Saturday, September 30, 2006

The Washington Post editors miss a fine point

An editorial in the Washington Post titled “A Healthy Response” lauds new Washington, D.C. legislation that funds healthcare with tobacco settlement funds. However, the editors make the common mistake of thinking the source of the funds is relevant for deciding the best use of the funds.

Clearly the method of funding the measure -- through the use of the city's tobacco settlement funds -- makes sense. Tobacco use, as Mr. Catania has noted, contributes to five of the 10 leading causes of death in the city. Tobacco use is also the leading cause of cancer deaths in the District. What better use for the settlement funds?

Hanle in the Washington Post on The Education Issue

Paul Hanle has an article in the Washington Post titled “The Education Issue”. Its first paragraph is amusing, although Hanle did not intend it to be. Here it is.

I recently addressed a group of French engineering graduate students who were visiting Washington from the prestigious School of Mines in Paris. After encouraging them to teach biotechnology in French high schools, I expected the standard queries on teaching methods or training. Instead, a bright young student asked bluntly: "How can you teach biotechnology in this country when you don't even accept evolution?"

Hanle characterizes the student as bright. Hanle makes a recommendation about teaching in France. The student criticizes the US. The student claims that nobody in the US accepts evolution (plural “you”). The student implies that it is impossible to teach a concept that nobody in the US accepts (yes, I am purposely ignoring the probability that the student may have been referring to the operational aspects of the issue).

This student sounds abrasive and dumb, not bright.

Monday, September 18, 2006

The New Yorker gets an F in statistics

Thanks to Don Luskin at “Conspiracy to Keep You Poor and Stupid” for steering me to the New Yorker article this post is about.

The 9/25/06 issue of the New Yorker contains an article, “Wagers of Sin” by Suroweicke. Suroweicke laments in part that the ban on online betting has serious adverse consequences. Here is an excerpt from his article.

Furthermore, the ban on online betting is hindering the development of new markets that could predict far more important outcomes than that of the N.B.A. finals. In the past few years, a host of prediction markets, as they’re usually called, have appeared online, offering people the chance to speculate on subjects ranging from the box-office performance of Hollywood films to the outcome of Presidential elections and the spread of bird flu. These markets’ forecasts have proved remarkably accurate—just as bettors collectively do an exceptionally good job of predicting sports results. (In 2004, for instance, Tradesports, a Dublin-based prediction market, called thirty-three out of thirty-four races in the Senate correctly, and called all fifty states correctly in the results for the electoral college.) But in the U.S. these markets have to use play money, because using real money would constitute gambling. The online gambling ban prevents these markets from getting bigger and more accurate.

I favor online betting and believe that there are times when a betting market provides valuable predictions. However, Suroweicke’s article is misleadingly optimistic.

The idea behind betting markets’ accuracy is, roughly, that each individual bettor’s estimate is unbiased, can be viewed as the sum of true value plus mean zero error, and that the errors across bettors are approximately independent. If this property holds, then the error associated with the average estimate across bettors becomes very small as the number of bettors increases.

If betting markets really reflected these assumptions, future events could be predicted as accurately as desired by using the average prediction of a large number of bettors. Suroweicke gives the impression that this possibility is likely. In fact, it is to be expected that it is unlikely, particularly for any prediction where great accuracy is valuable. And Suroweicke’s quoting a few lucky exceptions to the rule does not invalidate that fact.

One problem is that a prerequisite for an accurate prediction to be valuable is that an accurate prediction is not easy, or even possible. Another problem is that bettors prediction characteristics are not characterized by Suroweicke’s implicit estimation assumptions. Moreover, at best, unbiased estimates provide an accurate estimate of the mean. Where there is large volatility around the mean, there is still great uncertainty.

Bettors’ estimates are often biased in the same direction and highly correlated. This does a betting markets’ prediction accuracy in just where prediction accuracy is most valuable.

To drive the ridiculousness of Suroweicke’s optimism home, see if you agree that the following events can be predicted accurately by simply using the average forecast of a large number of forecasters.

Next year’s price of xyz stock.

Next year’s price of a broad stock market index.

Your year of death.

The year New York will suffer a nuclear attack by terrorists.

Friday, September 15, 2006

Tradeoffs: The New York Times denies the obvious

A recent New York Times editorial, “Everyday Low Wages”, blasts Mayor Richard Daley of Chicago for vetoing a plan to force large retailers to pay higher wages and benefits. The editors miss just about every point there is to miss.

Here is the editorial, along with my comments.

