Reality is Unreal

Tradeoffs: Jimmy Carter and James Baker on voter ID

2008-02-03T19:37:00.000-05:00

Jimmy Carter and James Baker have an op-ed in the 2/3/08 Sunday New York Times. The title is “A Clearer Picture on Voter ID. Here is the last paragraph of their op-ed.

In the meantime, the Supreme Court can lead the way on the voter ID issue. It has the opportunity to inspire the states, our national leaders and the entire country to bridge the partisan divide on a matter that is important to our democracy. It can support voter ID laws that make it easy to vote but tough to cheat.

Aside from their dubious idea that the Supreme Court’s role is to inspire, their notion that “easy to vote” and “tough to cheat” go together has the tradeoff exactly opposite to what it is.

Consider a voter qualification arrangement as “efficient” if it maximizes cheating difficulty at a give level of voting ease (or equivalently maximizes voting ease at a give level of cheating difficulty). The history of government efficiency suggests that lawmakers will choose an inefficient voter qualification arrangement. Nevertheless, give lawmakers the benefit of the doubt and assume that they do choose an efficient voter qualification arrangement, so that only efficient arrangements need to be considered.

The issue is: what is a reasonable expectation considering the direction of the relationship between voting ease and cheating difficulty?

Suppose the relationship among efficient voting qualification arrangements is that increased voting ease leads to increased cheating difficulty. Then maximizing voting ease maximizes cheating difficulty. The implication is that ID cards are a step in the wrong direction because they decrease voting ease. The optimum arrangement would be to maximize voting ease, which would also maximize cheating difficulty. This could be accomplished by eliminating all voting requirements, such as voter registration, and simply letting anyone vote who wants to.

Suppose the relationship among efficient voting qualification arrangements is that increased voting ease leads to decreased cheating difficulty. Then maximizing voting ease minimizes cheating difficulty. The implication is that requiring ID cards increases cheating difficulty but decreases voting ease. In this case, it is not clear that requiring ID cards is an improvement. More generally, it is not clear where the optimum point on the voting ease – cheating difficulty tradeoff curve lies.

Jimmy Carter’s and James Baker’s comments suggest that they believe that increased voting ease and increased cheating difficulty are compatible. The implications presented above suggest that this view is incorrect.

Either Carter and Baker are naïve or they are pushing their agenda under false pretenses. In neither case should they be taken seriously.

The sheep never learn

2007-10-08T22:03:00.000-04:00

An excerpt from the Daily News, 10/7/07 brings home the horrors that anti gun groups and their supporters make possible when they succeed in disarming honest citizens.

A shirtless madman wielding stolen knives went on a bloody midtown rampage yesterday - stabbing a restaurant worker and a psychologist walking her dog before being shot by an off-duty cop, authorities said.

Deranged Lee Coleman stood wild-eyed over the dog-walker, methodically plunging a knife into her body and face over and over - even pausing to change knives as the woman lay in a pool of blood, screaming for help.

"He was chopping down on her," said Andrew Fink, 29, who was getting into a cab when the attack took place. "I saw him hit her at least 10 times. She was screaming and crawling along the street and people were running away.

Not everyone would have been running away if something like this occurred in one of the majority of States that allow their citizens to carry concealed weapons. This was an easy crime for an armed citizen to stop almost immediately after it began. However, no one without a weapon is going to stop a criminal wielding a weapon.

Police cannot be everywhere at once. Your fellow citizens pretty much are.

A few choice quotes about the airline industry

2007-10-07T16:13:00.000-04:00

A retired TWA airline pilot sent me the following quotes about the airline industry. I don’t know where he got them or whether they are true quotes. However, they are priceless, so I am posting them.

Sort of what you would expect in a competitive industry.

These days no one can make money on the goddamn airline business. The economics represent sheer hell.- C. R. Smith, President of American Airlines.

A recession is when you have to tighten your belt; depression is when you have no belt to tighten. When you've lost your trousers - you're in the airline business- Sir Adam Thomson.

As of 1992, in fact-though the picture would have improved since then-the money that had been made since the dawn of aviation by all of this country's airline companies was zero. Absolutely zero.- Warren Buffett, billionaire investor, interview 1999.

I think it's dumb as hell, for Christ's sake all right, to sit here and pound the shit out of each other and neither one of us making a fucking dime. Well - I mean, goddamn! What the fuck is the point of it? Nobody asked American to serve Harlingen. Nobody asked American to serve Kansas City. . . . If you're going to overlay every route of American's on top of every route that Braniff has, I can't just sit here and allow you to bury us without giving you our best effort. Oh sure, but Eastern and Delta do the same thing in Atlanta and have for years. Do you have a suggestion for me? Yes, I have a suggestion for you. Raise your goddamn fares twenty percent. I'll raise mine the next morning. You'll make more money and I will too. Robert, we can't talk about pricing. Oh, bullshit, Howard. We can talk about any goddamn thing we want to talk about.- Robert L. Crandall and Howard Putnam, from United States v. American Airlines Inc. and Robert L. Crandall, U.S. District Court, CA383-0325

You fucking academic eggheads! You don't know shit. You can't deregulate >> this industry. You're going to wreck it. You don't know a goddamn thing!-Robert L. Crandall, CEO American Airlines, addressing a Senate lawyer prior to airline deregulation, 1977.

If we went into the funeral business, people would stop dying.-Martin R. Shugrue, Vice-chairman Pan Am.

I've said many times that I'd be thrilled to sell the airline to the employees and our guys said no, we'll take all the money, anyway.- Robert L. Crandall, 1997.

I mean, they get paid an awful lot of money. The only good thing about them is they can't work after they're 60.- Judge Prudence Carter Beatty, New York Southern District Bankruptcy Court, regards Delta Air Lines pilots. Reported in The Wall Street Journal, 18 November 2005.

Freakonomists and incentives: Missing the point

2007-10-06T16:30:00.000-04:00

Steven Levitt’s 10/5/07 Freakonomics column in the New York Times, “Looking to Live in a Community with Low Murder Rates? Try Committing a Crime” points out that the murder rate in prisons is lower than in many big cities.

“Ironically, however, some of the lowest murder rates are found in places where one might suspect just the opposite to be true: U.S. prisons.”

"In 2005, 56 prisoners were murdered. There are roughly 2 million inmates held in state prisons, meaning that the homicide rate per 100,000 prisoners last year was only 2.8. That number is less than half the rate of New York City (6.6 per 100,000) and an order of magnitude lower than Baltimore (42 per 100,000). Indeed, of the 66 largest cities in the United States, only El Paso, Tex. and Honolulu, Hawaii have lower homicide rates than the state prisons.”

Levitt attributes the low murder rate to prisons being a highly controlled environment.

“These low homicide and suicide rates are both testimony to the fact that prisons are incredibly highly controlled environments. Whenever I have visited prisons, I have been amazed at how safe I felt.”

How typical of Levitt to miss the point.

Anyone who has watched movies about prison knows that, for all practical purposes, nothing prevents one inmate from murdering another (sorry, couldn’t resist).

The safety of visitors to a prison does not imply the same safety for the inmates. Furthermore, Levitt’s feelings of safety are irrelevant; a prison visit does not make one a prison safety expert.
Could it be that the low murder rate in prisons reflects the fact that inmates contemplating violence against other inmates recognize that they may end up being the loser? Could it be that John Lott is right that felons are capable of assessing risks and act accordingly? Could it be that one way of lowering violent crime rates is to convince potential perpetrators that attempting a violent crime is dangerous?

In Florida, it is easy to obtain a license to carry a concealed weapon. Potential perpetrators have to wonder whether the weak little old guy (me) could blow their brains out.

Competition and Government

2007-10-03T19:02:00.000-04:00

The potential benefit of having states within the United States is the competition it fosters. States with unproductive laws and policies tend to lose out to those with less unproductive laws and policies (note that I avoided any reference to states with productive laws and policies – there are none :-)).

The real purpose of the states’ attorneys’ general is to eliminate as much of the potential benefit from competition as possible.

The following is from the Wall Street Journal’s “Best of the Web Today - September 28, 2007” by James Taranto.

Life Imitates 'Seinfeld

"Newman learns that bottles and cans can be refunded for 10 cents in Michigan (as opposed to 5 cents in many other states). Kramer tells him it's impossible to gain a profit from depositing the bottles in Michigan due to the total gas, tollbooth and truck rental fees that would compile during the trip, but Newman tries to find a way."--Wikipedia description of "The Bottle Deposit, Part 1," aired May 2, 1996.

"Authorities said they arrested 10 people and seized more than $500,000 in cash after breaking up a smuggling ring that collected millions of beverage containers in other states and cashed them in for 10 cents apiece in Michigan."--WDIV-TV Web site (Detroit), Sept. 26, 2007.

Hedge funds managers and quants don’t get the point

2007-08-13T08:37:00.000-04:00

Every time hedge funds and quant funds lose big, their managers characterize the market’s behavior as a “10 sigma” event or a “one in a 1,000 year” event. In other words, they blame the market not themselves. Who could have known?

A good example is in the recent Wall Street Journal article “One Quant Sees Shakeout For the Ages – 10,000 years” by Kaja Whitehouse. The protagonist is Matthew Rothman, Global Head of Quantitative Equity Strategies for Lehman.

Here are two quotes from the article.

“The trouble started Aug. 3, when stocks started moving not only in ways that commonly used models didn't predict, but in precisely the opposite direction from what was expected. Equally troubling, the moves were far more volatile than models based on decades of testing assumed were likely.”

"Wednesday is the type of day people will remember in quant-land for a very long time," said Mr. Rothman, a University of Chicago Ph.D. who ran a quantitative fund before joining Lehman Brothers. "Events that models only predicted would happen once in 10,000 years happened every day for three days."

History suggests that hedge fund managers and quant managers won’t remember what happened for long. What long-term impact did the Long Term Capital Management collapse have?

Perhaps hedge fund managers and quant managers shouldn’t “remember” for long. Most of the time, they walk away with plenty of money in the bank. Their clients are the ones who lose big.

The primary problem with many hedge fund managers and quant managers is that they mistake the map for the territory, despite abundant evidence to the contrary.

Quant models are models, not reality. A quant model that describes reality reasonably accurately most of the time is valuable. However, it is inadvisable to use a quant model to compute the probability of a large loss from using the model aggressively. It is also inadvisable to compute the probability of a large loss from using the model aggressively from a simulated application of the model.

Suppose a quant model implied that so called “10 sigma” and “one in a 1,000 year” adverse events were fairly frequent? Would it be used? No. The only quant models that are used are the ones that are unrealistic enough to make such adverse events appear to be “10 sigma” and “one in 1,000 year” events. The same goes for long-term simulations.

The ability to hedge and diversify aggressive investment strategies effectively depends on strong assumptions about the market’s behavior, i.e., on the realized interactions among its securities. These are not known.

To illustrate, only an estimated covariance matrix is available and it is not the true covariance matrix. Moreover, the fund’s realized hedging effectiveness depends on the realized covariance matrix, which is different from the true covariance matrix. Worse yet, not even the realized covariance matrix captures a fund’s true risk.

The true probability distributions of returns and relative returns of aggressive hedge funds and quant funds have much more probability of devastating negative returns and negative relative returns than the normal distribution suggests.

A quant model may allow an aggressive fund’s risk to be known pretty well most of the time, but the other times occur frequently enough with devastating effect to make aggressiveness a loser’s game.

“10 sigma” and “one in 1,000 year” market events have occurred frequently enough over recorded history to convince any reasonable observer that they are nothing of the sort. They are quite common.

There is nothing wrong with the market. It’s the quant models and those who use them that are the problem.

Achieving Social Security and Medicare solvency

2007-04-16T23:10:00.001-04:00

Predictions of Social Security and Medicare solvency reflect the distorted demographics due to the baby boomers. The ratio of workers to retirees will decline dramatically as the baby boomers retire.

The easy solution is to change the demographics by increasing the number of workers. This can be achieved by allowing enough foreigners to work in the United States on some kind of work visa. These foreign workers would pay enough US taxes to keep Social Security and Medicare solvent, would not be citizens, would not vote, would not be entitled to remain in the United States indefinitely, and, best of all, would not be entitled to Social Security or Medicare payment themselves.

Rather than building fences to keep foreigners out, the United States should be encouraging foreigners to come here and work.

Minimum wage laws

2007-02-04T12:40:00.000-05:00

Steven Landsburg, a smart economist, wrote an interesting article in Slate, “The Sin Of Wages: The Real Reason To Oppose The Minimum Wage”.

Landsburg’s article makes two valid points. First, that increasing the minimum wage has little impact on employment. Second, that minimum wage laws are unfair because they constitute a tax on a small segment of society that should be paid, if paid at all, by all of society.

According to Landsburg:

Ordinarily, when we decide to transfer income to some group or another—whether it be the working poor, the unemployed, the victims of a flood, or the stockholders of American Airlines—we pay for the transfer out of general tax revenue. That has two advantages: It spreads the burden across all taxpayers, and it makes politicians accountable for their actions. It's easy to look up exactly how much the government gave American, and it's easy to look up exactly which senators voted for it.

By contrast, the minimum wage places the entire burden on one small group: the employers of low-wage workers and, to some extent, their customers. Suppose you're a small entrepreneur with, say, 10 full-time minimum-wage workers. Then a 50 cent increase in the minimum wage is going to cost you about $10,000 a year. That's no different from a $10,000 tax increase. But the politicians who imposed the burden get to claim they never raised anybody's taxes.

If you want to transfer income to the working poor, there are fairer and more honest ways to do it. The Earned Income Tax Credit, for example, accomplishes pretty much the same goals as the minimum wage but without concentrating the burden on a tiny minority. For that matter, the EITC also does a better job of helping the people you'd really want to help, as opposed to, say, middle-class teenagers working summer jobs. It's pretty hard to argue that a minimum-wage increase beats an EITC increase by any criterion.

Landsburg is right that this is reason enough to oppose minimum wage laws. However, it is worth noting why minimum wage laws may not have a material impact on unemployment.

