in love with: He judges the effects of privatization as bad, a failure, without comparing them to the effects of the status quo.

But when making a choice of options one must compare the two -- examine both!

I mean, really: Kinsley's logic is that closing Social Security's financing gap by private investment must fail because he believes (erroneously) that it is zero sum game overall and only takes from others in the economy.

While closing Social Security's financing gap with tax increases -- as has been done relentlessly since the payroll tax was 3%, and which must inevitably be done again if the system remains paygo -- surely seems to remain in his mind the virtuous and superior option because .... why?

Because tax increases don't take from others? Because they add to the economy??

Is he kidding???

There is a $10 trillion financing shortfall in Social Security. If we maintain a paygo system, then by the Iron Laws of Arithmetic the only options for closing it are:

1a) General benefit cuts that both reduce returns on contributions to even more negative than they are now, to as little as 35% (a 65% loss!) -- and which are regressive because the poor rely on benefits the most, and so suffer the greatest welfare loss from reducing them.

1b) Means-tested benefit cuts that reduce overall returns on contributions to even more negative than they are now, to as low as 0% (a 100% loss ) for those who pay the most in taxes to support the program -- and which thus do what the guardians of Social Security starting with Franklin Roosevelt personally have always explicitly rejected: turn it into a rich-pay-for-poor welfare program.

2) Tax increases that reduce overall returns on contributions to being even more negative than they are now, to as little as 35% (a 65% loss!) -- and which impose an increased deadweight economic cost of higher taxation on the economy at the same time as it will need to grow as fast as possible to finance a massive fiscal crunch.

No Democratic politician alive would stand up and openly vote for these options -- yet every time they deny the need for Social Security reform they do exactly that, as is pointed out in more detail by the Concord people. But they never admit it.

So here's a challenge for Michael Kinsley. I challenge him to compare options, and then write in the LA Times....

"I openly support and publicly endorse 'fixing' Social Security by staying on course to add $5 trillion to general revenue costs as the great fiscal crunch of a generation from now builds to a crescendo; and by regressively cutting benefits, and also increasing deadweight loss-causing taxes; and by putting the very political survival of Social Security at jeopardy by making it impose big losses and negative returns on all the young -- when we all dang well know that its great political popularity in the past resulted from its providing big above-market positive returns to everybody. Will negative returns for all reverse this popularity? I don't care.

"I endorse all this because it is better than using private investments, which, after all, can only take from others and add nothing to the economy as a whole."

I really want to read that. Will he say that?

If yes, and he openly endorses the status quo as is, then good for him!

If no, if he believes the status quo is not good enough and needs to be improved to produce better results than that, then let him make a tangible proposal of his own that can be compared in detail to others, and be subject to criticism just as he criticizes.

Will he do that?

Like Demosthenes, I search for an honest defender of the Social Security status quo.

Wednesday, December 15, 2004

Who will guard us from our airport guards?

The BBC reports...
Plastic explosives were mistakenly loaded onto a plane at a Paris airport after security officials lost track of it during an exercise, police say.

Around 150 grams (about five ounces) of explosive were slipped into the bag of a passenger during sniffer dog training at Paris Charles de Gaulle airport.

The bag ended up on one of 90 flights leaving at the time, and police are now trying to track it down. ... airlines, airports and police forces around the world have been alerted.

The package of explosive was put in a bag at the airport on Friday to see if police dogs could detect it...
Time to train another poodle.
Someone though took their eye off the ball and the baggage handler unwittingly put the bag on a plane ...

Police insist the package of explosives is no more harmful than a chocolate bar - it has no detonator and does not react to movement, shock or even fire.

But they do concede that somewhere in the world, one of the thousands of passengers who passed through the airport will get a nasty surprise when they open their luggage...
Especially if that person has a connecting flight and opens it at another airport security check.

But just when we were getting ready to take another cheap shot at the French...
Screeners let 'bomb' travel from New Jersey to Amsterdam

NEWARK, N.J. - Baggage screeners at Newark Liberty International Airport spotted — and then lost — a fake bomb planted in luggage by a supervisor during a training exercise.

Despite an hours-long search Tuesday night, the bag, containing a fake bomb complete with wires, a detonator and a clock, made it onto an Amsterdam-bound flight. It was recovered by airport security officials in Amsterdam when the flight landed several hours later... [AP]
Though if it had landed if France it would never have been seen again.

Got the cheap shot in anyhow!

The next time you fly, it might be rational to worry more about what's in your bags after you go through airport security, rather than before.

There goes the judge.
The Louisiana Supreme Court has given a judge a six-month suspension for wearing blackface makeup, handcuffs and a jail jumpsuit to a Halloween party.

Judge Timothy Ellender will lose all of his pay during the suspension. That totals more than $50,000.

Ellender, who is white, said the costumes worn by him and his wife were meant as a joke. She dressed as a policewoman. And the party's host, Ellender's brother-in-law, was dressed as Buckwheat... [AP]
But enough of my own noble profession, let us converse of other things...

Tuesday, December 14, 2004

How much is free trade worth to Americans, in dollars?


Some of those who are sceptical about globalisation concede that rich countries, at least, gain from it. But many Americans, on recent evidence, seem unconvinced...

A new paper ... can help set them all straight. It surveys the evidence and puts a dollar figure on America's past and prospective gains from trade.

The authors draw on several approaches to estimate the total effect, because any single study is bound to be imprecise...

One method is to look at macroeconomic models of the effects of trade over time. The OECD has recently studied the impact of trade "exposure" on incomes per person in several countries. It concludes that trade accounted for 20% of the gain in America's GDP per person between 1950 and 2003.
My quick and dirty calculation makes that about $4,500 per person today, around $12,000 per household.
[Another] study cited by the authors suggests that, by bringing greater product variety, trade has boosted consumers' purchasing power by 2.8% of GDP, or $300 billion a year. On the corporate side, competition from abroad has induced changes in the mix of capital and labour and the incorporation of new technologies that raise productivity. Such “sorting and sifting” is reckoned to yield an additional 5.8% of GDP.

Combine the benefits of greater product variety and the gains from sorting and sifting, and the total impact of trade is to raise the level of GDP by 8.6%.
That's about $8,000 per household.
A third approach is to consider a counterfactual: what if the wave of global trade liberalisation that began after the second world war had never taken place? One study estimates that a return to 1930s-style protectionism today would reduce America's GDP by 2.4%. If other countries retaliated with higher barriers of their own, GDP would fall by 2.1% more. Once again, consumers' lost product variety would have to be considered too. On this method, the total value of trade to America is put at 7.3% of GDP.
Around $6,800 per household.
Taking the average of the estimates, the authors conclude that the American economy is roughly $1 trillion a year better off thanks to "global integration". That means about $9,000 of extra income for each American household.

... they use the same techniques to glimpse the effects of future liberalisation. Clearly, there are huge margins of error, but the gains look big: anywhere from $450 billion to $1.3 trillion annually, if America concluded free-trade deals with all its trading partners.

The authors think that this "final march" to freer trade could safely be expected to generate gains equivalent to about half of those already achieved, or around $4,500 per American household per year.

... they think the total economic costs of trade-related job losses if America eliminated all trade barriers would amount at most to $54 billion, far less than the economic gains.

Crucially, this is a one-time cost. The benefits of trade, by contrast, accrue year after year ...

~end quote~

[Economist/free access]
'Nuff said.

Big brother may be watching more closely than we think.


Over the past three years, the American government has deployed tens of thousands of detectors intended to look for those who might be up to no good with radioactive materials ...

The good news is that the devices seem to work. The bad news is that most of those covertly transporting radioactive substances turn out to be medical patients.