Mayor Richard M. Daley of Chicago wielded the first veto of his 17-year tenure this week — and the City Council supported him — striking down Chicago’s short-lived plan to force behemoth retailers like Wal-Mart to pay higher wages and benefits.

In this round, Mr. Daley, the retailers and local Wal-Mart suppliers argued that mandating higher compensation would do more harm than good by driving business and employment opportunities away from low-income neighborhoods.

Every basic microeconomics textbook points out that price controls have a net negative impact on people’s welfare. Mandating higher wages is price control on the price of labor. Mr. Daley, the retailers and local Wal-Mart suppliers are right and the NYT editors are wrong. Strike one for the NYT editors.

But the choice — between no jobs or low-wage jobs — is probably a false one. Wal-Mart and other mega-retailers, like Target and Home Depot, need market share. With suburban areas saturated, cities are the logical places to grow. Wal-Mart especially needs more American consumers, having recently pulled the plug on unsuccessful attempts to expand in Germany and South Korea. It is currently planning to expand in Santa Fe, N.M., where local laws require higher wages than the company normally pays.

Wal-mart and other mega-retailers need market share only if it is profitable. By raising costs, some locations that were profitable become unprofitable. Some jobs that might have been created by Wal-mart, et al, are not. The fact that not all locations where there are mandated higher wages and benefits, such as Santa Fe, become unprofitable does not invalidate the argument. That the NYT editors use this fallacious logic is, unfortunately, not a surprise. Strikes two and three for the NYT editors.

The notion that Wal-mart needs more American consumers, even if they reduce profits, is just silly. Strike five for the NYT editors.

Another argument propounded by Wal-Mart is that paying higher wages would compel the company to raise its prices, hurting low-income consumers. Wage gains do not automatically lead to higher prices. They could be absorbed by higher productivity or by a narrowing of profit margins. Given Wal-Mart’s profits, the company could improve its wage structure and still beat the competition.

In order for a business opportunity that has become unprofitable due to mandated higher wages and benefits to become worthwhile, it must become profitable. That implies higher prices. The fact that higher productivity is possible is irrelevant because that possibility was factored into the original assessment of profitability. Narrowing profit margins is not acceptable for a project that just meets minimum profitability requirements. Strikes six and seven for the NYT editors.

The Chicago ordinance raised legal and technical questions. If Mr. Daley had not wielded the veto, it would surely have faced a court challenge. But proponents of living wages have the moral high ground, and are increasingly finding a political voice. Chicago hasn’t heard the last of them, and Washington hasn’t either.

The moral ground does not go to those who, intending to or not, make things worse. Strike eight for the NYT editors.

It is impressive that the NYT editors can make so many fundamental errors in such a short editorial. The NYT editors have definitely struck out.

Saturday, September 09, 2006

Iraq in perspective

Here is a comment by Victor Hanson, a Professor Emeritus at Fresno State University in California and a Senior Fellow at the Hoover Institution at Stanford University.

Thanks to my friend Bob Taubert for sending it to me.

War-torn Iraq has about 26 million residents, a peaceful California perhaps now 35 million. The former is a violent and impoverished landscape, the latter said to be paradise on Earth. But how you envision either place to some degree depends on the eye of the beholder and is predicated on what the daily media appear to make of each.

As a fifth-generation Californian, I deeply love this state, but still imagine what the reaction would be if the world awoke each morning to be told that once again there were six more murders, 27 rapes, 38 arsons, 180 robberies, and 360 instances of assault in California - yesterday, today, tomorrow, and every day. I wonder if the headlines would scream about "Nearly 200 poor Californians butchered again this month!"

How about a monthly media dose of "600 women raped in February alone!"Or try, "Over 600 violent robberies and assaults in March, with no end in sight!" Those do not even make up all of the state's yearly 200,000 violent acts that law enforcement knows about.

Iraq's judicial system seems a mess. On the eve of the war, Saddam let out 100,000 inmates from his vast prison archipelago. He himself still sits in the dock months after his trial began. But imagine an Iraq with a penal system like California's with 170,000 criminals - an inmate population larger than those of Germany, France, the Netherlands, and Singapore combined.

Just to house such a shadow population costs our state nearly $7 billion a year - or about the same price of keeping 40,000 Army personnel per year in Iraq. What would be the image of our Golden State if we were reminded each morning, "Another $20 million spent today on housing our criminals"?