It is clear that a large increase in minimum wages, say to $100/hour would cause widespread unemployment, other things equal. This establishes that, other things equal, any increase in minimum wages causes some unemployment. If other things really are equal, the fact that increases in minimum wages have not caused material unemployment only goes to show that an immaterial percentage of workers have minimum wage jobs.

But are other things equal? Over the years, the cumulative increase in the minimum wage has been dramatic, with no apparent impact on unemployment. One possible explanation is that the real impact of increasing the minimum wage by X% is a dynamic reaction leading over time to inflation of X%. In this case, workers earning below the minimum wage have no ultimate benefit from increasing it. Another possibility is that productivity increases reach X% over time offsetting the adverse unemployment impact of the minimum wage increase. In this case, workers end up with the same, higher, wage they would have gotten anyway. Or, there could be a combination of the two.

In either case, eventually, the increased minimum wage is detrimental (if you think inflation is detrimental) and has no impact on the people it is designed to help.

Racial profiling or good policing?

2007-02-03T17:26:00.000-05:00

The New York Post article “NYPD frisked blacks at 5 times the rate of whites” notes that of total frisks in 2006, 52% were Black, 29% Hispanic, and 10% White.

Does this indicate racial profiling?

Does this indicate racially biased policing?

Consider that the arrests resulting from these frisks were 51% Black, 30% Hispanic, and 12% White.

The fact that the arrest and frisk percentage breakdowns by race were almost identical implies that the probability of an arrest, given a frisk, was the same for all races. Assuming that the arrest decisions were made without regard to race (something that remains to be determined), then the implication is that the frisk decisions were racially unbiased and not due to adverse racial profiling. This is not to say that there was no racial profiling, only that, if there was, it was statistically relevant.

The New York Times on College Aid

2006-11-01T15:26:00.000-05:00

A recent New York Times editorial shows, once again, that the NYT editors have a hard time thinking straight. Here are some excerpts from the editorial, “College Aid Cutbacks” along with my comments.

Government loans also have not kept pace with rising costs. Subsidized loans accounted for only 55 percent of student borrowing in the most recent academic year, down from 69 percent 10 years earlier.

Why should student loans be subsidized at all? If there is a reason to subsidize them, what is the rational for determining the right subsidy? Assuming it is true that “Subsidized loans accounted for only 55 percent of student borrowing in the most recent academic year” is “down from 69% 10 years ago”, does that imply that subsidized loans are down or down per capita? The NYT editors missed all these points and they are the crux of the issue.

Bush administration officials have said repeatedly that the solution to the nation’s growing income inequality is more education. That’s a gross oversimplification, but if they really believed it — and cared about a remedy — would federal college aid be declining?

Without knowing the right level of federal college aid, we cannot know if a decline is good or bad.

As things stand, privatization of college lending is the administration goal that is being advanced. As government aid has declined, loans from banks and other private lenders have soared, climbing to 20 percent of all education borrowing last year, up from 12 percent five years earlier.

This implies nothing about whether students are obtaining the loans they need to attend college or not?

Should all these students be attending college?

The result is towering debt. The same bachelor’s degree will cost a student borrower far more than a student who can afford to pay.

The student borrower pays interest on his loan. The student who pays cash loses the interest he could have earned on his money. The latter’s loss is at the market interest rate, which is higher than that of a subsidized student loan. In this case, the student borrower has a lower (present value) cost than the student who can afford to pay. If the student borrower pays the market interest rate, then there is not much difference between the borrower’s (present value) cost and the cost for the student who can afford to pay.

That’s not a path to greater equality.

I will believe that the NYT editors really want equality when they stop wearing Rolex’s, stop driving expensive cars, and donate the difference between their income and the average income to charity.

Business mathematics

2006-10-15T12:21:00.000-04:00

Thanks to Jennifer Young for this one.

What should you do when your boss wants you to give 100%, or even more than 100%?

Here is the math behind this concept.

Represent A, B, C, . . . , Z by the numbers 1, 2, 3, . . ., 26.

Then:

KNOWLEDGE = 96%

HARD WORK = 98%

ATTITUDE = 100%

BULLSHIT = 103%

ASS KISSING = 118%

So, it is mathematically certain that while knowledge, hard work, and attitude will get you there, bullshit and ass kissing will put you over the top.

The Palm Beach Post’s editor wants to make the insurance problem worse

2006-10-08T17:35:00.000-04:00

Randy Schultz, the Palm Beach Post’s Editor of the Editorial Page, has an editorial titled “On insurance, will the state get fooled again?”. However, it is Mr. Schultz that is being fooled, and by his own faulty understanding of arithmetic and economics, not by the insurance companies.

Mr. Schultz’s article is an excellent example of the kind of mistaken thinking that I often used in my MBA classes to illustrate that even VIPs spread dumbth.

Here are some excerpts from Mr. Schultz’s editorial, along with my comments.

However the Foley scandal plays out in the race for his congressional seat and other U.S. House races around the country, Floridians will be dealing with the same insurance crisis once the election is over. There's no chance that the Legislature will hold a special session on property insurance before the Nov. 7 election, since there's no consensus on what to do. Also, Gov. Bush would have to call it, and a special session would remind voters how little he and the Republican-led Legislature did this year and last year.

Given the proposed solutions that typically come from government and the Mr. Schultz’s of the world, doing nothing is preferable to making things worse by doing something.

Ideally, the next Congress would deal with the problem by creating a federal disaster fund similar to the National Flood Insurance Program. Both candidates for governor favor such a program, and why wouldn't they? It would solve the problem for them.

A federal disaster fund, if experience to date is any guide, would encourage overbuilding and inadequate construction in hurricane prone areas. The real problem is that nobody who lives in these areas wants to pay the economic cost. The “solutions” proposed by politicians and Mr. Schultz invariably have the innocents pay for the consequences of the inappropriate behavior of the irresponsible.

The real solution is to have those who insist on living in hurricane prone areas (like Mr. Schultz and me) pay the full average cost of living there. This requires that those living in hurricane prone areas pay for all the hurricane damage, averaged over a suitably long term. That requires a real, economically viable insurance industry, not one required by law to charge “affordable” premiums that are below the average loss and to build up a reasonable reserve.

In reality, though, the Legislature will have to act. For nearly 60 years, Congress has left insurance regulation to states, which enables the industry to set rates state-by-state and work the system to its advantage. That's how the property insurers made record profits in 2005 despite Hurricane Katrina and two bad storm seasons in Florida.

Rates should be set state by state, or even better by risk area. Why should someone who decides not to run the risk or expense of hurricane losses be forced to subsidize those who do so that the latter can live where they shouldn’t in homes that are inadequately constructed?

Focusing on profits in one year when the problem is losses over many years is wrong. Do we want the insurance company to go broke precisely when the big loss is incurred? How can that be prevented if the insurance company is not allowed to have big profits in years when the losses are below average or when reserves are below where they should be?

Yet Gov. Bush continues to insist that Florida has "more a hurricane problem than an insurance problem." The committee he formed to study property insurance is to seek only solutions that restore the private market.

Gov. Bush is right and Mr. Schultz is wrong. If private insurance is not economically viable, presumably due to government meddling, neither will be public insurance. Politicians are smart enough to realize that they will have to bill citizens for the average loss and that the average loss will be just as large as what private insurers will charge. When the big loss comes, we will simply get an enormous tax bill and a partisan outcry about the failed government insurance program set up by the other party.

Test question: Why might the average cost of private insurance be less than the average cost of government provided insurance?

That would be the same private market that has dumped hundreds of thousands of higher-risk policies onto the state, restricted what their policies will cover, sought relief from having to cover certain perils, delayed or refused to pay some claims - then acted as though Floridians should be grateful that the private market is still here.

It appears that Mr. Schultz thinks that an insurance company should be forced to run at uneconomically viable insurance premiums. This is obviously impossible. Who would invest in the insurance company?

If an insurance company is not allowed to charge a premium appropriate to the risk, it would be foolhardy to sell the policy? If price controls make some segment of the insurance market a long term loss, the message is that government has done something that will, on average, hurt its citizens. If Mr. Schultz wants more risks covered, he shouldn’t be fighting for lower premiums.

There's a case to be made that the solution for Florida is to leave the private market out of any solution, since the private market has brought about the crisis. Making that case is Americans for Insurance Reform, which proposes "a privately run state insurer for the hurricane wind portion of homeowners' insurance coverage." Private companies would continue to write non-wind coverage, covering fire, theft and liability. Democrats in the Legislature supported this approach, but they didn't get a serious hearing.

To think that the private market has brought about the crises is wrong. It is the Mr. Schultz’s of the world who have messed up the insurance market by demanding “affordable” insurance when no such thing is possible. The only insurance premium viewed as affordable by the Mr. Schultz’s of the world are well below the average loss they are supposed to cover.

Fortunately, the Democrats didn’t get a serious hearing . . . . , or did they? A serious consideration should take no more than 60 seconds and should lead to rejection.

The key to any such plan would be how much to charge. That, in turn, would depend on who decides what the risk is. Americans for Insurance Reform suggests using models that are developed by state government and run by state government. As the group notes, Florida insurance regulators now have to rely on the industry's computer-generated risk models. One of those private models, Risk Management Solutions, said this year that projections now will be based on five-year periods. That means Floridians are paying property insurance based primarily on 2004 and 2005. Is that spreading risk?

Mr. Schultz is indeed misinformed. No hurricane loss models are accurate year by year. Even if they were, paying the current year’s expected loss each year would lead to wildly fluctuating premiums. The whole point of hurricane insurance is to average over years. Yes, Mr. Schultz, 2004 and 2005 should be included.

Mr. Schultz, have you any idea what the right tail of a probability distribution is? If so, do you have any idea of the implications for insurance?

On this one, really, get past politics.

Past politics and past the kind of dumbth Mr. Schultz and the politicians espouse.

Politics may keep some Republicans from taking Americans for Insurance Reform seriously. The group is part of the Center for Justice & Democracy, which gets money from those dreaded plaintiffs' lawyers Republicans like to criticize unless one of them - Sen. Mel Martinez, for example - is running as a Republican. Also, Michael "Fahrenheit 9/11" Moore sits on the Center for Justice & Democracy's board.

Well, those are some pretty good reason for expecting Americans for Insurance Reform to make the problem worse. I don’t see how anyone could take AFIR seriously, given what it is trying to accomplish.

Last Sunday's Post featured an update on how drastically higher premiums are hurting homeowners and the real estate market. Combined with higher tax bills from soaring values, the costs threaten to undermine the state's economy. Florida has managed to get by as a low-cost, low-wage state, but Florida can't be a high-cost, low-wage state.

Too bad. That is the cost of living in Florida. If you don’t want to pay for your cost of living here, move. Don’t try to force others to pay the cost of your inappropriate decision.

The sad truth is that Florida is a high-cost state.

What would help is high enough insurance premiums to make it worth while to build stronger structures that make economic sense instead of the weaker structures that make sense when you can count on having your damage paid for by others who don’t choose to run your risk.

A decade ago, after Hurricane Andrew, the state created another committee to study property insurance. Under the changes that became law the next year, Floridians were supposed to get this deal: Rates won't go down a lot when there are few storms, but rates won't go up a lot when there are lots of storms. If the insurance companies didn't live up to their end of the deal the last time, why should Floridians think that they would do so this time?

The only way to achieve level rates is to have high level rates.

Of course, all that said, I am willing to continue to be subsidized if you are silly enough to elect politicians who will do me the favor.

Tradeoffs. The New York Times editors on the national debt

2006-10-06T07:15:00.000-04:00

Here is an editorial, “Deeper and Deeper” from the New York Times. The title is apt. The editors get themselves deeper and deeper into analytical trouble as they go along.

There is fresh evidence, if any more were needed, that excessive borrowing during the Bush years will make the nation poorer.

The NYT editors have yet to realize that what matters most is the size of the government budget, not how it is funded. If the borrowing will make the nation poorer, it is because the government is spending too much.

From the standpoint of a fixed government budget and the country as a whole, there is little if any difference between funding the budget with taxes or funding it with borrowing. Since the NYT editors are for increased taxes, they should not be worrying about the impact of funding those same projects with debt.

Hint: The present value of interest payments on debt is the proceeds of the debt. The present tax required to accomplish the same spending is the amount of the debt.

For most of the past five and a half years, interest rates have been low, allowing the government to borrow more and more — to cut taxes while fighting two expensive wars — without having to shoulder higher interest payments.

The NYT editors fail to appreciate the equivalence of funding spending with debt vs taxes. The additional interest payments from using debt are offset by the additional interest earned by taxpayers on funds they get to keep because they don’t have to pay the equivalent tax.

That’s over now. For the first time during President Bush’s tenure, the government’s interest bill is expected to rise in 2006, from $184 billion in 2005 to $220 billion this year, up nearly 20 percent. That increase — $36 billion — makes interest the fastest-growing component of federal spending, and continued brisk growth is likely. According to projections by Congress’s budget office, the interest bill will grow to $249 billion in 2007, and $270 billion in 2008.

So, one year’s increase is a permanent growth rate?

All of that is money the government won’t have available to spend on other needs and priorities. And much of it won’t even be recycled back into the United States economy. That’s because borrowing from foreign countries has exploded during the Bush years. In 2005, the government paid about $77 billion in interest to foreign creditors in China, Japan and elsewhere.

If foreigners buy US Debt, the US gets their money. US taxpayers do not have to pay now, either in the form of taxes or debt. The interest they pay later has a present value equal to the tax or debt they would have paid. Moreover, if the foreigners don’t treat us right, we can renege on the debt.

And that’s not the worst of it. While foreign investors were putting up most of the $1.5 trillion the federal government has borrowed since 2001, they were also snapping up hundreds of billions of dollars in private sector securities, transactions that have been a big source of the easy money that allowed Americans to borrow heavily against their homes.

Let’s see, having willing buyers for private debt makes it more difficult for Americans to borrow? Isn’t borrowing selling debt?