Medical procedures employing radiation are common these days: everything from positron-emission tomography (PET) scans to thyroid treatments use radioactive substances ... more and more patients are being caught in the security net ...

One individual, who has Graves disease, a thyroid disorder, was strip-searched twice in three weeks on the New York subway. In another case, a radioactive passenger on his way to Atlantic City caused a busload of people to be searched by police.

No one knows for sure how many people are being needlessly interrogated, but anecdote suggests the numbers are high...

Last year, America's Nuclear Regulatory Commission issued a notice urging hospitals to give patients a document to show to the authorities ... But practitioners of nuclear medicine who have tried furnishing their patients with such letters are jaded. They say the documents do not seem to help.

Few security officials seem to understand the concept of medical radiation. And when they have called the Department of Homeland Security to discuss the problem, no one acknowledges that detectors even exist.

~ end quote ~

[Economist/with subscription]

Monday, December 13, 2004

The Social Security debate's Lewis Carroll arguments, part one: the catastrophe of defaulting on one's debt to oneself. With puzzles for readers!

Any serious consideration of the US Social Security system brings into view three or four basic, fundamental issues to ponder and weigh, none of which are particularly complex or difficult to grasp (for all the apparent unwillingness of many to do so).

But there are many more logically bizarre arguments, with no practical real-world meaning at all, that surface repeatedly (and heatedly!) to distract people from what does matter. And some of these seem to have miraculous power of persuasion among those who want to be persuaded.

It's as if Charles Dodgson donned his Lewis Carroll persona to pen analysis on Social Security using the logic of the Mad Hatter -- but with an entirely straight face -- and dropped it into the cultural currents, just to have the fun of baffling future generations of adults as well as children.

As one typical instance, how often have you come across statements along the lines of: 'The Social Security trust fund's bonds guarantee full payment of benefits as long as they last because they are backed by the full faith and credit of the U.S. government and defaulting on them is unthinkable.'

Or, as I just saw somebody put it on another web site...
"The Social Security surplus is held in Treasury bonds. Just like the ones China holds. The ones my bank holds. Defaulting on them would be EXACTLY like defaulting on China. The resulting meltdown would be catastrophic... "
[All emphasis in original]
This person feels strongly about it! But pause for a moment.... What are we really to make of this?

Well, to start with, if we take a practical point of view, we might realize that the accrued Social Security liability in excess of future payroll tax is about $12 trillion current value, while the trust fund's bonds total about $1.5 trillion. This means that even if one believes the trust fund bonds have intrinsic value like gold and platinum they cover only about 12% of Social Security's otherwise unfunded liability, or about 1/8th of it.

And long before the trust fund expends those bonds, Congress is going to have to decide what to do about the other 88% of the liability -- which decision, concerning the other 7/8ths of Social Security's unfunded liability, will make whatever is done with the 1/8th represented by the bonds pretty much a tertiary consideration.

So one might very reasonably think about the bonds and the entire trust fund ... "Who cares? The whole business is a red herring." And move on to more productive matters.

[Those of you who value your time might take the hint and move on now to another post, or another blog!]

But let's say we do care, if just for the fun Lewis Carroll would give us.

Let's take the claim seriously: Defaulting on the bonds in the trust fund would be EXACTLY like defaulting on those held by China. The resulting meltdown would be catastrophic.

Pondering this, we note that despite the "EXACTLY like" claim the bonds in the trust fund are not at all like the bonds held by China in one very big way. (Always expect the most dubious link in an argument to be proclaimed with the most emphasis!)

That is: The bonds owned by China represent debt owed by the US Treasury to someone else, while the bonds held in the trust fund represent debt owed by the US Treasury to the US Treasury, to itself.

This leads us to some interesting questions of the sort the author of Through the Looking Glass might have introduced if the Red Queen had been interested in national finance.

#1) How does one default on a debt one owes to oneself?

Consider your own case. Draw up a legally enforceable note for a sum of money -- a large sum, $100,000, or $1 million. Secure it with your house, retirement accounts and everything you own, so default on it will be truly catastrophic to you. Only make this note one that you owe to yourself.

Now, try to default on it. Go ahead! See if you can. How would you do it?

Are you going to sue yourself in court to enforce the note? Or sue over the loss you suffered by not paying money to yourself? Perhaps you will report your net loss of $0 that you suffered due to yourself to a credit agency, to get the word out about you?

Will a court or credit agency listen to such silliness? If not, how are you going to get the world to notice?

#2) How is a default on a debt owed to oneself supposed to hurt one's credit standing?

Maybe you owe $100,000 to yourself on your note. You earn $50,000 a year, have no other debt, your home is paid off, your credit rating is tops, all the banks love you! You default on the note just because ... well, for whatever reason, you just decide to deadbeat yourself.

Why would your creditors care? Your position for them is totally unchanged: You still make $50,000 a year, have no debt, your home is paid off, your credit rating is still tops ... how is it supposed to be hurt?

Hey, anyone who can e-mail in convincing answers to these two questions will receive a free lifetime subscription to!

And now... how is the case of US government supposed to be any different?

As a thought experiment, imagine that the US defaults on the trust fund bonds not 30 years from now but next year -- that as part of a new Social Security reform law Congress simply cancels all the bonds outright.

Surely this is "default" -- could the US simply cancel its bonds owned by China without defaulting on them? I think not!

Yet who in the world would be affected by this act? Let's see. We know that the trust fund bonds...

[] ... being both assets and liabilities of the US in equal amount have a net value of exactly $0, and are reported at just that value on the Treasury's Consolidated Balance Sheet of the United States. So their cancellation causes exactly $0 loss to the US there.

[] ... have $0 value* towards financing future Social Security liabilities. To recall what the government itself says about this....

"At the time Social Security ... redeems these instruments to pay future benefits not covered by future income, the Treasury will have to turn to the public capital markets to raise the funds to finance the benefits just as if the trust funds had never existed.

"From the standpoint of overall Government finances, the trust funds do not reduce the future burden of financing Social Security."
[Analytical Perspectives on the 2005 Budget (.pdf), p. 199, my emphasis]

The point here is, of course, that though some may consider Social Security to be funded with the trust fund bonds, nobody can consider the bonds to be funded with anything but the ability to collect taxes.

So every $1 of Social Security benefits paid in excess of payroll tax collections that is financed with a trust fund bond will require the government to use $1 of income tax (or income tax substitute such as new debt) to pay down the bond -- exactly as the government would be required to collect the same $1 of income tax to pay the same benefit if there was no bond (or trust fund).

(* That's $0 positive value, of course. They may well represent negative value of $1 trillion or so -- but that story is best left in another post.)

OK, so canceling the trust fund bonds outright in 2005 will cost the US exactly $0 now and in the future combined. There's no reason there for its credit standing to be impaired!

But what about others? Would canceling all the trust fund bonds in 2005 affect anybody else in the world?

Well, nobody else owns any of the bonds, so it wouldn't affect anyone that way. And as for any effect on the US's ability to service its debt, canceling the bonds would have exactly zero ($0) effect on national income, the trade account, capital account, other national accounts, everything. Just as in the case where an individual defaults on a debt to himself, all would remain exactly unchanged.

So ... why would China care at all? Why would anybody else??

What is it that is supposed to impair the US's credit standing at all -- much less produce "a meltdown that would be catastrophic"?

Hey, if I'm missing something, e-mail me the answer to these questions ...

#3) If the US simply cancels the trust fund bonds in 2005, how -- by what mechanism -- is this supposed to hurt the nation's credit standing?

#4) If canceling the trust fund bonds in 2005 wouldn't harm the nation's credit standing, why would canceling them at any future time -- say, in 2030 -- do so?