Some of California's most recent prison scandals would be easy to sensationalize: "Guards watch as inmates are raped!" Or "Correction officer accused of having sex with under-aged detainee!" And apropos ofSaddam's sluggish trial, remember that our home state multiple murderer, Tookie Williams, was finally executed in December 2005 - 26 years after he was originally sentenced.

Much is made of the inability to patrol Iraq's borders with Iran, Jordan, Kuwait, Saudi Arabia, Syria, and Turkey. But California has only a single border with a foreign nation, not six. Yet over 3 million foreigners who sneaked in illegally now live in our state. Worse, there are about 15,000 convicted alien felons incarcerated in our penal system, costingAbout $500 million a year. Imagine the potential tabloid headlines: "Illegal aliens in state comprise population larger than San Francisco!" or "Drugs, criminals, and smugglers given free pass into California!"

Every year, over 4,000 Californians die in car crashes - nearly twice the number of Americans lost so far in three years of combat operations in Iraq. In some sense, then, our badly maintained roads, and often poorly trained and sometimes intoxicated drivers, are even more lethal than Improvised Explosive Devices. Perhaps tomorrow's headline might scream out at us: "300 Californians to perish this month on state highways! Hundreds more will be maimed and crippled!"

In 2001, California had 32 days of power outages, despite paying nearly the highest rates for electricity in the United States. Before complaining about the smoke in Baghdad rising from private generators, think back to the run on generators in California when they were contemplated as a future part of every household's line of defense.

We're told that Iraq's finances are a mess. Yet until recently, so wereCalifornia's. Two years ago, Governor Schwarzenegger inherited a $38 billion annual budget shortfall. That could have made for strong morning newscast teasers: "Another $100 million borrowed today - $3 billion more in red ink to pile up by month's end!"

So is California comparable to Iraq? Hardly. Yet it could easily be sketched by a reporter intent on doing so as a bankrupt, crime-ridden den with murderous highways, tens of thousands of inmates, with wide-open borders.

I myself recently returned home to California, without incident, from a visit to Iraq's notorious Sunni Triangle. While I was gone, a drug-addicted criminal with a long list of convictions broke into our kitchen at 4 a.m., was surprised by my wife and daughter, and fled withour credit cards, cash, keys, and cell phones.

Sometimes I wonder who really was safer that week.

Friday, September 08, 2006

The New York Times misses several points but gets one right

In a recent editorial “Cashing Their Chips”, the NYT’s editors discussed Intel in the context of the American Jobs Creation Act.

This week, Intel announced that it would be cutting 10,500 jobs, or about 10 percent of its work force. The company’s chief executive, Paul Otellini, said that while it was a difficult decision, the move was “essential to Intel becoming a more agile and efficient company.”

That kind of cutback is par for the course in today’s business environment. What’s notable about it is that Intel was also one of the major corporations that took advantage of the American Jobs Creation Act (AJCA), a one-year tax holiday for American businesses operating overseas that lawmakers claimed was going to act as an engine for job growth. By reducing taxes on repatriated profits, it was supposed to generate cash for companies to use in underwriting new hiring at home.

In reality, it was little more than a multibillion-dollar giveaway. Intel repatriated $6.2 billion under the program, which taxed foreign profits at a rate of just 5.25 percent, compared with the normal rate of 35 percent. Now, instead of creating new jobs, it is cutting existing ones.

The NYT wants you to believe that the AJCA failed to create US jobs. But the fact that one company, Intel, cut US jobs after taking advantage of the tax break implies nothing about whether the AJCA created US jobs in the aggregate. Nor does the NYT appear to understand that if the AJCA caused Intel to cut fewer US jobs, then the AJCA created US jobs. In other words, the NYT’s editors didn’t even know how to think about the issue.

It is not clear to me why a firm that is able to bring back overseas money with less taxes will want to use that money for US job creation. Giving credit to the NYT, they did point this out. However, the NYT missed all the subtleties. Less money paid to Government means more money to do other things. If the extra money is distributed to shareholders, then shareholders have more money and spend it. If the extra money is sent back overseas and creates overseas jobs, well, what are the overseas payees going to do with their dollars? They will spend them, and the dollars will end up buying US goods. That, presumably, requires US jobs to create the additional goods that are bought. No matter what alternative you consider, it is likely that more jobs of a more useful kind are created (because governments spend too much money and spend it inefficiently).

On the other hand, the NYT might rightfully respond to me that no matter how the tax system is modified, the total tax bill will remain the same. In which case, the NYT might say, I missed some of the subtleties, at least if I hadn’t included this paragraph. But then, the issue is pretty much moot and the editorial was superfluous.