The result, as The Wall Street Journal reported last week, is that for the first time in at least 90 years, the United States is now paying noticeably more to foreign creditors than it receives from its investments abroad. That is a momentous shift. It means that a growing share of America’s future collective income will flow abroad, leading to a lower standard of living in the United States than would otherwise have been achieved. Americans deserve better than this financial mess.

The future collective income flowing out is offset by the debt proceeds flowing in now? If the consequence is a lower standard of living, it is due to a government budget that is too large, not how it is financed.

A nice lesson from STATS (checking out the facts behind the news)

2006-10-01T23:05:00.000-04:00

Here is a link to a STATS article, “Fingering the Media”. It shows why much of the statistical quotes in the media are nonsense.

Here are a few excerpts from the article.

The media just loves a finger story. Last year, the Express Newspaper of the U.K. reported on a study finding that male aggression is linked to finger length – the longer the ring finger is as compared to the index finger, the more likely the male is to be aggressive.

The problem with these kinds of studies is two fold. First, these researchers don’t have a plausible mechanism to justify their claim.

Secondly, there are rarely studies published about what finger-length is not correlated with. Some might argue this is irrelevant, but it actually is extremely relevant from a statistical point of view.

Any time you test for a correlation, there is a small possibility (about five percent) that you will measure a relationship (such as finger-length and athletic talent) when it isn’t actually present in the whole population. These “findings” will seem as “true” as any other statistical finding, such as the fact that lung cancer and smoking are correlated. But this means that if you try to correlate twenty different traits to finger length –even if none of them are actually related to finger length – you will likely find some correlation, just by chance.

The Washington Post editors miss a fine point

2006-09-30T13:28:00.000-04:00

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

2006-09-30T10:56:00.000-04:00

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.

The New Yorker gets an F in statistics

2006-09-18T20:38:00.000-04:00

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.

Tradeoffs: The New York Times denies the obvious

2006-09-15T17:08:00.000-04:00

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.

Iraq in perspective

2006-09-09T15:07:00.000-04:00

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.

The New York Times misses several points but gets one right

2006-09-08T19:26:00.000-04:00

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.

More incompetent media economic analysis

2006-09-04T15:56:00.000-04:00

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.

More polluted California law

2006-08-27T17:14:00.000-04:00

An article in the New York Times, “California Builders Fight Air Pollution Fee”, by Carolyn Marshall, is another example of polluted California law.

According to the article:

The fees are part of a new regulation by the San Joaquin Valley Air Pollution Control District requiring builders of commercial and residential projects to use energy-saving technology and traffic-reduction features in their projects. The rule requires payment into a fund for pollution control. The idea is to make developers more accountable for the explosion in traffic and emissions that typically accompany building.

The ultimate cause of pollution and traffic is people, not builders. By charging builders, all those who do not live in new homes escape the fees, even though they are responsible for just as much, and often more, per capita pollution and traffic. Older homes also experience a one-time positive relative price change.

If people are the cause, isn’t it more sensible to charge people? On the other hand, existing people are not responsible for being born; their parents are. Shouldn’t parents be charged to have children (sorry, I couldn’t resist)? Alternatively, shouldn’t polluters be charged for the amount of pollution they produce?

Requiring specific energy-saving technology doesn’t make sense, either. If too much energy is being consumed, raising energy prices will reduce consumption by the same amount but in a way that leaves people better off, on average (marginal benefit equal to marginal cost).

Of course, who is to say what price should be charged for pollution or that too much energy is being consumed or that too many babies are being born? Certainly not the environmental activists. On the other hand, if it is me, fine.

U. S. Representative Robert Wexler on the Medicare D “Doughnut Hole”. Spin or dumbth?

2006-08-19T04:14:00.000-04:00

Wexler’s article, “’Doughnut hole’ a black hole for seniors; allow Medicare to negotiate drug prices” was published in the Palm Beach Post. Here are some excerpts with my comments.

After being rushed by the Bush administration to sign up for a drug plan under Medicare Part D and avoid paying stiff penalties, an estimated 7 million seniors are receiving a rude awakening as they find themselves plummeting into an abyss of prescription-drug non-coverage known as the "doughnut hole."

This carefully crafted clause in the Part D program is nothing more than a large gap in drug coverage that occurs between $2,250 and $5,100, where seniors and the disabled are required to pay 100 percent of their prescription-drug costs . . .

You receive a rude awakening if something is a surprise. The doughnut hole was not a surprise.

Presumably, those who signed up for Medicare D did so because it was an improvement over alternatives, even with the doughnut hole.

Many who signed up have a low probability of reaching the doughnut hole. For these people, Medicare D with the doughnut hole is a far better alternative than it would be if it did not have the doughnut hole. Why? Because they aren’t forced to buy doughnut hole coverage they don’t want or need.

Others who signed up have excessive drug costs and will go far beyond the doughnut hole. Their total drug cost will be lower with Medicare D than with alternatives.

The fact is that Medicare D is an improvement for every rational person that signed up, not a disaster.

President Bush and Republicans in Congress, in cooperation with the pharmaceutical and insurance industries, devised a flawed program that conveniently omits benefits for beneficiaries when they need it the most.

Mr. Wexler’s rhetoric is good, but his logic leaves much to be desired.

Some of those who need it most are those whose drug costs far exceed the doughnut hole range. These people are far better off with the superb coverage beyond the doughnut hole range and the doughnut hole than they would be without the doughnut hole and no extensive coverage beyond it.

Less obvious is the fact that those who need drugs the most often do not reach the doughnut hole range. Equating need with total cost is fallacious. You can save a life on $100 monthly.

This goes against the principle of what it means to be insured. Usually, the purpose of insurance is to protect individuals against large losses; contrarily, the Medicare Part D doughnut nut hole leaves seniors completely unprotected, facing skyrocketing prescription-drug costs that they cannot afford.

Great spin, but only spin.

The insurance principle is to spread the cost across a suitable cohort for those who find the tradeoff between average cost certain versus probability distribution of loss and risk aversion favorable. No rational person wants too pay for too much insurance.

The fact that Medicare D has a doughnut hole is not the same as leaving seniors completely unprotected. What would be leaving seniors completely unprotected would be no Medicare D and no alternatives. That is not the case.

With respect to affordability, there is a negligible chance that people who define affordable as below cost (as many of the complainers do) will ever find a sensible Medicare drug program affordable.

The argument made by proponents of the Republican prescription-drug program is that the doughnut hole was necessary to keep the cost of the program down and save taxpayers money. In fact, the only effects resulting from the doughnut hole are huge windfalls for pharmaceutical companies and inadequate drug coverage for millions of seniors. Ironically, according to a recent report issued by the Center for Economic and Policy Research, if Medicare had been allowed to bargain directly with pharmaceutical companies - as is currently done by the Veterans Administration and state Medicaid programs - the savings would be more than twice the size of the doughnut hole. Direct bargaining by Medicare with pharmaceutical companies would completely eliminate the doughnut hole, in addition to providing substantial savings for the federal and state governments.

Mr. Wexler is pulling a bait and switch.

The current style of program would cost more without the doughnut hole.

Direct bargaining would change the program by slowing the development of new drugs. Cheaper drugs lead to less effective drugs over time, because pharmaceutical companies will slow development of new drugs if their profitability is reduced. There is no free lunch, no matter what Mr. Wexler says.

Those who are griping about the high cost of newer drugs can put themselves into Mr. Wexler’s world by simply refusing to buy any drug developed more recently than, say, twenty years ago. These generically available drugs are cheap. You will never reach the doughnut hole by buying them.

Don’t blame me; blame Charles Wilder

2006-08-13T17:53:00.000-04:00

My friend Charles Wilder doesn’t want to be blamed either, because someone sent it to him.

1. A bicycle can't stand alone; it is two tired.
2. A will is a dead giveaway.
3. Time flies like an arrow; fruit flies like a banana.
4. A backward poet writes inverse.
5. In a democracy it's your vote that counts; in feudalism, it's your Count that votes.
6. A chicken crossing the road: poultry in motion.
7. If you don't pay your exorcist you may be repossessed.
8. With her marriage she got a new name and a dress.
9. Show me a piano falling down a mine shaft and I'll show you A-flat miner.
10. When a clock is hungry it goes back four seconds.
11. The guy who fell onto an upholstery machine was fully recovered.
12. A grenade fell onto a kitchen floor in France resulting in Linoleum Blownapart.
13. You are stuck with your debt if you can't budge it.
14. Local Area Network in Australia: The LAN down under.
15. He broke into song because he couldn't find the key.
16. A calendar's days are numbered.
17. A lot of money is tainted: 'Taint yours, and 'taint mine’.
18. A boiled egg is hard to beat.
19. He had a photographic memory which was never developed.
20. A plateau is a high form of flattery.
21. The short fortuneteller who escaped from prison: a small medium at large.
22. Those who get too big for their britches will be exposed in the end.
23. When you've seen one shopping center you've seen a mall.
24. If you jump off a Paris bridge, you are in Seine.
25. When she saw her first strands of gray hair, she thought she'd dye.
26. Bakers trade bread recipes on a knead to know basis.
27. Santa's helpers are subordinate clauses.
28. Acupuncture: a jab well done.
29. Marathon runners with bad shoes suffer the agony of de feet.

Hurricanes: Forecasting and insurance

2006-08-06T08:31:00.000-04:00

A recent article in the Sunday New York Times, “Researchers Lower Estimate of Hurricanes This Season”, provides perspective on how little credence the media, politicians, and environmental activists deserve when they confidently forecast either doom or the absence thereof.

Forecasts of the number and intensity of hurricanes on a one-year basis are not accurate and cannot expected to be accurate. Neither are forecasts for several years very accurate.

Hurricanes, in a particular part of the country, such as Florida, are not insurable, i.e., the total loss cannot be reliably predicted for one year or several years.

It may be that hurricanes are not even insurable in the aggregate, at least for time intervals of several years. This is because they are too few in number to average out over only a few years.

The worst hurricanes may not be insurable over any reasonable time interval. By definition, such hurricanes are the worst storms. That means they are low probability events. Trying to average out events drawn from the extreme right tail of a probability distribution takes a lot of draws and the volatility is enormous.

One implication is that hurricane insurance losses cannot be forecast very accurately and insurance companies that charge what the media, politicians, and consumers view as fair hurricane insurance premiums are likely to money.

The same perspective applies to predicting and insuring against most low probability events.

Reinsurance works only if you don’t go too far into the right tail of the probability distribution.

Here are some excerpts from the New York Times article.

Hurricane researchers at Colorado State University predicted Thursday that this year’s hurricane season would not be as bad as their earlier forecast had indicated, and they said a monster storm like Hurricane Katrina was unlikely.

In December, the researchers predicted nine hurricanes, five of them intense. On Thursday, they reduced those numbers to seven and three.

“Moreover,” they said, “these forecasts do not specifically predict where within the Atlantic Basin these storms will strike.”

Minimum wage laws

2006-08-05T23:25:00.000-04:00

To make things simple, assume no inflation, fixed technology, and employers that always employ labor with a specified skill set up to the point where the cost of an additional worker equals the benefit (e.g., incremental profit). Then raising the minimum wage will cost the lowest end workers their jobs. If this case is realistic, then advocates of increased minimum wages hurt the people they are, ostensibly, trying to help.

The same conclusion holds if there is inflation as long as the minimum wage increase is specified in real terms.

Although this characterization is somewhat simplified, the history of increases in the minimum wage suggests a substantial increase in the unemployment rate over time, which has not been observed.

Abstracting from changing skill sets and improvements in technology, one reason could be that the real minimum wage has not trended up over time.

A useful perspective is that microeconomic equilibrium is tied to relative prices, not absolute prices. Roughly, if the minimum wage is doubled and the result is a 100% one time inflation, then the same equilibrium could hold in real terms, including no change in the unemployment rate.

While this analysis is a bit simplified, it suggests that most of the minimum wage discussions you hear are, at best, misguided and perhaps intellectually dishonest.

Here is an example from a recent Palm Beach Post editorial.

The case for the wage increase is compelling and shouldn't be burdened by political opportunism. Workers who earn the current minimum of $5.15 an hour, less than $11,000 a year, fall far below the poverty line. About 36 million Americans - roughly one in eight of us - live in poverty, a quiet disgrace. Congress hasn't raised the minimum wage in nine years, but lawmakers have given themselves $35,000 in raises during the same period. Think of how costs of living have risen since 1997 - what it was like to go to the supermarket midway through the Clinton administration and what it's like now - and the idea of a minimum wage frozen at $5.15 an hour seems absurdly unfair. Congress has neglected the raise for so long that many states have done it on their own, including Florida, which increased it to $6.40 through constitutional amendment.

One gathers from this editorial that those earning less than the proposed new minimum wage would earn the new, higher, minimum wage, i.e., no jobs would be lost. Furthermore, it seems that the editor presumes that there would be a corresponding permanent increase in these workers’ real wage. If this perspective is accurate, then it is easy to make us all rich, in real terms, by raising the minimum wage to, say, $1000 per hour.

As you can see, most of what you read about minimum wages is BS.

The housing market: The New York Times makes me laugh again

2006-07-29T10:52:00.000-04:00

Vikas Bajaj and David Leonhardt have an article in the New York Times, “Housing Slows, Taking Big Toll on the Economy”. It is not a bad article (by NYT’s standards), but it has a few humorous bloopers. Here are a few of them.

The housing slowdown is perhaps the clearest effect of the Federal Reserve’s two-year campaign of raising interest rates in a bid to tap the brakes on the economy and reduce inflation.

The role of overbuilding and excessive speculation, in other words the fact that the housing market has been experiencing a large bubble is, of course, only a minor, ignorable factor. Perhaps Bajaj and Leonhardt should read up on the tulip craze.

The biggest risk, economists say, is that the optimism that fed the real-estate boom will reverse dramatically.

Wait a minute, I thought you just finished blaming interest rates. Was there a real-estate boom or not? If there was, do we need higher interest rates to end it or do bubble markets sometimes just crash on their own?