Anybody who answers these questions convincingly in the affirmative will get not only a free lifetime subscription to but also a gift subscription for a friend. Great for Christmas! [Decision of the judge is final no matter how arbitrary.]

Yes, yes ... I admit, this whole long, time-consuming line of thinking about defaulting on a debt owed to oneself is an absurdity, an exercise in Dodgsonian logic that is a complete waste of time but for its entertainment value.

It is curious, though, how it is so often invoked seriously by those on one side of the Social Security reform debate, as a defense of the status quo.

That would have entertainment value too, if the policy decisions at issue didn't have such serious real-world consequences for so many.

If you enjoyed all this, Jabberwocky-like, look out for our next foray into the Lewis Carroll logic of the Social Security debate: "The Social Security trust fund assures payment of full promised benefits until the day when the fund runs out of bonds, in 2042 or so, but no later."

If you thought all of this was an over-verbose waste of time, well, don't say I didn't warn you.

Who says China isn't fast joining the capitalist world?
China to crown first "Miss Plastic Surgery"

BEIJING - China will soon host the finals of the country's first beauty contest in which every contestant has gone under the knife.

Twenty "man-made" beauties will parade their surgical nips and tucks next Saturday in the hope of taking home the country's first Miss Artificial Beauty crown.

The contest is the latest addition to China's beauty pageant scene after Miss World was held in the southern island of Hainan for two years in a row.

Beauty pageants were once considered reviled displays of western decadence but have become big business in Communist-ruled China following more than two decades of economic reforms...

Organisers dreamed up the pageant after one woman who splashed 110,000 yuan on improving her looks attempted to sue them for banning her from the finals of a traditional beauty contest in May.... [Reuters]
They're even doing this stuff to avoid discrimination lawsuits!

Saturday, December 11, 2004

Holiday advice for the risk averse.

The Royal Society for the Prevention of Accidents and the TUC issued the advice, which included banning mistletoe in case it resulted in sexual harassment claims.

It also said workers should be instructed not to photocopy parts of their body in case the machine broke and glass caused painful injuries...

The RoSPA last night defended its guidelines. "We are not party poopers"... [Telegraph]
Courtesy of Tim Worstall.

This Social Security crisis we are facing could have unexpected consequences.

From Japan, which is a generation ahead of us in facing the challenge of financing national pensions, comes a word of warning...
Dr. Shika also notes that recent breast growth is probably the result of psychological and economic factors. "Larger breasts can be said to be one manifestation of economic prosperity," says Shika.

"But with such recent problems in the news as concerns over the shortfall of funds for the national pension scheme and other economic anxieties, these might very well put a damper on any future growth." [Mainichi News]
Oh, my ... would the younger generation ever forgive us for that?

The price of aristocracy
Ben Kingsley's marriage is on the rocks after little more than a year because he insisted his wife's friends call him "Sir." Kingsley, 60, famed for his role in "Ghandi," was knighted in 2002; he married Alexandra Christman, 30, in 2003... [NY Post]
You know ... if I had a wife who was 30 years younger than me, and I looked like him and she looked like her, I'd probably give the "Sir" business a break.

But maybe this is why there will always be an England.

Friday, December 10, 2004

The joy of contingency fees.

How's $586,000 for writing a letter? Reportedly enough to make the next edition of the Guiness Book of Records.
Juergen Graefe is a local lawyer in Germany who has just broken the world record for an hourly wage, after he accidentally earned over £300,000 ($586,000 US) for less than an hour's work.

An elderly client of Juergen's had made a mistake on a tax form, estimating his income at 11,000 Euros, then correcting it to 17,000 Euros. In the best traditions of bureaucracy though, the tax office interpreted it without questioning as 1,100,017,000 Euros, and the pensioner was duly summonsed for 287 million Euros in unpaid tax. Juergen wrote the court a simple letter explaining the mistake, and the matter was resolved.

However under German law, the lawyer gets a cut of any amount saved for a client, so the court ruled that the taxman should foot the bill for Juergen's legal fee of 440,000 Euros. [Worksmart]
I am so jealous.

Steven Landsburg on the beneficence of Scrooge
"Scrooge has been called ungenerous. I say that's a bum rap...

"In this whole world, there is nobody more generous than the miser — the man who could deplete the world's resources but chooses not to. The only difference between miserliness and philanthropy is that the philanthropist serves a favored few while the miser spreads his largess far and wide.

"If you build a house and refuse to buy a house, the rest of the world is one house richer. If you earn a dollar and refuse to spend a dollar, the rest of the world is one dollar richer — because you produced a dollar's worth of goods and didn't consume them.

"Ebenezer Scrooge lowered interest rates ... Though Dickens might not have recognized it, the primary moral of A Christmas Carol is that there should be no limit on IRA contributions."
OK ... I'm telling my kids right now that they're getting squat nothing for Christmas this year, because I'm being generous to the whole world instead.

Thursday, December 09, 2004

The New York Times: Paper of those who've never been in a subway, and protector of the public purse -- when its own hand isn't in it.

The NFL's New York Jets want to build a new football stadium on the west side of Manhattan, and the Mayor wants the city to contribute financing to the project so the stadium will tie into the city's convention center and can be used to host conventions and trade shows all year round. No need to go into the merits of the project at the moment here.

Over the weekend the Times weighed in on this in an editorial that is oh so typical.

Opposing the spending of "public money" on private-sector beneficiaries, the Times seeks to impress by critiquing project details...
... the [Metropolitan Transit Authority] has other priorities, most notably the expansion of the No. 2 subway line on the East Side. That's the longtime dream of the Assembly speaker, Sheldon Silver, who happens to represent the Lower East Side. Rather than wait for the No. 2 to be finished or for Mr. Silver to retire, neither of which seems likely to happen in Mr. Bloomberg's political lifetime, the mayor's team has decided that the city should use its own money...
Now if you are a NYCer you may be either confused or holding your head in your hands at this point. The No. 2 line was completed, oh, about 100 years ago.

The Times has confused it with the infamous Second Avenue Subway -- a black hole of the unique kind that only politicians can create, which for decades has been sucking hundreds of millions of taxpayers' dollars into a theoretical point, located somewhere on Second Avenue in the 70s, that is invisible to the human eye.

In situations where people in other parts of America might say "Pigs will fly", New Yorkers say "Second Avenue Subway" ... except for the Times' editors, who say "No. 2 line". (And who also talk about the "expansion" of a line that doesn't exist.)

As for the larger point of the wrong of using public money and government influence to benefit private-sector parties ... Was I mistaken in thinking that a certain NYC newspaper got the local government to use its eminent domain powers to evict scores of going business from blocks in midtown Manhattan, so it could flatten those blocks to qualify them as a "greenfield", so it could qualify for millions of dollars worth of government subsidies on the financing of its new for-profit "state of the art" office building ... which will provide very nice new offices for its editorial board?

I don't think so.

The Times, on why the city shouldn't heed any threat that the Jets might move...
... the threat isn't that a professional sports team will depart, or fail to arrive, if the proper stadium isn't available. For the Jets, leaving the New York metropolitan area would mean abandoning the biggest media market in the nation...
See, a threat has to be more credible than that to work, as the Times knows first hand...
The Times proposed the deal to city and state officials in an October 19, 1999, letter from vice chairman Michael Golden. He offered two "scenarios": The Times would remain on 43rd Street but move 750 jobs to a new facility in Edison, New Jersey, or it would sell its headquarters and build a new one in Times Square. He claimed it would cost the Times $135 million more over 30 years to keep the jobs in New York, and indicated that he expected government to fill the "gap"...

BTW, Bob Herbert a short while back wrote a column that was really pretty tough on the idea of public subsidies for this privately-owned facility, "Feed the Billionaire, Starve the Students".