However, the NYT’s editorial was right on one point.

The moral is this: Businesses will slash jobs when they deem it wise and build plants when they think it’s cost effective. All the Jobs Creation Act accomplished was to hand companies a nice little present with a big, fat price tag and a misleading name.

Businesses do make decisions based on profitability, not unrelated tax breaks. However, even here, the NYT’s editors could not resist letting their emotions get the better of them. The AJCA does not have a big, fat price tag. Government taxes are the big, fat price tag, not tax cuts.

Monday, September 04, 2006

More incompetent media economic analysis

The media’s comments about the economic data from the Census Bureau have been mostly negative, despite that the median household income in 2005 rose slightly in real terms. The major media complaints have been remarkably uniform. For example, a recent Palm Beach Post editorial complained as follows.

The stories behind the numbers are nothing to celebrate. The meager 1.1 percent rise in family income, to $46,326, is the first increase since 1999, but it didn't come from higher wages. The rise came because 23 million households headed by someone 65 or older are doing better with investments and retirement income. Such numbers are hardly the vital signs of an overall healthy economy. In Florida, many households are keeping inflation at bay only because more family members are working longer hours or holding second jobs. Last year, salaries for full-time working men and women declined. Again.

It is increases in wealth that count. Wages are only one source of wealth increases. Disparaging other sources of income and profit is silly.

Many households headed by someone under 65 benefited from (1) income and profit on tax deferred investments, which is not included in these households’ reported income and (2) tax deferred contributions to retirement plans, also not reported as income. The Underground Economy is not included either, and that is rampant in Florida.

In South Florida, the number of people living in poverty increased by about 50,000. Driven by tourism and the robust service industry, the state again leads the nation in job creation, and registered an enviable 3.5 percent unemployment rate - but don't ask what those new jobs pay.

Erstwhile unemployed workers are better off with jobs than without them. Thus, the economy has improved.

Job creation implies that more people are working. Presumably, the comment “but don’t ask what those new jobs pay” means that the new jobs don’t pay much. All else equal, if some unemployed workers become employed at low level jobs, the percentage of low paying jobs (e.g., below the poverty level) increases, there is no change in the median income level (which lies well above the poverty level), and there is a decline in the average income level. As the old adage says, “figures don’t lie, but liars (and editors) figure”.

The number of Floridians without health insurance rose to 19.6 percent, well above the national average of 15.9 percent; only Texas (24.6 percent) and New Mexico (21.1 percent) are worse. Most of the job creation Gov. Bush likes to crow about comes without benefits or career possibilities. Don't get sick and don't count on a future.

With respect to lack of health insurance, there are many sources of free health care. For example, many hospitals are required to provide emergency room treatment regardless of patients’ ability to pay. The percentage of people without health insurance overstates the percentage of people who cannot obtain adequate health care.

Complaining about the type of job creation and linking it to career possibilities misses some points that invalidate the complaint.

Most workers move through a life cycle, as Thomas Sowell has discussed endlessly. They start at low paying jobs (including currently highly paid editors) and move up the pay scale. Many of those currently with incomes below the poverty level are young and will move to higher income levels as they age.

A better indication of how the economy is doing is the implied time average income of workers over their working lives. The low end of this measure is far higher than the low end of the point in time income distribution. Yet, it the latter that the media focuses on. Perhaps it is an unreasonable to expect the media to do otherwise; that would take some economic insight.

Low unemployment rates mean less if the nation gets there with low-quality jobs.

I can accept this statement. But it does not imply that low-quality jobs are worse than no jobs and that those who take low-quality jobs never move up the income ladder.

A final point. Cost of living indicators are biased in a manner that understates standard of living improvements. Today, even those with incomes below the poverty level live far better lives than their corresponding cohort did in the past. That is, in part, because the huge price declines in technological products are not reflected accurately in cost of living statistics. Today, for example, even “poor” people have cell phones, TVs, etc. They also have access to far more effective medical care, even without health insurance.

A colleague of mine, Jason Greene notes that:

In an economy in which there is an increasing proportion of households in which there are two wage earners, health insurance for one of those wage earners might be unnecessary. For example, if I am employed in a position in which I have family health care coverage at a reasonable cost, my spouse has the luxury of seeking employment in a job that she likes, but which does not offer health insurance. I believe that she would be counted among the workers without health insurance, since these surveys usually do not account for the entire picture. Thus, I expect the under insurance problem is overstated.