For much of the last five years, housing — along with health care — was also one of the only reliable generators of jobs. From the start of 2001, when the Fed began cutting its benchmark rate to steady a faltering economy, until early last year, the housing sector added 1.1 million jobs.

The rest of economy lost 1.2 million jobs over the same period, according to an analysis by Moody’s Economy.com.

There are a limited number of workers, hence a limited number of jobs. If demand increases in one sector relative to another and workers move to that sector, wouldn’t jobs in the other sector have to decline? Does that imply that if the first sector’s demand had not increased that the second sector’s jobs would still have decreased?

The situation is somewhat different elsewhere. An official at the International Union of Bricklayers and Allied Craftworkers said housing work was more difficult to find, but most of its members had been able to find work on commercial building sites.

“If something were to happen with both markets, that would affect us — and everybody for that matter,” said Robert A. Fozio, director of the union’s Northern Ohio district.

Yes indeed. Resources could then be devoted to things that are not in relative oversupply. We would be better off.

Tradeoffs: Subsidized housing is a waste of money

2006-07-26T17:51:00.000-04:00

Every so often you hear of a project, often funded or subsidized with tax money, for building low cost homes and selling them to low income families at bargain prices. Bargain prices means below fair market value.

According to the Miami Herald’s ongoing investigative report, one such project was gamed by non-low income people. They bought the houses at the below market prices and flipped them at a profit. Naturally, the Herald is upset at this. But the Herald failed to appreciate reality. As in hurricane disaster relief and low income housing, much of the benefit intended to go to people in need does not go there and this is a pervasive problem that is not likely to be eliminated.

The far more important issue, which the Herald missed completely, is that these kind of projects are inherently inefficient. Providing housing to low income people is, necessarily, a waste of money even if the housing does go to low income people.

To see why consider two alternatives. First, that a house worth $100,000 is provided to a low income family at a price of $80,000. Also assume that the house costs $80,000 to build. That means that the family has been given a gift of $20,000. Second, consider giving the family $20,000 to do with as they please.

In the second case, the family can spend the $20,000 in whatever manner makes them happiest. In the first case, they are forced to spend the $20,000 on housing.

There are two possibilities, either housing is the family’s optimal use for the $20,000 or it is not. For some families the optimal use for the $20,000 will not be housing, or at least not all for housing. These families could be made happier by giving them $20,000, not a discounted house. Families where the optimal use of the $20,000 is the house would be no worse off receiving $20,000. They could still buy the equivalent house.

The moral of the story is that gifts with strings attached are not as valuable as gifts without strings attached.

The basis for this moral is the mathematical fact that maximizing a function with constraints yields a result that is, at most, as great as maximizing a function without the constraints.

Freakonomics author Steven Levitt: Incompetent? Unethical?

2006-07-25T10:26:00.000-04:00

Steven Levitt (along with Donohue), the well known economist author (along with Dubner) of Freakonomics, advocated the theory that the advent of legalized abortion in the 1970s is responsible for much of the steep and persistent drop in the crime rate during the 1990s. The research behind this claim was a paper by Donohue and Levitt. However, as Foote and Goetz [2005] showed, it turned out to be wrong.

Donohue’s and Levitt’s mistake is so elementary as to suggest incompetence or the intent to mislead. These two possibilities also are consistent with Donohue’s and Levitt’s criticism of John Lott’s research showing that allowing honest citizens to carry concealed weapons reduces violent crime.

Donohue has written copiously on Lott’s work, all of it negatively. However, as Plassman and Whitney show in their Stanford Law Review article “Confirming More Guns Less Crime”, Ayres and Donohue’s work appears to be substandard, including statistical errors and claims not supported by the data. Moreover, Donohue has continued to make negative claims in the face of several papers pointing out his errors. Here, too, the mistakes and continued apparently incorrect claims are so elementary and pervasive as to suggest incompetence or the intent to mislead.

Levitt has taken up Donohue’s cudgel and attacked Lott in Freakonomics, saying:

Then there was the troubling allegation that Lott actually invented some of the survey data that supports his more-guns/less-crime theory. Regardless of whether the data were faked, Lott’s admittedly intriguing hypothesis doesn’t seem to be true. When other scholars have tried to replicate his results, they found that right-to-carry laws simply don’t bring down crime.

In fact, Lott’s results have been replicated and supported by other researchers. This was known in the field. Indeed one researcher sent the following email to Levitt.

I also found the following citations – have not read any of them yet, but it appears they all replicate Lott’s research.

Levitt’s response was:

It was not a peer refereed edition of the Journal. For $15,000 he was able to buy an issue and put in only work that supported him. My best friend was the editor and was outraged the press let Lott do this.

Levitt’s response misstated the facts.

It seems that Levitt now has a record on at least two important issues, abortions and guns. In both cases he has confidently and repeatedly espoused a position that is probably wrong and that he should have known was probably wrong. In one case, he has compounded the error by apparently acting unethically, i.e., by possibly libeling a competent researcher in lieu of admitting his own likely mistake.

Here is Foote and Goetz’s abstract.

State‐level data are often used in the empirical research of both macroeconomists and microeconomists. Using data that follows states over time allows economists to hold constant a host of potentially confounding factors that might contaminate an assignment of cause and effect. A good example is a fascinating paper by Donohue and Levitt (2001, henceforth DL), which purports to show that hypothetical individuals resulting from aborted fetuses, had they been born and developed into youths, would have been more likely to commit crimes than youths resulting from fetuses carried to term. We revisit that paper, showing that the actual implementation of DL’s statistical test in their paper differed from what was described. (Specifically, controls for state‐year effects were left out of their regression model. ) We show that when DL’s key test is run as described and augmented with state‐level population data, evidence for higher per capita criminal propensities among the youths who would have developed, had they not been aborted as fetuses, vanishes. Two lessons for empirical researchers are, first, that controls may impact results in ways that are hard to predict, and second, that these controls are probably not powerful enough to compensate for the omission of a key variable in the regression model.

Here is the abstract from Ayres’s and Donohue’s paper “Shooting Down the More Guns, Less Crime Hypothesis”.

John Lott and David Mustard have used regression analysis to argue forcefully that “shall issue” laws (which give citizens an unimpeded right to secure permits for concealed weapons) reduce violent crime. This article shows that the claim has support from certain facially plausible statistical models, but that these are rejected by a variety of statistical tests. Estimating more statistically preferred disaggregated models on more complete data, we show that in most states shall issue laws have been associated with more crime. Using our expanded data set and our preferred jurisdiction-specific regression model, we show that more states have experienced an upturn in crime than have experienced a downturn in crime after enacting the law and that the apparent stimulus to crime tends to be especially strong for those states that adopted in the last decade. We estimate that on net the passage of the law in 24 jurisdictions has increased the annual cost of crime somewhere on the order of half a billion dollars. We also provide an illustration of how our jurisdiction-specific regression model has the capacity to generate more nuanced assessments concerning which states might profit from a particular legal intervention.

Here is an excerpt from the introduction to Plassman’s and Whitney’s Stanford Law Review article “Confirming More Guns Less Crime”.

Quite a few empirical papers have examined the impact of right-to-carry laws on crime rates. Most studies have found significant benefits, with some finding reductions in murder rates twice as large as the original research. Even the critics did not provide evidence that such laws have increased violent crime, accidental gun deaths, or suicides.

Unlike previous authors, Ian Ayres and John Donohue claim to have found significant evidence that right-to-carry laws increased crime. However, they have misread their own results. The most detailed results they report. following the change in crime rates on a year-by-year basis before and after right-to-carry laws were adopted.clearly show large drops in violent crime that occur immediately after the laws were adopted. Their hybrid results showing a small increase in crime immediately after passage are not statistically significant and are an artifact of fitting a straight line to a curved one. When one examines a longer period.from 1977 to 2000.even this type of result disappears.

Ayres and Donohue.s efforts have been valuable in forcing others to reexamine the evidence, extend the dataset over more years, and think of new ways to test hypotheses, and we appreciate their efforts. They are both highly regarded and well-known for their research, such as claiming that the legalization of abortion can account for half the drop in murder during the 1990s. Unfortunately, their research on this issue inaccurately describes the literature and also fails to address previous critiques of their work. For example, Ayres and Donohue claim that "[w]hen we added five years of county data and seven years of state data, allowing us to test an additional fourteen jurisdictions that adopted shall-issue laws, the previous Lott and Mustard findings proved not to be robust". All their tables report results for "Lott's Time Period (1977-1992)" and compare those estimates with the "Entire Period (1977-1997)". Yet, whatever differences in results arise, they are not due to the inclusion of more data for a longer period. Their paper gives a misleading impression as to how much their research extends the data period, since Lott's book and other work examined both the county and state data up through 1996. Ayres and Donohue's work thus extends the county-level data by one year, from twenty to twenty-one years.

STATS on PCBs in salmon: The media, activists, and others are wrong again

2006-07-24T21:39:00.000-04:00

STATS is a non-profit, non-partisan Statistical Assessment Service (STATS) that provides perspective on the use and abuse of science and statistics in the media. Its latest assessment on the risk of PCBs in farmed salmon shows that the media, activists, and others are, once again, just plain wrong.

Here is the introductory STATS article. The entire report can be found here.

The evidence in favor of eating fish rich in omega-3 fatty acids, such as salmon and trout, keeps on mounting. On July 10, the Archives of Opthalmology published a new study showing evidence that these acids reduced the risk of macular degeneration. The association isn't backed by clear evidence of a causal mechanism, but it builds on earlier research which found similar correlations. As the Seattle Post Intelligencer reported, "if you are still balancing the risks of and benefits of eating fish, stop. There is no contest."

And then the very next day, the PI sort of backtracked by warning that the risk of cancer from PCBs in salmon needed to be taken into account:

" there is another side to this story. As we've reported when we took on the matter of contaminants in salmon here, the calculus for any individual consumer needs to be, well, individual."

"For example, cancer tends to get my people, so PCBs in salmon are something to be concerned about because PCBs promote cancer. My wife's forebears, on the other hand, tend to kick the bucket while clutching their hearts. So the dilemma for us is: how can she get the omega 3s -- "W-D 40 for the brain," according to this wide-ranging and worthwhile what-you-should-eat piece in yesterday's Vancouver Sun -- while I avoid the PCBs? "

Click on "here" and you are taken right back to the study that launched a global health scare: Hites et al. And it's not just the Seattle Post Intelligencer. The New York Times Dining Section warned readersin March that "studies have shown that salmon farms can pollute the waters around them with their waste and the fish can contain dangerous levels of contaminants like PCB's and dioxin."

"Consumer Reports' August issue also advises readers to buy wild Alaskan salmon because farmed salmon may contain higher levels of PCBs. Actually, a brace of studies have shown the opposite to be true - not that it matters either way, the levels being so low in both wild and farmed fish, and radically diminished after cooking and removing the skin. "

In fact, even if you accept the worst-case scenario of the fish-scare mongers, the U.S. public is at much, much greater risk for injury and death from falling television sets. Really. Which, when added to what the media missed when they covered the publication of Hites et al. two years ago, is another reason to consider the sight-enhancing benefits of eating salmon.

Time magazine on the Israeli-Arab conflict: Mistaking words for solutions

2006-07-24T09:05:00.000-04:00

Time magazine has an article, “6 Keys to Peace” by Michael Elliott that illustrate how fatuous and vacuous are journalists’ “solutions” to the Israeli-Arab conflict.

The problems with pundits like Mr. Elliott include:
Proposing “solutions” that don’t solve the problem.
Proposing solutions that cannot be implemented.
Representing goals as solutions, with no workable proposals for reaching the goals.
Representing prerequisites for a solution as the solution.
Representing assertions as fact.

Here are some excerpts from the article that illustrate some of these points, along with my comments.

1 GET THE U.S. INVOLVED

Washington can talk to the Israelis and, occasionally, convince them that their best interests require them to talk to those whose motives and behavior they despise.

Point 1 is fatuous and the discussion is vacuous.

What if the motives and behavior between the two parties are incompatible and cannot be changed by discussion? What if substantial violence and bloodshed are a prerequisite for changing the motives and behavior? What if there is no way to change the motives and behavior, except by forcibly eliminating them?

2 DON'T FORGET THE PALESTINIANS

For the Arab states, it is axiomatic that a second key for curing the ills that have plagued the region is peace between Israel and the Palestinians.

Point 2 is fatuous and the discussion is vacuous.

Peace is a goal, not a solution. Mr. Elliott has adopted the approach that the way to cure the problem is to cure the problem.

There is little disagreement among states in the region or outside it about what an ideal peace between Israel and the Palestinians would involve. Since before World War II, most reasonable observers have known that sooner or later, two states--one with a Jewish majority, one with an Arab one--would share the land between the Jordan River and the Mediterranean.

Israel has seen suicide bombers flock to its cities from the West Bank and watched rockets sail into its towns from Gaza and Lebanon, areas from which it had withdrawn all its soldiers--in the case of Lebanon, a full six years ago. Within that context, it isn't the details of a two-state solution that matter now; it is something much more elemental. Israel needs to know that in any deal with the Palestinians, its people will be safe.

Suppose it is correct that two-states is a prerequisite, along with safety for Israel. How is it to be achieved? Mr. Elliott leaves this out.

Prerequisites for a solution are neither a solution nor the means of achieving one.

3 GUARANTEE ISRAEL'S SECURITY

THE THIRD KEY TO PEACE is to find a way to convince Israelis that they and their children can sleep easy at night.

Point 3 is fatuous and the discussion is vacuous.

This may be a prerequisite for a solution, but is not a solution. Mr. Elliott provides no basis for thinking that it is even possible.

4 STABILIZE LEBANON

the fourth key to peace is to stabilize Lebanon. In part, that means propping up the fragile government of technocrats led by Fouad Siniora and pumping donors to help Lebanon rebuild itself

But it also means ensuring that Hizballah can no longer use its strongholds in the south to threaten regional peace.

Point 4 is fatuous and the discussion is vacuous.

How? Mr. Elliott has no practical suggestions for stabilizing Lebanon or preventing Hizballah from threatening regional peace.