I do hope he appreciates the view from his nice new taxpayer-subsidized midtown office -- because it's sure going to beat observing the world from Edison, New Jersey.

Wednesday, December 08, 2004

Is the Social Security Trust Fund worth less than zero? Are the "savings" in it actually worsening budget deficits as we speak?

New empirical analysis says it may be so! But first some necessary background before we get to the main issue...

[If you already know all about the trust fund and the ways it may have economic value, or not, skip to the bottom.]

The Social Security trust fund is claimed by various people to help finance future Social Security obligations in two ways.

(1) The first, naïve claim -- though believed by a great many of the workers who pay the taxes that fund the trust fund -- is that the US government bonds held by the trust fund are assets the government can liquidate in the future to pay the costs of Social Security.

That is, the government will be able to sell them off to pay future retiree benefits, in lieu of collecting taxes or borrowing more money to pay the benefits -- just as you will be able to sell the assets you own in your IRA or 401(k) to fund your own future retirement, in lieu of having to keep working and earning a salary to live on.

But a moment of thought reveals this is not at all true.

The bonds in the trust fund are issued by the government to itself. So if one counts them as assets of the government, one must also count them as liabilities of the government in an identical amount. And since assets and liabilities of equal amount net to $0, that is the liquidation value of the bonds for financing Social Security: $0.

To grasp this simply, imagine that your IRA or 401(k) holds not stocks or bonds but only IOUs written by you to yourself. Go ahead and write yourself an IOU (or IO-ME) for $100,000 ... or $1 million. How much of your retirement expenses will it pay? If only it were that easy!

Alas, when that IOU to yourself matures what you collect from yourself on it will of course be exactly offset by what you pay to yourself on it, net: $0. Thus, you will end up continuing to be entirely dependent on your salary and other income to meet your expenses, just as before, as if the IOU never existed.

The situation is no different with the government's IOUs-to-itself in the trust fund. When it goes to liquidate the bonds for cash it will have to collect the bond proceeds from itself, net: $0. Thus, it will continue to be entirely dependent on raising taxes and increasing borrowing to finance its growing Social Security obligations, just as before, exactly as if the bonds never existed.

In future years, after about 2016, Social Security's expenditures on promised benefits will exceed its payroll tax revenue. In any such year it will thus run a deficit, let's call that amount $D. In order to pay all promised benefits the government will have to make up this shortfall...

* Without the Social Security trust fund the government would have to cover this shortfall using funds obtained from other general revenue sources (income taxes, new borrowing, cuts in other programs, etc.) in the amount $D.

* With the Social Security trust fund the government will cover the shortfall by redeeming bonds in the trust fund in exchange for cash in the amount of $D -- and to obtain this cash needed to redeem the bonds, it will have to use funds obtained from other general revenue sources (income taxes, new borrowing, cuts in other programs, etc.) in the amount $D.

Since $D = $D it is clear the trust fund makes no difference whatsoever in the funding of Social Security.

The government doesn't pretend anything different. To quote its Analytical Perspectives on the 2005 Budget (.pdf) on the subject of the trust fund bonds....

"At the time Social Security ... redeems these instruments to pay future benefits not covered by future income, the Treasury will have to turn to the public capital markets to raise the funds to finance the benefits just as if the trust funds had never existed. From the standpoint of overall Government finances, the trust funds do not reduce the future burden of financing Social Security."
[p. 199, my emphasis]

Those are the government's own words and they couldn't be plainer.

The trust fund bonds do not reduce the future burden of financing Social Security. And when the government turns to liquidating the trust fund bonds to pay Social Security benefits, it will have to pay for the benefits just as if the trust funds had never existed -- imposing tax increases, issuing new debt, and/or cutting other programs, exactly as if there was no trust fund.

OK -- since the trust fund does all of exactly zero to help finance Social Security this way, the question becomes whether or not it has helped finance Social Security in any other way.

(2) The second and more plausible claim is that the trust fund's "savings," as represented by the value of bonds in the fund, help finance Social Security indirectly by reducing the national debt. This is the actual claim that has been made all the way back to 1935 by proponents of trust fund financing.

The logic runs this way: In any given year, absent Social Security, the federal government will run a deficit (or surplus) of $X. This results in its increasing its borrowing by $X (or reducing its total borrowing by paying off debt of $X).

Now add Social Security to the picture and assume its tax receipts are exceeding expenditures by some amount-- a Social Security surplus -- with this surplus being "borrowed" by the Treasury's general operations account from its Social Security account and spent on general government operations: paying for paper clips, B-52s, agricultural subsidies, civil service salaries and whatnot.

Looking at the government as a whole, the argument goes, the surplus coming from Social Security is simply extra tax revenue for the government. As such it lets the government run a smaller deficit (or bigger surplus) than it would have otherwise. The government's total national debt as evidenced by bonds issued to the public thus is reduced by the total accumulated Social Security surplus.

No, the bonds in the trust funds indeed are not "assets" that can be liquidated to finance Social Security in the future in lieu of collecting taxes -- they instead are a tally of national savings, they show the amount by which the national debt has been reduced by the Social Security revenue surplus.

The benefit of these national savings is that they make it easier to finance Social Security in the future, in a number of ways. With the government having borrowed less, investors will have invested more in real economic investments, growing the economy larger. Less debt means less debt service and thus lower taxes, also growing the economy. A larger economy means it will be easier to collect more taxes in the future when they are needed for Social Security. And less debt will make it easier to increase debt in the future as well, if needed.

Thus, while the trust fund itself does not at all reduce the amount of future taxes that will have to be collected to finance Social Security compared to if there was no trust fund, the process of accumulating the surplus it represents will in the future make it easier for people to afford to pay those increased taxes. So the argument goes.

But ... very clearly, a condition must be met for this to be true: Congress must actually save the surplus payroll taxes to actually reduce the national debt -- and not simply consume them by increasing spending and/or reducing other taxes.

If in response to receiving $100 billion of tax revenue through a Social Security surplus Congress decides to curry favor among its constituents by increasing spending $50 billion on paper clips, B-52s, agricultural subsidies, civil service salaries, and whatnot, and also cutting income taxes by $50 billion, then the amount added to national savings is $0. The entire mechanism of surplus-and-trust fund then is worthless, no matter how many bonds eventually accumulate in the trust fund.

So which is it? Does Congress save the Social Security surplus or spend it? The argument has raged since the beginning of Social Security itself.

In 1937, at Social Security's very origin, Senator Arthur Vandenberg complained the surplus was already being spent...

"[I]n plain language, payroll taxes for Social Security ... have been used to render painless another billion of current government spending, while the old-age pension fund gets a promise to pay which another generation of our grandsons and granddaughters can reckon with decades hence. It is one of the slickest arrangements ever invented. It fits particularly well when the federal government is on a perpetual spending spree..."
Arthur Altmeyer, the first Commissioner of Social Security, responded...

"The Social Security contributor benefits [from paying increased taxes to fund a surplus] because future government expenditures will be proportionately lower. This is because the government debt in the hands of banks and other private investors will be that much less.... "
They were talking past each other. Vandenberg was saying the surplus was being spent, Altmeyer that it was being saved.

Sixty years later, people were still talking past each other. For example, economist Alan Blinder ...

"These [trust fund] cash-flow surpluses have raised national saving and investment and thus have helped to expand national income. They have bolstered our ability to pay Social Security benefits in the future…"
... and Senator Tom Daschle ...

"Right now we are using Social Security trust funds to pay for other spending in the federal budget, and that to me is unacceptable. That isn't what we should be doing ... No, there is no such fund per se."
With countless other examples. Which side is right? There was no definitive answer (although the number of politicians lined up saying they themselves were actually spending the surplus, from Vandenberg to Daschle, should I think have given any defender of trust-fund financing pause).

Opinions have been subjective and varied, with a "reasonable middle ground" splitting the difference: sure, Congress probably spent some of the SS surplus, but not all, so the trust fund probably represents national savings of some value.

And now, at long last, we get to the point of this post!

A new empirical analysis of the Social Security surplus and its historical effect on government spending ventures a conclusion on the value of the surplus. And it surprisingly lies outside what seemed the logical bounds until now: 100% of the value of the trust fund bonds on the upside, and $0 on the downside.

It is that the value of the accumulated Social Security surplus, represented by the Social Security trust fund, on national savings, is negative.

From Is the Social Security Trust Fund Worth Anything? (.pdf), by Kent Smetters, PhD., Wharton School and National Bureau of Economic Research:

~~ quote ~~

We find that there is no empirical evidence supporting the claim that trust fund assets have reduced the level of debt held by the public. In fact, the evidence suggests just the opposite: trust fund assets have probably increased the level of debt held by the public....

... each dollar of Social Security surplus appears to have actually increased the debt held by the public in the past by $1.76.

At first glance, this dramatic overspending of Social Security surpluses seems entirely implausible. However, the next section presents a simple game theory model that is consistent with this result...

We show how this counterintuitive result can be explained by a simple "split the dollar game" where competition between two political parties exploits the ignorance of voters who don’t understand that the government’s reported budget surplus actually includes the "off-budget" Social Security surplus...

The political game is really interesting but can't be explained here, you'll have to take a look at the paper. Prof. Smetters continues...


... going forward, the results herein suggest that a newer mechanism might be needed in order to prevent Social Security surpluses from being spent elsewhere.

In 1999, the Clinton Administration proposed the creation of a “lock box” whose purpose was to provide a better storage technology. The “lock box” was defined as “broken” if the on-budget surpluses ever turned negative.

However, this definition was somewhat naïve and, for example, could even rule out automatic stabilizers and other countercyclical actions during recessions -- fiscal policies that might have been undertaken even without the availability of Social Security surpluses. Whether Social Security surpluses are spent or saved does not depend on whether the on-budget surplus is negative or even positive.

Instead, this determination depends on how the on-budget surplus (positive or negative) changes in response to the presence of off-budget surpluses.

It is unlikely that a complicated budget rule that incorporated this feedback, as captured in the regression analysis herein, could ever be implemented.

Creating a more safe storage technology, therefore, might require the adoption of personal accounts that augment the current Social Security system...

~~ end quote ~~

Hey, there's $3.5 trillion more scheduled to go into the Social Security trust fund by 2016.

Stop the politicians from spending $6 trillion of it!

Put it in private accounts!!

What's better than hiring a lawyer to teach ethics?

Answer: Hiring a disbarred lawyer to teach ethics.

It seems that City University's Hostos community college until recently employed one Bibiano Rosa, a disbarred lawyer, as a tenured teacher of business ethics. Then Mr. Rosa was convicted of stealing $78,000 from a Long Island church. As City U. has a policy of terminating convicted felons, it fired him. The rest is predictable...

Rosa, also a lawyer who was disbarred for other unethical behavior, including being accused of ripping off a Brooklyn church for $14,000, appealed his firing by CUNY. But an independent arbitrator upheld his dismissal last year. "The guy was teaching business ethics, give me a break" ... said one source.

In a lawsuit filed in Manhattan federal court, the convicted church thief claims he's a victim because CUNY violated his civil rights to be able to work as a convicted felon.

"Defendants' actions have caused plaintiff serious emotional distress and upset, including sleeplessness, anxiety, humiliation and depression," Rosa claimed in court papers. Rosa also complained that he has suffered "severe economic loss" because of lost wages and benefits and said he was fired without a proper hearing.

"It appears that Hostos made a profound due-process error dismissing someone summarily," said Rosa's lawyer, Stephen Hans. Hans said the crime occurred "off campus" and therefore is "not within the parameters of the law" warranting termination.

The lawsuit requests ... punitive damages for "malicious and wanton conduct" ...

Rosa doesn't lack credentials. He earned an MBA from Harvard and a law degree from the University of Texas, where he edited the law review. But college officials say he's morally bankrupt and lacks common sense. [NY Post]

And speaking of common sense, if somebody had had the common sense not to hire disbarred lawyers to teach ethics then somebody wouldn't have this problem.

Tuesday, December 07, 2004

When the CSI team is done, who cleans up the bloody mess?

This place can't be all Social Security all the time, so how about some murder, pornography and kidnapping for a change of pace?

NYC's most entertaining tabloid has the full sordid story that one can read for oneself. But a little bit of it caught my eye.

Back in 1995, ten-year old Marissa Pomarico was watching the Three Stooges on TV when her mother chastised her step-dad for eating out of a pot of sauce on the stove.

Step-dad then went and got his sawed-off shotgun and used it to blow away mom, grandma, grandpa and brother, before putting the gun at Marissa's own head. But he didn't pull the trigger on her, and he's been in jail ever since. Well, tragically, such things happen, we've all heard such stories.

After that Marisa moved around living with various relatives and in different foster homes. And some years later she was still troubled by those events -- understandably enough, one might think.

Then what seems an odd thing happened. A psychiatrist decided it would help young Marissa to work things out if she went back and visited the scene of the crime.

So on Veterans Day 2000, Marissa was brought back to 9 Evan Place by an uncle, psychiatrist and agent from the bank that had foreclosed on the family home.

By that time, neighborhood kids had taken to calling it "the dead house," and with good reason. It had been boarded up for five years, preserving the crime scene like a museum exhibit... The psychiatrist knocked on the door of the adjoining house and asked if the then-14-year-old girl could peer into her old back yard.

"I took her out back, where she stared across the way for a few moments before running off crying," said Linda Venturino, who moved her family in five months after the crime.

The bank agent then asked Venturino's husband to help him remove the chains from the front door of the house. "I went in first to make sure there were no rats running around," Mike Venturino told The Post.

But what he saw shocked him more than rodents.

"There was blood splattered on the wall behind the couch," where Marissa's grandpa had been shot, he said. "There was also a blanket on the living-room floor with bloodstains around it and a crucifix on top," where her mom had been shot.

And the pot of sauce that sparked the horrors was still on the stove.

Shortly thereafter, the shrink took Marissa into the house, where the two stayed for about an hour.

Well, that must've done the girl a world of good!
"Common sense says this isn't the sort of thing you do"... said Manhattan psychiatrist Vivian Pender.
Yes, but we are talking about psychiatrists here.

Anyhow, from there young Marissa was off to a career in the L.A. porn industry as "Jewel Affair" (links found but not provided here) the kidnapping of her sister's children, and a starring role in an episode of America's Most Wanted which lead to her being outed in the business as a person with ID problems, next stop NYPD.

But getting back to the question, who has the job of cleaning up when the CSI team is done? Apparently, nobody.


Winning $149 million can make one miserable, so it seems.

The New York Times on steroids: cheating drug-abusing millionaire baseball players should be above the law.

The New York Times' explains why baseball is the only major professional sport without a serious drug testing program: it's the government's fault...
... the United States attorney's office seized the urine samples from the drug tests that major league players took last year.

If not for that, the union would most likely have agreed to a new testing program long before grand jury testimony was leaked last week, prompting McCain to call for stiffer testing...
... ace sports reporter Murray Chass tells us. Though he doesn't give any source for this claim.

Does anyone want to guess that it might be somebody in the players' union, which has been taking the heat from Sen. McCain, the press, the fans, and its own non-steroid-using members over its obstinacy in refusing to accept drug testing?