Mr. Elliott’s approach to the oil problem might be to find a way to burn water.

5 HANDLE IRAN

European officials talk of a "constructive dialogue" with Tehran that involves recognizing it as an important regional power while maintaining the right to sanction it if it breaks the nuclear rules. But Israel--along with many supporters in the U.S.--thinks dialogue with a nation whose leader has said that Israel "must be wiped off the map" is a waste of breath.

Point 5 is fatuous and the discussion is vacuous.

In other words, nobody can agree on how to handle Iran. Mr. Elliott’s approach is to tell us what people think, which is not a solution.

THERE IS, FINALLY, THE MATTER OF IRAQ.

Yes indeed, there is Iraq, where, clearly, everybody knows the solution. Unfortunately everybody’s solution is different from everybody else’s.

The Miami Herald's bad logic, bad statistics, and possible contribution to a higher death rate

2006-07-16T13:47:00.000-04:00

The 7/16/06 Miami Herald has an editorial on air cargo safety. It follows “A Miami Herald investigative series last week -- Deadly Express by Ronnie Greene” that “described the air-cargo industry's troubled history.”

Both the investigative series and the editorial show a lack of understanding of flight safety and statistics. The scare language in both is not supported by the quoted statistics, most of the relevant characterizations about flight safety and who is responsible for it are incorrect, and there is a failure to address relevant tradeoffs.

Once again, the print media has shown that it can write well but is unable to refrain from writing about topics it does not understand.

Here are some excerpts from the editorial, along with my comments.

Air cargo service in America is like a ticking time bomb. One day a cargo plane -- with an exhausted pilot or mechanical problem -- will crash into a crowded mall or school and kill scores of people. The Federal Aviation Administration mustn't wait for such a tragedy to jump-start it into action.

This kind of statement is characteristic of the investigative report and the editorial. Slim possibilities are blown out of proportion and presented as emergencies.

It is virtually certain that, sooner or later, a mall or school crash will occur and kill scores (“Scores” means large numbers) of people. It also is virtually certain, assuming that the Miami Herald remains in business, that one of its delivery trucks will eventually crash into a group of grade school children, somewhere, killing scores of them. We can eliminate this possibility by closing down the Miami Herald.

What counts is the probability of such an air cargo crash and the cost of reducing it, not that such a crash is possible. The editorial’s own statistics suggest that the probability is small enough so that saving lives with scarce resources warrants using those resources elsewhere.

Given air cargo's track record -- one fatal crash per month on average since 2000 -- the FAA should tighten the industry's safety rules and oversight now, particularly for small cargo carriers that have the worst accident rates.

Air cargo is the deadliest segment of commercial aviation. Sixty-nine fatal crashes since 2000 have taken 85 lives.

The editorial fails to note the large number of air cargo flights. Nor does it strike the editor that sixty-nine fatal crashes since 2000 taking 85 lives implies a very low number of fatal crashes per year and a fatality rate of less than 2 per crash. This fatality rate per crash probably is far lower than for cars, bicycles, boating, etc.

The data implies an average fatality rate of less than 2 per fatal crash. This suggests the probability of crashing into a crowded mall or school and killing scores is very small. Why didn’t the Editor point this out? Two possibilities are that the Editor didn’t realize it and that the Editor did realize it but decided objectivity doesn’t sell enough papers. Neither possibility reflects well on the Editor or the Miami Herald.

Given air cargo's track record -- one fatal crash per month on average since 2000 -- the FAA should tighten the industry's safety rules and oversight now, particularly for small cargo carriers that have the worst accident rates.

Isn’t it true that the smallest air cargo carriers can be expected to have the lowest fatality rates per fatal crash? It might make sense (why might it not?) to spend more money on preventing airline crashes, where the fatality rate per fatal crash is often in the hundreds. What is the number of fatalities per year from the airlines? Is it higher than from air cargo? Where is the cost-benefit discussion?

The industry is hampered by aging planes, tight deadlines and overnight flights. Pilots fly under extreme pressure to meet tough deadlines. Many get paid only after the delivery.

Pilots often fly in hazardous weather, sometimes without enough sleep. Many fly planes that have mechanical problems, which is unthinkable in passenger flights.

Despite the problems, fewer FAA safety rules apply to cargo planes than passenger planes. For example, cargo pilots can fly 40 percent more hours per year; they are not required to have eight hours' rest 24 hours prior to a flight, as are passenger pilots. Small cargo planes aren't required to have ''black boxes'' that help determine the cause of a crash and can lead to safety improvements.

Old planes taken proper care of are safe. Overnight flights are safe and are common in airline schedules. Pilots are usually under pressure to meet deadlines, air cargo and airlines.

Pilots do not often fly in hazardous weather. They do often fly in weather. Very few pilots, air cargo or otherwise fly with mechanical problems that are serious. FAA regulations already prohibit such flying.

Perhaps FAA safety rules should be less restrictive for air cargo, because the consequences are less serious and the cost/benefit ratio favors less restrictive rules. Black boxes are desirable, but are they worth the cost?

Lax enforcement only worsens safety concerns for cargo carriers. In many cases, the FAA allows cargo firms to continue flying despite egregious maintenance lapses and crash histories. For example, the FAA has yet to ground one firm with four crashes involving seven deaths since 2002. That Ohio firm, Grand Aire Express, and its affiliate TriCoastal Air Inc. have had three dozen accidents or incidents since the 1980s, according to FAA records.

In 2000, the FAA fined Grand Aire $290,000 for operating a plane for 20 days without repairing a known problem and for other maintenance failures. Yet the companies continue to fly and accidents continue to happen. The latest crash took a pilot's life in February.

Remember the Chicago airline crash where an engine fell off on takeoff? That was due to two things. First, improper maintenance procedures. Second, pilot training that called for procedures that were inappropriate for the loss of an engine (as opposed to loss of an engine’s power). Did the FAA shut down the airline? Does the Herald’s Editor think the airline should have been shut down? That single, avoidable, crash killed more people than the sum total of air cargo fatalities, 85, quoted in the Herald’s editorial.

Grand Aire Express and TriCoastal do sound bad, and they may be. However, Luck plays a role, too. What is the probability that one properly run air cargo firm would suffer this kind of record from bad luck? What is the probability that at least one air cargo firm among many would suffer this kind of record from bad luck? I haven’t done the analysis, but neither has the Herald. I guarantee you the probability is much higher than you think (how does (1-p)^n behave?). Looking for the worst accident or fatality rate and implying that it is wholly due to poor maintenance, etc., is bad logic and bad statistics. If the Herald’s Editor and reporter do not know this, they are incompetent. If they do, they are dishonest.

The FAA says it has to be cautious before grounding planes because of the threat of lawsuits. Yet the cost of lawsuits, improved safety and more stringent enforcement should be weighed against the potential loss of life in the sky and on the ground.

Finally a tradeoff is considered. But, as usual, the cost to the industry and consumers of saving a few lives is ignored. One would have thought that this was the important tradeoff.

By pilot skill or luck, that crash hit a vacant lot and exploded just short of an industrial park west of Miami International Airport. The crash claimed five lives, including one on the ground. The toll could have been much worse. Had the plane come down just a little to the south, the plane could have plunged into the Mall of the Americas. Had the flight gone east, it could have exploded in dense residential neighborhoods or downtown Miami.

The fact that this crash and all the others quoted in the Editorial did not come down into a Mall and did not explode in a dense residential neighborhood or city says something about the probability of such an occurrence. Possibilities do not necessarily appreciable risks make.

Yet there can be no excuse for indifference to the threat of a potentially disastrous air-cargo crash. The FAA should take seriously its obligation to prevent death from raining down from our skies.

And, here, we have the final platitude. If the probability of a potentially disastrous air cargo crash is low enough and the cost of reducing it further is expensive enough, no effort should be made to reduce the probability further. “Death raining down from our skies” is a nice line, but irrelevant. Come to think of it, that is what the Herald’s investigative report and Editorial are; irrelevant. No, that is wrong. They are disasters themselves. To the extent the public and Government assigns resources as the Herald advocates, the Herald probably will cause an increase in the death rate due to the likelihood that assigning the same level of resources elsewhere would save more lives.

Tradeoffs: Walter E. Williams knows how to spot them

2006-07-14T19:22:00.001-04:00

Walter E. Williams holds a bachelor's degree in economics from California State University (1965) and a master's degree (1967) and doctorate (1972) in economics from the University of California at Los Angeles. His recent column “The Pretense of Knowledge” shows that he knows how to find tradeoffs that others miss.

Here are some excerpts.

One of the great contributions of Nobel Laureate economist Friedrich Hayek was to admonish us to recognize the insurmountable limits to human knowledge. Why? Not even the brightest minds, and surely not the U.S. Congress, can ever have the knowledge to shape an economic system entirely to our liking. To think we can represents the height of arrogance and a pretense of knowledge. The billions upon billions of interrelationships between an economic system's human and non-human elements defy human capacity to know.

Let's examine just a few pretenses of knowledge. Under Social Security law, Congress forces workers to set aside a portion of their earnings for retirement. Take a 25-year-old -- let's call her "Mary" -- who earns $40,000 a year. Her Social Security tax is about $2,500. Here's my question to you: Was having $2,500 forcibly taken out of Mary's pay for retirement her best possible use of that money? Mary might have saved and invested several years to open a small business. She might have put it toward private schooling or music lessons for her child, or any number of things that might have made her, and possibly our nation, wealthier in the future.

How about Congress' mandate for more fuel-efficient cars? According to a National Research Council of the National Academies of Sciences 2002 report, delivered by Dr. Leonard Evans to the Washington-based Competitive Enterprise Institute, Corporate Average Fuel Economy (CAFE) standards have contributed to between 1,300 and 2,600 traffic deaths a year. Congress' mandate for higher gasoline mileage leads to the production of lighter, smaller and less crash-worthy cars, resulting in unnecessary deaths. Through technological innovation and natural market forces, cars were already becoming more fuel efficient before CAFE standards were mandated. But more important, how does Congress know whether this loss of life is worth the amount of fuel saved? Do they even know or care about the tradeoff?

Why investment managers' performance tends to be disappointing after they are hired

2006-07-12T22:42:00.000-04:00

Institutional investors often have the discouraging experience of hiring an investment manager who, despite good historical performance, has disappointing performance after being hired. One reason for this is the difficulty most institutional investors have assessing the a priori probability that an investment process is effective. Another is an excessive reliance on good past performance.

Some sophisticated institutional investors compute the probability of observing a performance history as good as the manager’s or better, assuming that the manager’s investment process is not effective. In statistical parlance, this is a test of the null hypothesis that the manager’s true performance is zero (i.e., due to luck).

If this probability is substantial, then the observed performance is consistent with the hypothesis that it is due to luck. If this probability is small, then the assumption that the observed performance is due to luck implies a great coincidence and it may be more reasonable to assume that it was due to an effective investment process.

Typically, the historical performance is attributed to an effective investment process if the computed probability of achieving the observed performance or better from luck is below 5% or thereabouts. What most investors who use this approach do not realize is that this choice is arbitrary and virtually assures disappointing future performance.

Suppose the probability of achieving the observed performance or better from luck is 1%. Is that sufficiently small to attribute the observed performance to an effective investment process? Doesn’t the answer depend on what is the investment process? Suppose the performance was achieved by choosing stocks at random? Or, to put it more accurately, suppose the performance was achieved through a process that one cannot imagine should work? Or, to put it even more accurately, suppose the investment process has an a priori probability of being effective of 0.000001%?

On the other hand, suppose the probability of achieving the observed performance or better from luck is 25%. Is that sufficiently large to attribute the observed performance to luck? Doesn’t the answer depend on what is the investment process? Suppose one cannot imagine that the investment process would not work? Or, to put it more accurately, suppose the investment process has an a priori probability of being effective of 99%?

What the typical statistical testing leaves out is the a priori probability that an investment process is effective.

What investors ought to estimate is the probability that the investment process is effective, given the observed performance. This depends on both the a priori probability that the investment process is effective and the probability of achieving the observed performance or better from luck (i.e., given that the investment process is not effective). Investors almost never compute, numerically or subjectively, the probability that the investment process is effective, given the observed performance. The reason is that they are usually unable to assess an investment process from an a priori perspective.

To see why the typical approach of computing the probability of the observed performance or better due to luck fails, consider that there are thousands of managers and only those with good past performance show up at the institutional investor’s door.

Here is a dramatic illustration of the kind of thing that goes on. Assume there are 1000 managers and that none of their investment processes are effective. Approximately fifty of them should have past performance that is good enough, due to good luck, so that the computed probability of observing performance as good or better is 5% or less. Naturally, these fifty show up at the institutional investor’s door and the results of his statistical tests are a foregone conclusion. The expected future performance of the fifty managers is zero. The investor’s statistical tests are virtually worthless.

The institutional investor’s only protection is to have a very good a priori reason for thinking that an investment process should work.

Anti-gun academics cannot be trusted

2006-07-11T17:46:00.000-04:00

For several years, John Lott has been publishing papers and books, including the best statistical work, on the impact of allowing qualified citizens to carry concealed weapons. His results strongly suggest that the impact of passing these laws is to reduce murders and rapes. There appears to be little or no down side to such laws and a good deal of upside.

The response of some anti-gun academics has been to accuse Lott of incorrect statistical methodology and fabricating data. Lott’s response has been to explain, patiently, why the criticism is unwarranted and to show that it is the statistical studies put forth by these academic that are incorrect.

To illustrate, the lies (my opinion) spread about Lott’s work, consider the following quote from Steven Levitt’s book “Freakonomics.

Then there was the troubling allegation that Lott actually invented some of the survey data that supports his more-guns/less-crime theory. Regardless of whether the data were faked, Lott’s admittedly intriguing hypothesis doesn’t seem to be true. When other scholars have tried to replicate his results, they found that right-to-carry laws simply don’t bring down crime.

In fact, Lott’s results have been replicated and supported by other researchers. This was known in the field. Indeed one researcher sent the following email to Levitt.

I also found the following citations – have not read any of them yet, but it appears they all replicate Lott’s research. The Journal of Law and Economics is not chopped liver.

Levitt’s response was:

It was not a peer refereed edition of the Journal. For $15,000 he was able to buy an issue and put in only work that supported him. My best friend was the editor and was outraged the press let Lott do this.

According to Lott:

Levitt’s e-mail was false and defamatory because the Special Issue was, in fact, peer refereed, and he didn’t “buy” the issue. Nor did he “put in only work that supported him.” Lott says he invited scholars who both agreed and disagreed with him to provide articles.

Failing to obtain redress from Levitt through peaceful means, Lott is now suing Levitt. The most recent legal document filed by Lott’s attorney can be found here.

I am with Lott on this. I think his work is excellent.

Read Lott’s book, “The Bias Against Guns”. It is a good read and enlightening.

Hawala money laundering

2006-07-09T21:49:00.000-04:00

The following link to an article “The hawala alternative remittance system and its role in money laundering” is found on an Interpol website. It give some interesting knowledge about how money laundering is sometimes done.

Thanks to my friend Neal Hitzig for the link.

Here are some excerpts.

Hawala works by transferring money without actually moving it. In fact 'money transfer without money movement' is a definition of hawala that was used, successfully, in a hawala money laundering case.

Abdul calls the number, and speaks with Yasmeen. She offers him the following deal:

A fee of 1 rupee for each dollar transferred;

37 rupees for a dollar; and

Delivery is included.

Under these terms (6), Abdul can send Mohammad Rs 180,000. He decides to do business with Yasmeen.

The hawala transaction proceeds as follows:

Abdul gives the $5,000 to Yasmeen;

Yasmeen contacts Ghulam in Karachi, and gives him the details;

Ghulam arranges to have Rs 180,000 delivered to Mohammad.

Even though this is a simple example, it contains the elements of a hawala transaction. First, there is trust between Abdul and Yasmeen. Yasmeen did not give him a receipt, and her recordkeeping, such as it may be, is designed to keep track of how much money she owes Ghulam, instead of recording individual remittances she has made. There are several possible relationships she can have with Ghulam (these will be discussed later); in any case she trusts him to make the payment to Mohammad. This delivery almost always takes place within a day of the initial payment (a consideration here is time differences), arid the payment is almost always made in person. Finally, in some scenarios, he trusts her to repay him the equivalent of either $5,000 or Rs 180,000.

If Yasmeen needs to pay Ghulam the Rs 180,000 that he has given to Mohammad, she can do it by 'under invoicing' a shipment to him. She could, for example, send him $20,000 worth of telecommunications devices, but only invoice him for $15,000. Ghulam pays Yasmeen $15,000 against this invoice. The 'extra' value of goods, in this case $5,000 (the equivalent of Rs 180,000) is the money that she owes him.

In order to move money the other way (in this case, from Pakistan to New York)',over invoicing' can be used. For this example, it is assumed that Ghulam owes Yasmeen $5,000. She could buy $10,000 of telecommunications devices, and send it to Ghulam with an invoice for $15,000. Ghulam would pay her $15,000; this covers the $10,000 for the telecommunications devices as well as the other $5,000.

When compared to a 'traditional' means of remitting money, such as obtaining a check or ordering a wire transfer, hawala seems cumbersome and risky. In this section, we will examine the motivations for using the hawala system.

The primary reason is cost effectiveness. As was shown in this example, Abdul was able to obtain nearly Rs 30,000 more (averaging exchange rates, this is about US$ 880), a significant savings by using the hawala system. Some of the reasons for this cost effectiveness, namely low overhead, exchange rate speculation and integration with existing business activities, will be discussed in the next section of this paper.

The second reason is efficiency. A hawala remittance takes place in, at most, one or two days. This can be contrasted with the week or so required for an international wire transfer involving at least one correspondent bank (as well as delays due to holidays, weekends and time differences) or about the same amount of time required to send a bank draft from North America to South Asia via a courier service (surface mail is not a reliable option where the contents are valuable, and it can also take several weeks to arrive).

The third reason is reliability. Complex international transactions, which might involve the client's local bank, its correspondent bank, the main office of a foreign bank and a branch office of the recipient's foreign bank, have the potential to be problematic. In at least once instance reported to the authors, money for a large commercial transaction (money being sent from the United States to South Asia) was lost 'in transit' for several weeks while trying to conduct such a transaction. When the bank located the money, it was returned to the customer. He enlisted the services of a local hawaladar, who was able to complete the transaction in less than a day.

The fourth reason is the lack of bureaucracy. Abdul is living and working in the United States on an expired student visa; he does not have a social security number (and since he deals almost exclusively in cash, he really does not need one). It would be difficult, if not impossible for him to open a bank account as he does not have adequate identification. In addition, he does not completely trust banks and would prefer not to use them if at all possible. Iqbal and Yasmeen do not operate in a 'bureaucratic' framework, making them a preferable alternative to the bank.

The fifth reason is the lack of a paper trail. Even though Abdul earned the money that he sent to Mohammad legally, he would prefer to remain anonymous (this is a much more important consideration in illicit hawala transactions). Since it is rare for hawaladars to keep records of individual transactions, it is unlikely that Abdul's remittance will ever be identified as part of the business dealings between Yasmeen, Ghulam and their associates.

The sixth reason is tax evasion. In South Asia, the 'black' or parallel economy is 30%-50% of the 'white' or documented economy. Money remitted through official channels might invite scrutiny from tax authorities - hawala provides a scrutiny-free remittance channel.

Money laundering consists of three phases: placement, layering and integration. Since hawala is a remittance system, it can be used at any phase.

In placement, money derived from criminal activities is introduced into the financial system. In many money laundering schemes, the biggest 'problem' here is handling cash. Some jurisdictions, such as the United States, require reporting by financial institutions of cash transactions over a certain amount (in the U.S. it is US$ 10,000) (12), and attempting to circumvent such reporting requirements by making smaller transactions is an offense.

Hawala can provide an effective means of placement. In the example, Abdul gave Yasmeen US$ 5,000 in cash. Since she also operates a business (and also performs remittance services for others), she will make periodic bank deposits consisting of cash and checks. She will justify these deposits to bank officials as the proceeds of her legitimate business. Even though she might prefer it if reports were not filed, she will not object to this as it would arouse suspicion at the bank (and her business provides more than adequate justification). She may also use some of the cash received to meet business expenses, reducing her need to deposit that cash into her bank account.

In the layering stage, the money launderer manipulates the illicit funds to make them appear as though they were derived from a legitimate source. A component of many layering schemes has been seen to be the transfer of money from one account to another. Even though this is done as carefully as possible, when it is done through the 'traditional' banking system it presents two problems to the money launderer. First, there is the possibility that a transaction could be considered to be suspicious and reported as such. Related to this is the paper trail created by these transactions. If any portion of the laundering network is examined, the related paper trails could lead a diligent investigator directly to the source of the criminal proceeds and unravel the money laundering network.

Hawala transfers leave a sparse or confusing paper trail if any. Even when invoice manipulation is used, the mixture of legal goods and illegal money, confusion about `valid' prices and a possibly complex international shipping network create a trail much more complicated than a simple wire transfer.

Both of the authors of this paper have investigated hawala money laundering, and have found that even 'basic' hawala transfers can be difficult to trace and tie to the original, criminal source of money. There is no reason, however, why hawala transfers could not be 'layered' to make following the money even more difficult. This could be done by using hawala brokers in several countries, and by distributing the transfers over time.

In the final stage of money laundering, integration, the launderer invests in other assets, uses the funds to enjoy his ill-gotten gains or to continue to invest in additional illegal activities. The same characteristics of hawala that make it a potential tool for the layering of money also make it ideal for the integration of money. This is when money seems to become legitimate, and, as we have seen, hawala techniques are capable of transforming money into almost any form, offering many possibilities for establishing an appearance of legitimacy.

The New York Times teaches us a lesson, but misses much of the point itself

2006-07-09T12:31:00.000-04:00

Here is a link to a NYT’s article by Edmund Andrews, “Surprising Jump in Tax Revenues is Curbing Deficit”.

One lesson illustrated by the story is the surprising amount of uncertainty in economic forecasts. Short term forecasts typically are very wrong. Long term forecasts typically are more uncertain than short term forecasts. Nobody knows much about what will happen long term. Would the stock market fluctuate so much as it does if economic variables could be forecasted accurately? The author fails to point this out.

Another lesson is that politicians and the media typically talk as if their favorite economic forecasts are accurate, despite that they are not. The author fails to point this out.

A third lesson is that politicians and the media get away with their spin because it is successful in influencing voters. Hence, voters' understanding of the issues is the problem, not the media and politicians. The author fails to point this out.

Here are some excerpts, with my comments.

An unexpectedly steep rise in tax revenues from corporations and the wealthy is driving down the projected budget deficit this year, even though spending has climbed sharply because of the war in Iraq and the cost of hurricane relief.

The unexpected is about all that can be really expected.

Congressional analysts say the surprise windfall could shrink the deficit this year to $300 billion, from $318 billion in 2005 and an all-time high of $412 billion in 2004.

"The fact is that revenues are way below what the administration said they would be a few years ago," said Thomas S. Kahn, staff director for Democrats on the House Budget Committee. "The long-term prognosis is still very, very bleak, and the administration doesn't have any kind of long-term plan."

This spin simply shows that Mr. Kahn is unable to address the real issues. Does he have a better forecasting methodology? Does he have a long-term plan?

The surge could also evaporate as quickly as it appeared. Over the past decade, tax revenues have become much more volatile, alternately soaring and plunging in the wake of swings in the stock market and repeatedly defying government projections.

Have tax revenues become more volatile? Where is the evidence? Should we take the NYT’s word?

Both supporters and critics of Mr. Bush cautioned against attributing much long-term significance to the recent fiscal improvement, in part because tax revenues have become more volatile.

Volatility is different from trend. If up volatility is not to be extrapolated, why should down volatility be extrapolated? If neither is to be extrapolated, what does that imply about all the media and political spin? Why does the author quote the spin without noting that it is rubbish?

Compared with the size of the economy, tax revenues are still below historical norms and far below what the administration predicted as recently as 2003.

More spin. Tax revenues also are far higher than others predicted as recently as 2003. This is not mentioned. Why?

Low tax revenues as a percent of the economy may be good. They may increase growth and increase the present value of tax revenues. This possibility is not mentioned. Why?

A Wall Street Journal statistical oops

2006-07-07T11:47:00.000-04:00

The Wall Street Journal’s recent editorial “Safe at Any Speed” is a nice piece, but the Editor fails to realize that the data he uses to draw his conclusion actually suggests the opposite conclusion.

Here are some excerpts from the editorial.

In 2005, according to new data from the National Highway Safety Administration, the rate of injuries per mile traveled was lower than at any time since the Interstate Highway System was built 50 years ago. The fatality rate was the second lowest ever, just a tick higher than in 2004.

As a public policy matter, this steady decline is a vindication of the repeal of the 55 miles per hour federal speed limit law in 1995.

This may seem non-controversial now, but at the time the debate was shrill and filled with predictions of doom. Ralph Nader claimed that "history will never forgive Congress for this assault on the sanctity of human life." Judith Stone, president of the Advocates for Highway and Auto Safety, predicted to Katie Couric on NBC's "Today Show" that there would be "6,400 added highway fatalities a year and millions of more injuries." Federico Pena, the Clinton Administration's Secretary of Transportation, declared: "Allowing speed limits to rise above 55 simply means that more Americans will die and be injured on our highways."

We now have 10 years of evidence proving that the only "assault" was on the sanctity of the truth. The nearby table shows that the death, injury and crash rates have fallen sharply since 1995. Per mile traveled, there were about 5,000 fewer deaths and almost one million fewer injuries in 2005 than in the mid-1990s. This is all the more remarkable given that a dozen years ago Americans lacked today's distraction of driving while also talking on their cell phones.

The table, presented in the editorial, shows a 16% decline in the fatality rate per 100 million miles vehicle miles traveled. However, it also shows a 37% decline in the injury rate and a 33% decline in the crash rate. Since the fatality rate was down less than the injury and crash rates, the probability of fatality given an injury or a crash is up, and substantially. This suggests that crashes are more dangerous now, exactly what would be expected if driving speed is higher.

Pedestrian deaths also are down less than crashes. This suggests a higher probability of a pedestrian death given a crash. This also is what would be expected if driving speed is higher.

Of course, there are many other things going on and there is no test of statistical significance, so all of my comments, including the WSJ’s comments are speculative. Nevertheless, it is nice to see, in some gross sense, that the fear mongers were wrong.

Personal observations about handgun sights

2006-07-06T22:17:00.000-04:00

My handguns have a variety of sights, including three dot tritium, front sight only tritium, Big Dot tritium, LaserGrip, and plain iron.

All the tritium sights are easily visible to me at night. However, I occasionally have a delay in identifying which is the front sight in the three dot tritium system. There is no delay with tritium in only the front sight or in a different form on the front and rear sights, as with the Big Dot.

In the past, I had an integral laser sight on my Glock. However, I no longer have it installed, mostly because it took too much time to turn on, but also because the laser light was visible to an adversary due to scattering of in the air.

I find the LaserGrip much more effective. It is very bright, makes targeting easy, and the front of the grip micro switch allows me to turn it on the instant prior to firing by adding a little pressure to one finger on the grip. That way, I do not give away my position with what amounts to a very long, bright light sword.

For daylight shooting at intermediate distances, I prefer a very bright front sight. Day-Glo white or red sounds good to me, but I have not yet looked into having my iron front sights painted.

Tradeoffs: Gun locks

2006-07-06T10:25:00.000-04:00

John Lott has a thoughtful column in the Washington Times, “A False Safety”. It points out the unintended consequences of gun laws.

Failing to address tradeoffs often costs lives.

Here are some excerpts.

“Academic studies of safe-storage and gun-lock laws have also overwhelmingly found no evidence that they reduce the total number of suicides -- although a few studies have found some small reductions in suicides committed with guns. There are simply too many ways to commit suicide. If people are intent on killing themselves, they will still do it, with or without a gun.”