As for the how the union would have agreed to drug testing but for the government's actions, sure, I believe that. Anyone who follows baseball knows how the players' union habitually rolls over for management. But what was its reason for refusing to go along with drug testing before the government's actions?

Mr. Chass continues, offering up a novel legal innovation...

Confidentiality is the key to the players' acceptance of any program, and they feel that the government's action violated the promise of confidentiality, as well as anonymity...
What a great idea. Private parties can contract between themselves to bar the government from obtaining and using any evidence they may possess of criminal activities.

So I can contract to provide services to you, and you can insist that I be audited to assure I act in an honest and legal manner and as per all the details of our agreement. And I can respond sure, provided we agree that if it turns out I am, say, participating in illegal drug transactions, the grand jury and DA will be barred by our agreement from obtaining and using any evidence of it that the audit turns up. It'll just be between you and me. My drug-dealer friends and associates really shouldn't be bothered.

Confidentiality is important in business, after all. Deal? Done!

Why didn't Enron and Arthur Andersen draw up a contract like this? They should have had the players union's lawyer ... and its PR guy, to deal with the Times.

See, he'd say, cheating, drug abusing, lying, millionaire baseball players are victims of the "grandstanding" Sen. McCain and the government. "The Times is always looking for victims, that's how you spin it!"

Monday, December 06, 2004

Social Security: The "Do Nothing Reform Plan" detailed. Feel free to attribute it to opponents of reform who have no plan of their own.

It should be just plain common sense that opponents of Social Security reform who constantly invoke the "transition cost" objection to it can't do so in any intellectually honest way unless they present their own proposal to close the $10 trillion unfunded liability of Social Security while preserving workers' benefits and rates of return on contributions -- opening their own proposal to criticism, and comparing the two ideas.

After all, if you want to make the wise choice between two options, you must compare them, right? Yet those who line up to oppose every reform proposal crying "transition cost!" never present a proposal of their own to solve Social Security's problems.

John Kerry and John Edwards during their recent campaign, their economist supporters like Paul Krugman and Brad DeLong, the 45 Democrats surviving in the Senate, the NY Times' editorial page writers ... all have been quick enough to cry out "transition cost!" as an objection to all reform proposals, yet not one of them has presented an alternative to get Social Security out of its problems and said, "Let's compare".

But, happily, George Will reminds us that the "do nothing" proposal of the opponents to reform has been spelled out...
... two years ago two former senators, Democrat Bob Kerrey of Nebraska and Republican Warren Rudman of New Hampshire, proposed a thought experiment:

"Suppose that a member of Congress introduced legislation called 'the Social Security Do Nothing Act.' Under this bill, promised retirement benefits would be cut by 16 percent for today's 30-year-olds, by 29 percent for today's 20-year-olds and by 35 percent for today's newborns. Alternatively, payroll taxes would go up by roughly 40 percent in 2041.

"How many politicians would rush to endorse this bill? And yet these are the choices under the Do Nothing Plan."
The Concord Coalition continues ...
“What is remarkable is not that reform plans engender such heated debate, but that the Do Nothing Plan engenders so little outrage.

"Worse yet is the fact that no one will have to endure the scrutiny and ridicule of specifically advocating the Do Nothing Plan in order for its absurd consequences to take effect. The Do Nothing Plan has already been enacted. It is current law."
It is remarkable. And this all highlights the fallacy of the transition cost argument. Inevitably it is presented as: "reform has a cost but the status quo does not, and it is better to not needlessly incur that cost of reform."

Yet this argument works only if one doesn't present a plan of one's own to solve the problems in the status quo, because if one does then the future costs inherent in the status quo become visible. And then people can make a comparison between those costs and the costs of reform -- in which the status quo may not come out looking so good (all those benefit cuts!). So opponents of reform unanimously don't present any plan of their own -- they want nothing to compare!

Let's see how the New York Times' editorial writers just recently worked through this. They've heard the common sense message that options should be compared ... and they object!
Privatization advocates will tell you that the cost of creating private accounts today must be compared with the cost of doing nothing to reform Social Security. This is specious...
... no reasonable person is suggesting that nothing be done. The proper comparison is between a plan to borrow trillions and a plan to phase in slowly a modest package of tax increases and benefit cuts that would preserve the current system's essential protections without borrowing ...
Gee, OK, the proper comparison is between borrowing trillions of dollars and "modest" tax increases and benefit cuts phased in "slowly" that essentially maintain the current system. Hardly any changes at all, it sounds like. Who could argue?

Except that's not very specific. Let's imagine the Times being just a little bit more explicit about the "modest" changes it proposes in its "proper comparison"...
... no reasonable person is suggesting that nothing be done. The proper comparison is between a plan to borrow trillions and a plan to cut benefits for today's 30-year-olds by 16%, for those entering the workforce today by 29%, and for the younger by even more.

As to preserving the historical essentials of Social Security, all annual cohorts who retired before 2000 received from Social Security more than they paid into it. Most recieved much more. From now on, all will receive less under the current benefit formula, with 30-year-olds receiving as little as 50% less. Of course, reducing their benefits yet more will further reduce their return -- 30-year-olds will get back as little as about 40% of what they contribute, while the younger will get back even less than that.

But this modest change in the essentials of Social Security going forward is well worth it to avoid borrowing today...
Gosh, why didn't they print that? ;-)

Because just admitting that any significant changes are necessary in Social Security to preserve the status quo shows that the status quo can't be preserved -- major reform is in fact inevitable, one way or another, as a matter of arithmetic.

And if you are opposed to reform, where are you then?

Sunday, December 05, 2004

Social Security reform: The simple reason why it's better to borrow to close the funding gap now rather than later.

Future US government budget deficits as projected by GAO:

[From Figure 3, (.pdf) * ]


There's been much to-do recently about the pending Social Security reform proposal -- particularly about the "extra debt" that will have to be incurred to fund private accounts while closing Social Security's funding gap.

It's bad to incur additional borrowing, it will hurt the nation's credit standing, argues the NY Times (in an editorial that in all its economic astuteness matches the Times' recent one that claimed the labor force is growing both larger and smaller simultaneously.)

Folks like Max Sawicky and Dean Baker ask why we should borrow now to close the funding gap when we can put off doing so for so many years, until so much later, notes Andrew Samwick, who answers with his own good reasons why we should.

But here's the simplest reason why we should: Due to the unfunded liabilities of Social Security, Medicare, and Medicaid, the US government's deficits are set to explode starting about a decade from now. And borrowing then, as we will have to do if the status quo remains in place, will be one whole lot harder than borrowing now.

The General Accounting Office in 2001 projected the government's future financial position based on then-current law and economic projections. The result was that the annual fiscal deficit would reach 20% of GDP -- the size of the entire federal government today -- around the year 2045. After that GAO ended what was supposed to be a 75-year projection, saying 'government will end', projections beyond there are implausible.

A graph charting these projected deficits is at the top of this post.

So now, considering that graph, here's a simple question for the NY Times, Dean Baker, Max Sawicky, et. al., to answer:

If you are going to have to borrow to finance Social Security, and you are, would you rather do it now or in 2040? The NY Times thinks borrowing at today's deficit level will harm the nation's credit standing -- what does it imagine borrowing at 2035's deficit level will do??

Not that we can expect the US to actually run a fiscal deficit of 20% of GDP 30-odd years from now. That, being impossible, will be avoided -- but the only way it can be avoided is through a fiscal collision such as this nation has never seen before, which is sure to result in tax increases and benefit cutbacks for retirees that everyone will hate, to go along with the largest possible deficits that are sustainable.

Now, even if borrowing today doesn't actually reduce the total necessary borrowing cost at current value needed to sustain Social Security, but only moves borrowing forward in time to when it is easier to do, it provides a substantial fiscal benefit by helping alleviate the fiscal crunch of the future -- and thus also helps preserve retiree benefits.

And, of course, if market investments provide a higher return than government bonds -- and over 30+ years they'd better or we'll have bigger problems to worry about -- then borrowing today can indeed provide a substantial net reduction in total borrowing cost at current value, and larger benefits to Social Security participants too, compared to the status quo, since one dollar borrowed today can avert the need to tax or borrow multiple dollars in the future, as illustrated previously in more detail.

By the way, don't think that we won't have to borrow to finance Social Security during the next 40 years because we have the Social Security trust fund to finance it for us. Every single dollar of Social Security benefits "financed" by the trust fund must in fact be financed by a dollar more either added to the national debt through borrowing or collected through taxes. So as soon as Social Security starts tapping the trust fund, it starts driving up the national debt and driving us towards the future fiscal crisis.

But every dollar borrowed today that is saved and invested in real economic assets so that it enables the government to avoid borrowing or taxing one or more dollars in the future helps alleviate the future fiscal crisis -- and avoid future retiree benefit cutbacks too.

And that's the simple reason why it's better to borrow to close the funding gap now rather than later.

*fn: The GAO report used year 2000, pre-recession, pre-9/11, pre-Bush tax cut, and pre-Medicare drug benefit economic projections that anticipated the government would still be running a surplus today -- instead of the current deficit level marked by the X, which has arrived about 20 years ahead of schedule. This makes everything in this post even more so.

Saturday, December 04, 2004

Robert Rubin, smooth operator, but in some ways not so "progressive" as a banker.

I'm getting my NY Times op-eds via Portugal these days. Before opening the dead-tree version of today's edition of my hometown paper, I've already read Tim Worstall's sharp catch of Robert Rubin's smooth op-ed in it.

Rubin writes about Congressional do-goodism of the sort that makes Democrats like him proud...
Congress passed the Community Reinvestment Act in 1977 ... Under the act, regulators consider reinvestment performance when a bank seeks permission to expand or merge. Since its inception, the law has prompted banks to channel more than $1 trillion into reinvestment projects - without requiring a single dollar of Congressional spending.
Ah, isn't that great? Congress wants to send money to favored constituents, but doesn't want to pay the political price of collecting the taxes to do so. So it orders private businesses to spend their money there, or else.

And it is so proud of itself -- it's spent a trillion dollars without spending anything!

But I digress, that is not the point of this post.

Mr. Rubin continues, noting with alarm that regulators now are moving to ease restrictions they currently impose on small banks under the Act, because this will harm the poor...
Under the law now, banks with assets of more than $250 million undergo full periodic reviews of their lending, services and investments in low-income communities. At smaller banks, examiners limit their review to lending practices only.

The F.D.I.C. proposal would raise the asset level for this limited scrutiny to $1 billion, making many fewer banks fully accountable. The F.D.I.C. claims that the new rule is aimed at reducing the regulatory burden on banks. But there is a real question as to whether changing the rule would result in any meaningful savings for banks.

And communities will suffer if enforcement is curtailed, because the act has been working. A Treasury report presented in 2000 to the Congress concludes that mortgage lending to low- and moderate-income borrowers and areas rose substantially in the 1990's.
Well, that's what happens during an historic boom economy, eh?
At the same time, banks have learned that lending, investing and providing basic services in low-income communities can be good business.
And now that they have learned this, certainly we must impose the Act on them, or they will stop doing what they know is good business.
"The lower-income mortgage market has become demonstrably mainstream and more competitive over the last decade." The Federal Reserve Board, too, has deemed this lending to be safe and profitable.
Mainstream, safe and profitable -- certainly we need to apply the Act to have regulators compel mainstream, safe, profitable behavior.
Low-income families can be part of the mainstream economy only if they can buy homes, start businesses and live in stable, vibrant communities.
A touching thought ... But a thought that wasn't in the op-ed is that Mr. Rubin is Chairman of the Executive Committee of Citigroup, a bank that won't get a break from the regulators under the new rule while a 1,000 of its smaller competitors do.

Hmmm... considering his fiduciary obligation to Citigroup, he must be aware of that, and of his duty to do his best to prevent Citigroup from incurring any new competitive disadvantages. But why mention such a small thing when advocating a policy to help the poor -- even if it forces those 1,000 smaller competitor banks to make profits against their will in doing so!

But here's an oddity: As a good Democrat Rubin thinks "the rich" should pay much more than the little guys in taxes to support the modern welfare state. Yet he certainly doesn't here seem to think that among banks the richest and biggest -- his -- should pay more in regulatory burden than the littler banks to support the welfare state. I guess being a progressive has its limits.

(For the record Rubin's footnote on the op-ed has four words saying he is "a director of Citigroup" and 14 saying he "is the chairman ... of the Local Initiatives Support Corporation, a community development support group.")

Hat tip to Mr. Worstall.

Rumsfeld stays as Secretary of Defense

"Defense Secretary Donald H. Rumsfeld ... was asked by President Bush on Friday to remain at the Pentagon in the administration’s second term..." [AP]

Friday, December 03, 2004

Say goodbye to the VCR.

VCR sales are down almost 99% from their peak of 200 million annually during the 1980s, and from 23 million during 2000, to only 2.8 million projected for the coming year. [NY Post]

In Britain, the nation's largest consumer electronics chain has stopped selling VCRs completely -- and police say that home burglars don't even bother to take them. [Reuters]

The VCR was the most successful consumer electronics item ever after television and radio. It's had a great 30-year run, but that's about over now thanks to the DVD player. Get ready to plant it next to the eight-track.

Me, I have fond memories of my Betamax, long-since planted next to the eight-track.

Canada has immigration law problems too.
Canada Ends Permit Program for Foreign Strippers

The Canadian government, under fire because one of its ministers has been accused of giving preferential treatment to a Romanian stripper, said on Wednesday it was scrapping a program that handed out temporary work permits to foreign-born exotic dancers.

Human Resources Minister Joe Volpe said it was clear that not all Canadians supported the program, which granted permits to around 660 foreign strippers to work in Canada ...[Reuters]
Not all, maybe, but I'm sure some did.

However, maybe this is not a legal problem but a defect in the Canadian labor market. Some ask: are Canadians at some sort of international comparative disadvantage regarding women who take their clothes off?

Stripper Shortage National Disgrace

Rather than give Immigration Minister Judy Sgro a hard time about whether or not she greased the pole, as it were, to fast-track the process to allow a Romanian stripper to stay in Canada, we need to be taking a look at the bigger issue: Why is Canada unable to meet the demand for exotic dancers on its own?

What is lacking in our national character that we cannot turn out enough people who can figure out how to take off their clothes? ... [Toronto Star]

Thursday, December 02, 2004

Marc Cuban bets he can beat the bookies' betting line.

Marc Cuban -- who proved he's no dummy not only by making billions with his Internet start-up company but also by cashing in its stock for real money before the tech-stock bubble burst -- is opening a hedge fund that plans to make its money though sports betting. Cuban is now in the sports business as owner of the NBA's Dallas Mavericks...

Mr. Cuban outlined his thesis on his Web log, [sic, actually] on November 27. He said that in wagering on sports, “stupid money” invests primarily on emotion. Moreover, he said people who bet like this often do so with the expectation of minimal returns. “How efficient can a market be when the majority of investors expect to lose money?” he wrote.

Mr. Cuban wrote that the odds-makers in Las Vegas intentionally set the odds for sporting events to exploit this sentiment, seeking to attract so-called “stupid money” to skew the betting. Right before the contest, the “smart money”— sensing an inefficiency—places its wagers. More often than not, they win.