“Yet, gun locks also pose real risks. Besides the costs that may deter poor people from buying guns, locked guns are also not as readily accessible for defensive gun uses. Since potentially armed victims deter criminals, storing a gun locked and unloaded may therefore increase crime.”

“Research that I have done examining juvenile accidental gun deaths or suicides for all U.S. states from 1977 to 1998 found that safe-storage laws had no impact on either type of death. The families that obeyed the laws were the ones where there were essentially no accidental deaths occurring. What did happen, however, was that law-abiding citizens were less able to defend themselves against crime.”

John closes his article with:

“Laws frequently have unintended consequences. Sometimes even the best intentioned ones cost lives.”

Right on, John.

Tradeoffs: The Euorpean Parliament's green tax

2006-07-05T18:13:00.000-04:00

Here is another example of the failure to think properly about tradeoffs, this time by the European Parliament and the Greens.

According to the Times On Line in the UK:

”AIR passengers will be charged up to £40 extra for a return ticket within Europe to pay for the environmental impact of their journeys . . .”

“MEPs voted in favour of the “immediate introduction” of a tax on jet fuel for flights within the 25 member states of the EU. The charge would double the cost of millions of budget airline flights.”

“They also accepted a recommendation for a special emissions trading scheme for the aviation industry, which would see airlines buying permits to cover their output of carbon dioxide.”

Let’s presume that the airlines’ carbon dioxide emissions create costs for others (externalities). Then one could argue that the airlines should pay those costs. One problem in figuring out what to charge the airlines is that the costs, or damages, to others cannot be measured accurately. Who is damaged and by how much? It is not likely that Government will come up with the right number.

“The main proposal was for airlines to be forced to buy emissions permits within a separate trading scheme dedicated to aviation, with a specific cap on the amount of CO2.”

Since nobody knows the actual damages, it is unlikely that the chosen “specific cap on the amount of CO2” is right. Since the scheme is dedicated to aviation, the charge per unit of CO2 emissions varies from one CO2 source to another. Since the cap applies to aviation and the problem is in the aggregate, the cap is almost certainly wrong.

Parliament’s approach guarantees an inefficient equilibrium for the economy. It could well be that the inefficiency creates more damage than the CO2 emissions.

“BA had wanted to be allowed virtually unlimited growth by being able to buy cheap surplus permits from other industries.”

BA’s position is partly right. If there is going to be a permit scheme, the permits should be tradable. If they are not, it distorts economic equilibrium. The decision to charge non-airline industries less for their permits is ludicrous.

“The GreenSkies Alliance, a coalition of environmental groups that opposes the growth of aviation, said ‘The huge European Parliament majority shows that MEPs overwhelmingly recognise that air transport’s greenhouse gas emissions are out of control and urgent action to control them is long overdue.’”

The focus on one source of CO2 emissions is nonsensical and reflects an agenda that is not helpful. This is all too common with activists. They go after people they don’t like rather than try to ameliorate the problem, assuming it exists, in a helpful way.

“Andrew Sentance, BA’s head of environmental affairs, admitted that aviation could account for almost half of Britain’s total CO2 emissions by 2050, compared with 6 per cent today.”

Of course, since the predicted growth is pure extrapolation, it may not happen.

The predicted growth sounds really bad, but can happen only if the airlines are performing an extremely valuable service. In this case, the scheme focuses on reducing valuable services when it might be better to reduce other services. All this would be taken care of automatically if permits were priced the same to everyone and tradable.

“He said that imposing a cap on aviation emissions would “deny society the right to make choices” about how to tackle climate change. He said society might prefer to continue to allow flights to grow but to reduce emissions elsewhere to compensate, such as in power generation or road transport.”

Score one for BA. It is right and Parliament and the Greens are wrong.

Somehow, Governments and activists always manage to screw up.

Tradeoffs: Guns

2006-07-04T16:15:00.000-04:00

This picture captures a beneficial side of allowing qualified citizens to carry concealed weapons that anti-gun groups either do not mention or sweep under the rug by claiming resisting with a gun is more likely to result in injury or death than not resisting with a gun.

As John Lott and others have shown, resisting with a gun is considerably safer than other alternatives.

The typical anti-gunner characterization of gun owners as gun nuts looking for an opportunity to shoot someone also is inaccurate. I would not shoot someone unless it was absolutely necessary to prevent the death or extremely serious injury of my family. Nor would other gun owners I know.

I strongly recommend John Lott's book "The Bias Against Guns" as an interesting and informative read. You will hear a lot of BS about Lott's method of analysis and results. Speaking as one who has used econometric techniques, and even taught them, I find the work of Lott and his colleagues well above average for the field. Moreover, I find the widely quoted critiques of his work, that I have read, biased and mistaken.

My Bonanza

2006-07-04T15:59:00.000-04:00

For about ten years, I owned and flew this Beech S-35 Bonanza. It was fully instrument equipped. About one-third of my flight time was on instruments, either in instrument weather or under the hood.

I initially kept the Bonanza at Zahns airport, out on Long Island, NY. It no longer exists. When Zahns closed, I moved across the street to Republic airport.

I had one mid air collision in this aircraft. Climbing out of a Long Island airport at 130 mph, I ran into a seagull. It hit the leading edge of the left wing and splashed, like an insect on a car windshield. There was a rather large dent in the wing's leading edge, fortunately between the ribs. Nevertheless, it cost over $1,000 to fix (1975 dollars).

Global warming: Are we the enemy?

2006-07-02T21:51:00.000-04:00

Here is an article by an MIT Professor that suggests caution about buying into Al Gore's certainty.

http://www.opinionjournal.com/extra/?id=110008597

Enjoy.

Tradeoffs: Wearing helmets

2006-07-02T21:30:00.000-04:00

Every media discussion I have read or seen assumes that helmets save lives. I have yet to see the discussants present any evidence that warrants this conclusion, nor consider any of the tradeoffs that might make it sensible for some cyclists not to wear helmets.

A while ago, the Miami Herald ran an editorial noting the lives saved by helmets. The reasoning was based on the notion that cyclist fatalities rose after the helmet law was rescinded. This was a very short period.

The editorial was followed by a letter from Jack Grossman, past Chief, Division of Plastic Surgery, Mercy Hospital. The letter is titled “Wearing a helmet vs. a lifetime of disability”.

Dr. Grossman’s letter is reproduced below. Read it and see how many things, including tradeoffs, that you can find that he overlooked.

I have listed some things I think are relevant following the letter.

“The June 21 editorial No-helmet law ushered in fatal era is so true, sadly. Not wearing a helmet is absolutely foolhardy. Common sense and good judgment must prevail. Safety helmets save lives and can minimize serious skull and complex facial-skeletal fractures, as well as destructive soft-tissue injuries.

The use of a full-face helmet, properly padded and secured, protects the lower facial and jaw areas, providing greater safety for the rider. This type of head gear is used in professional motorsports. Anything less, such as open-face or crown-only helmets, might increase the risk of serious injuries.

Consider the nature of devastating injuries that often result -- partial or permanent neurological dysfunction; extended or lifetime disability; and permanent disfigurement, to name a few. Then there are complex and risky issues of neurosurgical, orthopedic and reconstructive surgeries; extended hospitalizations usually involving specialized intensive care in a trauma center; weeks or months of rehabilitation treatments; protracted loss of income, etc.

Imagine the financial expense involved because of these injuries. The mandatory personal-injury protection vehicular-insurance benefits may have already been exhausted by the med-evac helicopter ride to the trauma center or certainly in the first 25 hours of diagnostic and specialized critical-care management once there. The cost of such care can be staggering and eventually exceed the injured's insurance coverage and the ability to pay enormous balances out-of-pocket.

What about the uninsured or underinsured rider? When this situation occurs, it becomes our -- nonriders' -- collective responsibility to pay the rider's medical bills in the form of: 1. assessed local taxes to subsidize the unreimbursed expenses for the continued operation of our county/regional trauma centers where most of the initial treatment takes place; and 2. continuously increasing auto- and healthcare-insurance rates for everyone.

These remarks reflect some of my professional experiences after many years of practice in the field. If you have friends or family members who must ride, insist that they wear proper full-face helmets. Although the feeling of the wind through one's hair is invigorating or even ''cool,'' the feeling of asphalt across one's face is definitely not. Just ask Pittsburgh Steeler Ben Roethlisberger.”

Here are some observations.

One or two observations do not convey useful information about a change in the mean. That the fatality rate rose after the helmet law was rescinded is little grounds for drawing a conclusion unless there are enough observations to justify one and the many other factors that influence the fatality rate are controlled for.

Even if helmets reduce the fatality rate, that does not imply that all people should wear helmets. It is sensible to take a risk if there is sufficient compensating gain. For some people, the enjoyment of cycling is increased substantially. The risk of fatality is low, with or without a helmet. It is easy for the former to matter more than the latter.

The increased risk associated with not wearing a helmet, other things equal, is not relevant. The risk can be reduced by driving more carefully. Cyclists who make this choice probably save innocent lives.

Helmets may reduce the fatality rate but increase the rate of serious permanent brain damage or quadriplegia. For some, death is preferable to brain damage and quadriplegia.

Not wearing helmets could lead to lower health costs. Treating more serious survivable injuries does cost more than treating less serious survivable injuries. But that ignores the possibility that without helmets, a lot of the more serious survivable injuries may be converted to deaths, which involve low health costs. Brain damaged people and quadriplegics cost a lot.

Drawing a conclusion from a particular event, Ben Roethlisberger, is about the worst logic possible. Dr. Grossman is good at rhetoric, but rhetoric is not analysis.

Dr. Grossman notes the tradeoff between the “feeling of the wind through one's hair” versus the “feeling of asphalt across one's face”. However it does not dawn on him that one can feel an awful lot of the former at only a small risk of the latter. He fails to realize that this tradeoff is the basis for the decision, not minimizing injury or health cost. If the world was about minimizing injury or health cost, cycling, or driving cars, would not be legal except for absolute necessity.

A case can be made that those most at risk when not wearing a helmet are those who are more likely to kill innocents, either in a car or on a cycle. So, perhaps it is better that they not wear helmets and, for the most part, only kill themselves.

Figures don't lie, but liars (and incompetents) figure

2006-06-28T17:01:00.000-04:00

The media and politicians often tell us something like “Last period’s” result was the worst in “n” periods. Example: Last year’s murder rate was the highest in ten years. They then go on to lament how things have degenerated and to blame someone.

By itself, this kind of statement conveys no useful information about the message topic.

Suppose the underlying murder rate is constant. Due to random fluctuations, each year’s realized murder rate will be different. No matter how large is the highest realized murder rate to date and how small the lowest murder rate to date, the highest and lowest will be surpassed over time. The probability that the media and politicians will jump on this when it occurs is about 1.

Given a murder rate so high that it its probability of being realized in a year is only 10%, then it ought to be realized about once in ten years. The probability that the media and politicians will jump on this when it occurs is about 1. Assuming independence, the probability of not seeing such a high murder rate in ten years is 35%, i.e., there is a probability of 65% of seeing at least one year in a ten year period with such a high murder rate.

Moral: That the media and politicians make a big deal of unusually good or bad outcomes is something that often can be chalked up to either an agenda or ignorance. In either case, it says more about the person than the message topic.

One important probability is the probability that something has changed (good or bad), given that the media and politicians deliver their message. Since it is about equally likely that the media and politicians will deliver their message whether or not there has been an underlying change in circumstances, the fact that they deliver their message conveys approximately no information.

Tradeoffs: Humvee armor

2006-06-28T14:27:00.000-04:00

Life is about tradeoffs. Much of what you see in the media and from politicians ignores the tradeoffs. That is one reason why you can’t trust either.

From time to time, this blog will suggest some of the tradeoffs on important issues (and some not important ones) that ought to be considered.

Here is an example.

There was a lot of initial criticism from the media and politicians about Humvees having inadequate armor.

The more armor, the less chance of the occupants being killed from enemy action. On the other hand, armor makes the vehicle less stable and the more chance there is of the occupants (and bystanders) being killed from accidents involving loss of control (e.g., rollovers). Since the percentage of time Humvee driving is in combat conditions is low, there seems a reasonable chance that the overall Humvee related fatality rate is increased by adding armor.

I have no idea what the net effect has been. But the initial media and political focus on one side of the issue was misleading. Some of the media addressed the tradeoff later, with nothing like the initial misleading exposure. Politicians have yet to provide balance.

Here is a link to an article on the topic. I have no idea what the net effect has been. But the initial media and political focus on one side of the issue was misleading.

Go to article

Stealing from your fellow citizens

2006-06-26T23:15:00.000-04:00

Being a Florida resident, I just received this email letter from my Senator, Bill Nelson.

This is an example of how Government rewards people for making poor decisions.

Hurricanes are anticipated in Florida. If Floridians were not confident that the rest of the country would be required to reimburse them for much of their hurricane damage, Floridians, faced with the real costs of living in Florida, would build stronger infrastructure, stronger homes, etc. Just as important, they would build less in dangerous areas, like on the Ocean or the Gulf.

Subsidizing Floridians for known events distorts the economy in a way such that it is possible to readjust production so that everyone is better off (technically, the subsidy ensures that equilibrium is not Pareto-optimum).

It is jus plain dumb (but thanks for your money, anyway).

At this point you are probably nodding your head in agreement and ridiculing Government. But the real problem is that Bill Nelson gets elected in return for bribes like this.

As Pogo said, we have met the enemy and he is us.

Even worse, see if you can think up a set of “rules” for Government that would induce individuals, in and out of Government, to behave in the kind of efficient (Pareto-optimal?) manner we all claim we want to see. Don't forget to assume that everyone acts in their own self interest (in the economics vocabulary, marginal, not general analysis).

I conjecture that no such set of rules exists.

Here is the letter.

June 26, 2006

“Dear Floridian,I am pleased to report that Congress has authorized $5.2 billion for disaster relief to Florida and other states hit by hurricanes last year. The funding is included in the Iraq war funding supplemental bill.