The people who have the ability to exploit this market inefficiency — Mr. Cuban said he sees no difference between gambling and investing— are the ones he wants to hire.

“I will find the best and the brightest with a confirmable track record and hire them,” he wrote, without specifying whether their backgrounds will be in sports or finance. [NY Sun]
OK, this will be an interesting attempt. Cuban will be betting, literally, that the sports betting market is inefficient because of all the "stupid money" in it. Yet...

#1) A market awash in "stupid money" can set prices very efficiently so long as a minority of participants in it are smart and use their smarts to bid prices to efficient levels. This jibes quite well with empirical studies showing how hard it is to systematically beat both the bookies' spreads and the financial markets, even though there is surely no shortage of "stupid money" in either arena.

#2) Cuban in his post on his new hedge fund actually describes the sports betting market as operating just as in #1). More than that, he describes it as being more efficient than the financial markets, offering better information and other advantages to participants...

...this suggests [in sports betting] the smart money is better than just good. It’s very good...

When you think about betting on sports, there really is far better information about your local sports team than there is about any local business in your market. The local papers cover the team every day. The local TV station gives a report about every game. There are radio stations who cover them for hours at a time. That’s far more information than you get about Tyco or Computer Associates or NFI.

In sports, when someone does something wrong, they pretty much tell you the next day or two. Someone suspended — You know it. Someone hurt — They report it, and do a better job of policing that than any industry watchgroup.

And stats? my goodness. There is no comparison. You can tape everything and create your own stats, which I’m sure every “smart money” gambler does. There are public play-by-plays of every game. There are websites that analyze every which way from sunday every action and inaction of every player in the game.

There also is no such thing as insider information either. Player and team reps can’t talk to known gamblers, but do they really need to?

Reporters are there after every practice to interview the players and coaches. They ask the same questions that every gambler wants to know, if only so they know who to pick for their fantasy teams. They also get to see and report on who is there and who isn’t and who is limping and who isn’t.

That’s far better than we get from public companies...
OK, maybe it is -- but if so much superior information really is available to everybody in the sports betting market than in the financial markets, then how can it be easier to systematically beat the market in the former? (Is he implying there is some sort of deficiency of "stupid money" in the financial markets??)

It seems to me that Cuban is betting on the existence of a really singular market failure -- that in the whole wide world of Nevada gaming, sports books and "smart money" gambling, nobody else has thought of this before he has. Because if others already have, and are already competing with each other to take advantage of the stupid money, then they've already bid away the prospect of excessive profits.

Well, it will be an interesting attempt to watch.

Yale takes the trick (though Harvard wins the game).

At the annual Harvard-Yale football game Eli students dressed in Harvard Pep Squad shirts handed out to the Harvard fans colored papers to hold up to supposedly spell out "GO HARVARD".

But in fact they spelled ... well, go see for yourself. They're selling the pictures, and when America's future leaders show such initiative they deserve to have their copyright respected.

BTW, Harvard won the game 35-3.

Watch for the Becker-Posner blog.

That's as in Gary Becker, Nobelist in economics, and Richard Posner, judge of the Seventh Circuit Court of Appeals (until recently chief judge) and leader in the field of law-and-economics.

Promised to be coming soon.

I sure hope they have comments, so I can straighten 'em out on a couple things.

Wednesday, December 01, 2004

Missing the point entirely.

A reader's letter to the NY Times complains:

To the Editor:

While David Brooks may be correct that globalization is a factor in reducing world poverty ("Good News About Poverty," column, Nov. 27), I think he goes overboard when he says, "But if you really want to reduce world poverty, you should be cheering on those guys in pinstripe suits at the free-trade negotiations and those investors jetting around the world."

For the most part those guys in pinstripe suits are pursuing globalization to maximize their profits, not reduce the poverty of others. So, while their pursuits may have some positive effects on world poverty, Mr. Brooks imputes egalitarian motives to them that are likely not much of a factor in their actions...
First, it's been a good 228 years now since Adam Smith wrote...

"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner..."

... so isn't it about time to get such basic-level economics included in the high-school curriculum, and start fighting the scourge of economic illiteracy?

Second, Brooks never at all "imputes egalitarian motives" to the pinstripe-suit globalizers. That free trade, markets, and capitalism reduce poverty and increase human welfare without egalitarian motivations is the point.

The Industrial Revolution had no egalitarian motivation behind it. But it increased the life expectancy of all of us in the now-developed world from 25 to 75+, and is today increasing life expectancy correspondingly in every part of the lesser-developed world that it reaches, as it reaches it.

Perhaps the letter writer feels that the tripling of his own life expectancy is not to be cheered too highly, because there was no egalitarian motivation behind it?

Now, at this point I was going to head into a rant about the road-to-hell one risks taking when one judges others by their motives rather than by the real results of their actions. After all, nobody professed more egalitarian motivation than the Communists who killed 100 million of their own people and impoverished well more than another billion for generations to come.

But I'll save that for another day, and just ask again: If we teach biology, chemistry and physics in high school, isn't it about time we started teaching at least the ABCs of economics?

After all, on election day people don't vote on whether to defy the laws of chemistry and physics.

Learning as we go along -- six-month review, and greatest hits.

I've been puttering around at this web address for about a year now, fiddling with the blog for six months, and posting more or less regularly on it for a little more than two. Most of this time I've tried to keep it a private little experiment, keeping it out of listings and not doing anything to expose it to the public at all until just recently.

But one can't hide on the Internet. Tom Maguire, Tim Worstall and Andrew Samwick added it to their blogrolls for some reason, and Roland Patrick, who seems too ornery to have a blogroll, has linked posts to it. (Thanks, fellows.) So the visitor count has risen from the nillions to actual positive numbers nonetheless.

And then there are the search engines. Looking at the web stats it seems there are more spiders crawling around on the web than ... oh, in an old science fiction movie about spiders taking over the world.

It's old wisdom among marketing mavens that no matter how smart you are, you don't know what the public wants until you test, test, test, and you'd better be ready for surprises. So I've tried to be eclectic in making posts here, out of curiosity to see what kinds of things might draw a response. And it's true -- even with such low traffic some items draw way more attention than others, in ways I'd never have guessed.

That sex sells is no surprise, but that the Tara Reid post immediately got hundreds of hits through search engines was a surprise to me. I mean, this hidden little blog must be about 10,000th on Google's list of Tara Reid references, so the people who came through it to arrive here have got to learn to search more efficiently, or to get a life, or something.

That Mafia boobs sell as well as Hollywood ones was surely a surprise to me. The single most popular post continually to this day has been the one about bungling Mafiosi, posted back in June just to see how cut-and-paste worked from the NY Post online edition to Blogger.

Other posts that I thought were rather interesting have been ignored ... so I'll ignore them here too.

But anyway, for the Wayback Machine's permanent record, here are the greatest popular hits of the first six months of a blog that almost nobody reads, in order...

True crime stories (the entire June archive!)

Social Security privatization basics: How can privatization possibly help?

Entrepreneurial rise-and-fall story: NYC's Bill Gates of bathroom attendants brought down by justice.

Innovation in radio tomorrow and yesterday.

Arnold on the TV news, and dumb crimes of the week.

Accountability for performance in the NYC public schools.

You had a complaint about our national health service?

Merry Monday -- dead white European male's holiday version.

The question the 9/11 Commission didn't ask.

Dust to dust, ashes to antique shop.

If you're going to flash the cameras don't be cheap with the surgeon.

What's the lesson? A site dedicated to air-headed breast-flashing starlets, bumbling criminals and Social Security seems the way to get the blogads.

So here we go...