These federal funds are especially important to communities in the Panhandle that were hit hard by Hurricane Dennis. Although previous Federal disaster relief excluded damage caused by this storm, this new funding will help all communities damaged by storms last year, including Dennis, Rita, Katrina, and Wilma.

The relief will come in the form of disaster Community Development Block Grants (CDBGs), with the Department of Housing and Urban Development dispersing the funds among eligible states, and states then allocating the money to counties and municipalities. CDBG funds are often used for long-term recovery efforts, housing and business assistance, infrastructure reconstruction, mitigation efforts, and public services.

The following counties are eligible for the funds: Bay, Brevard, Broward, Calhoun, Charlotte, Collier, DeSoto, Dixie, Escambia, Franklin, Gadsden, Glades, Gulf, Hardee, Hendry, Highlands, Holmes, Indian River, Jackson, Jefferson, Lee, Leon, Levy, Liberty, Martin, Miami-Dade, Monroe, Okaloosa, Okeechobee, Osceola, Palm Beach, Polk, Santa Rosa, Sarasota, St. Lucie, Taylor, Wakulla, Walton, and Washington.

Sincerely,

Bill Nelson
U.S. Senator”

The New York Times’s overblown OxyContin abuse story

2006-06-25T14:22:00.000-04:00

Here is a link to a STATS article “The New York Times' Other WMD Problem”. It discusses another example of the NYT’s poor quality control.

The NYT is not trustworthy.

Here are some excerpts from the STATS article.

“In short, the Sentinel wildly over-estimated the number of people it claimed had died from overdoses of oxycodone (the active ingredient in OxyContin) by failing to scrutinize state law enforcement data. Most of those who died turned out to have consumed, in addition to OxyContin, a cocktail of illegal drugs.”

“Still, at least the Sentinel apologized and corrected the record. No such correction or apology has ever issued from the New York Times for taking a leading role in prompting the idea that OxyContin was a weapon of mass destruction in the nation's heartland.”

““Heck, we already know it’s pretty epidemic down here,” Capt. Minor Allen of the Hazard Police Department in southeastern Kentucky told Times readers in 2001 (“Cancer Painkillers Pose New Abuse Threat” by Francis X. Clines with Barry Meier, Feb 9.) “Abuse of this drug has become unbelievable in the last year, with probably 85 to 90 percent of our field work now related to oxys,” he continued. “We find them carrying pill pushers that are sold in drugstores to help elderly people swallow their prescriptions.””

“Unfortunately, the Times placed far too much trust in the numbers being thrown out by law enforcement and legal sources — as did other news organizations, especially television, which covered Operation Oxyfest like children covering candy.”

“As the Washington Post’s television critic Tom Shales wrote in Electronic Media just a few weeks after OxyContin abuse dominated February sweeps (March 26, 2001),”

““there is no hard evidence that OxyContin played a key role in 59 Kentuckians keeling over. David Jones, an official with the Kentucky State Medical Examiner’s Office, looked into the claim and wrote a letter to Purdue Pharma: ‘I am unaware of any reliable data in Kentucky that proves OxyContin is causing a lot of deaths. In the State M.E. Office, we are seeing an increase in the number of deaths from ingesting several different prescription drugs and mixing them with alcohol. OxyContin is sometimes one of these drugs.’”

“For confirmation, the Free Times turned to David W. Jones, executive director of the Kentucky State Medical Examiner’s office. He asserts that ‘as far as deaths go, I’ve heard different numbers in different places at different times; I have no idea where these people are getting their facts and figures.’ While he stresses that not every drug-related death is necessarily reported to his office, according to his data there were 27 oxycodone-related deaths in the entire state in 2000…”

““…Two of the 27 victims, he explains were found to have both oxycodone and alcohol in their bodies, with death caused by the interaction of two nervous system depressants. What’s more, 23 others had a head-spinning multiplicity of other drugs in their systems, including highly potent prescription painkillers such as Diludad and Fentanyl, as well as powerful illegal drugs like cocaine and heroin. In the final analysis, Jones reveals, only two of the 27 fatalities can be shown to have been due to the effects of oxycodone alone – not just two in eastern Kentucky, two in the entire state.””

Richard Feynman's Douglas Robb Memorial Lectures

2006-06-24T10:03:00.000-04:00

Thanks to my friend Neal Hitzig for directing me to this link.

http://www.vega.org.uk/video/subseries/8

Here is some information from the website.

A set of four priceless archival recordings from the University of Auckland (New Zealand) of the outstanding Nobel prize-winning physicist Richard Feynman - arguably the greatest science lecturer ever. Although the recording is of modest technical quality the exceptional personal style and unique delivery shine through.

A gentle lead-in to the subject, Feynman starts by discussing photons and their properties.

http://www.vega.org.uk/video/programme/45

What are reflection and transmission, and how do they work?

http://www.vega.org.uk/video/programme/46

Feynman diagrams and the intricacies of particle interaction.

http://www.vega.org.uk/video/programme/47

What does it mean, and where is it all leading?

http://www.vega.org.uk/video/programme/48

A Week At The Gym

2006-06-23T11:20:00.000-04:00

This was sent to me by a longtime friend, retired, of course.

For my sixty fifth birthday this year, my wife (the dear) purchased a week of personal training at the local health club for me. Although I am still in great shape since playing on my college football team 45 years ago, Idecided it would be a good idea to go ahead and give it a try.

I called the club and made my reservations with a personal trainer named Belinda, who identified herself as a 26-year-old aerobics instructor and model for athletic clothing and swim wear. My wife seemed pleased with my enthusiasm to get started!

The club encouraged me to keep a diary to chart my progress . . .

Dear Diary:

MONDAY:

Started my day at 6:00 a.m.Tough to get out of bed, but found it was well worth it when I arrived atthe health club to find Belinda waiting for me.She is something of a Greek goddess - with blond hair, dancing eyes anddazzling white smile.

Woo Hoo!!

Belinda gave me a tour and showed me the machines. She took my pulse after five minutes on the treadmill. She was alarmed that my pulse was so fast, but I attribute it to standing next to her in her Lycra aerobic outfit.

I enjoyed watching the skillful way in which she conducted her aerobics class after my workout today. Very inspiring! Belinda was encouraging as I did my sit-ups, although my gut was already aching from holding it in the whole time she was around. This is going to bea FANTASTIC week!!

TUESDAY

I drank a whole pot of coffee, but I finally made it out the door.

Belinda made me lie on my back and push a heavy iron bar into the air when she put weights on it! My legs were a little wobbly on the treadmill, but I made the full mile. Belinda's rewarding smile made it all worthwhile. I feel GREAT!!

It's a whole new life for me.

WEDNESDAY

The only way I can brush my teeth is by laying on the toothbrush on the counter and moving my mouth back and forth over it. I believe I have a hernia in both pectorals. Driving was OK as long as I didn't try to steer or stop. I parked on top of a GEO in the club parking lot.

Belinda was impatient with me, insisting that my screams bothered other clubmembers. Her voice is a little too perky for early in the morning and when she scolds, she gets this nasal whine that is VERY annoying.

My chest hurt when I got on the treadmill, so Belinda put me on the stairmonster. Why the hell would anyone invent a machine to simulate an activity rendered obsolete by elevators? Belinda told me it would help me get in shape and enjoy life. She said some other shit too.

THURSDAY

Belinda was waiting for me with her vampire-like teeth exposed as her thin, cruel lips were pulled back in a full snarl. I couldn't help being a half an hour late, it took me that long to tie my shoes.

Belinda took me to work out with dumbbells. When she was not looking, I ran and hid in the men's room. She sent Lars to find me. Then, as punishment, she put me on the rowing machine -- which I sank.

FRIDAY

I hate that bitch Belinda more than any human being has ever hated any other human being in the history of the world. Stupid, skinny, anemic little cheerleader. If there was a part of my body I could move without unbearable pain, I wouldbeat her with it.

Belinda wanted me to work on my triceps. I don't have any triceps! And if you don't want dents in the floor, don't hand me the M----- f-----barbells or anything that weighs more than a sandwich.

The treadmill flung me off and I landed on a health and nutrition teacher. Why couldn't it have been someone softer, like the drama coach or the Choir director?

SATURDAY

Belinda left a message on my answering machine in her grating, shrilly voice wondering why I did not show up today. Just hearing her made me want to smash the machine with my planner. However, I lacked the strength to even use the TV remote and ended up catching eleven straight hours of the Weather Channel.

SUNDAY

I'm having the Church van pick me up for services today so I can go and thank GOD that this week is over. I will also pray that next year my wife (the bitch) will choose a gift for me that is fun -- like a root canal or a vasectomy.

Corn-ethanol for cars?

2006-06-17T09:33:00.000-04:00

Here is another example of how Government meddling with the economy reduces the standard of living.

If two products or processes accomplish a job and one is cheaper, then replacing the cheaper one with the more expensive one reduces the standard of living.

According to the Wall Street Journal and others, Government’s subsidizing and/or forcing corn-ethanol use in cars increases the cost per mile of driving. It also increases oil demand, since it requires more than a gallon of oil to produce a gallon of corn-ethanol and the latter has less energy per gallon.

By increasing oil demand, it increases the price of oil and the price of all products that use oil in the production or delivery process.

Why is it so easy for Government to mess up the economy like this? Because too many voters either vote their own immediate interests (e.g., farmers) or fail to understand the issues.

The problem is not Government. The problem is us.

The Wall Street Journal’s editorial can be found here “An Energy Field of Dreams”.

Here are some excerpts.

“We'd say the world had gone mad, except that this is a fairly typical case study in how political meddling distorts energy markets. Weary of high gas prices, drivers can be forgiven for desiring a "miracle" fuel that is allegedly cheap and clean. But the corn farmers, ethanol producers, politicians and environmentalists who have promoted the new ethanol mania have no excuse for peddling misinformation.”

“We have nothing against corn-based ethanol per se, assuming it competes in the market on the same basis as other fuels. Ethanol's problem is that it is expensive to make and provides far fewer miles per gallon than gasoline. So its supporters have worked the political system to subsidize ethanol, and more recently to force Americans to buy it.”

“U.S. taxpayers today pay twice for ethanol: once in crop subsidies to corn farmers and again in a 51-cent subsidy for every gallon of ethanol. Without such a subsidy, ethanol simply wouldn't be cost competitive with gasoline. Then last year, Congress went further and passed a new ethanol mandate, requiring drivers to use at least 7.5 billion gallons annually by 2012.”

“Sorry. The most widely cited research on this subject comes from Cornell's David Pimental and Berkeley's Ted Patzek. They've found that it takes more than a gallon of fossil fuel to make one gallon of ethanol--29% more. That's because it takes enormous amounts of fossil-fuel energy to grow corn (using fertilizer and irrigation), to transport the crops and then to turn that corn into ethanol. The Saudis ought to love the stuff.”

Money flows into and out of the stock market

2006-06-15T22:54:00.000-04:00

Does money flow into or out of the stock market (the secondary market)? Don’t dollars of stock purchased always equals dollars of stock sold? So, how can there be a net dollar flow into or out of the stock market?

Al Gore and Global Warming

2006-06-14T21:34:00.000-04:00

My friend James Kitler, trained as an engineer sent me a website article that debunks Al Gore’s “The Inconvenient Truth”.

Here is an excerpt to convey the flavor.

“"Scientists have an independent obligation to respect and present the truth as they see it," Al Gore sensibly asserts in his film "An Inconvenient Truth", showing at Cumberland 4 Cinemas in Toronto since Jun 2. With that outlook in mind, what do world climate experts actually think about the science of his movie? "

“Professor Bob Carter of the Marine Geophysical Laboratory at James Cook University, in Australia gives what, for many Canadians, is a surprising assessment: "Gore's circumstantial arguments are so weak that they are pathetic. It is simply incredible that they, and his film, are commanding public attention."”

It goes on from there.

Stanford University has a Solar Center that has lots of good stuff on global warming. There is an interesting chart on the first page that suggests that climate is by far most correlated with solar activity. Looking at it makes you a skeptic with respect to Al Gore, although one chart is not a proof. On the other hand, having listened to Al Gore before, I have got to wonder how he could track down the truth even if he wanted to.

Looking down the links on Stanford University’s site, I found one quoting some researchers. Here are a couple of quotes.

“But the Earth is warming up, you say. Well, the evidence for that is very skimpy and not supported by an overwhelming quantity and quality of facts, as well as by the poor quality of surface temperature recordings.”

“Aside from the design- and human errors that may and do creep in when setting up instrumentation and taking readings, the readings are affected by the heat island effect generated in urban areas. The heat-island effect is substantial, measurable in communities of 250 or more residents, increasing over time as energy consumption and population density increase, and cannot be ignored. Determining accurate correction factors for individual areas in which temperature readings are taken in uncharacteristic hot-spots becomes difficult and even impossible if no corresponding records of readings exist for the surrounding rural areas, and as more and more weather stations in rural areas are being taken out of service.”

“However, for a number of years now, temperature measurements have been made via balloons and, in an even more thorough and comprehensive fashion, via satellites. The records established by those means show no or at worst only almost imperceptible global warming. Of course, those records are unbiased by human error and undistorted by the fact that temperature readings taken in urban areas are affected by the heat-island effects of the cities in which many are taken and that taint the results of global averaging of global temperature records.”

“What do they tell us about the highly-advertised claims of the world's climate alarmists relative to warming-induced droughts and floods?....”

“Climate alarmists claim that global warming will bring extremes of both floods and droughts to the world, and that the earth is now warmer than it has been in the entire past millennium. If these two claims were correct, we should clearly be seeing wet and dry periods that exceed the worst of the past half-millennium or more. In this extensive and well-calibrated record from the United States, however, we don't. Ergo, something is rotten in more than Denmark.”

“Curiously, and the Kyoto-hype advocates must surely be interested in that (or are they?), the record for the Sargasso Sea shows that the current sea-surface temperature is about half a degree Celsius below the average for the last 3000 years. Moreover, although the sea-surface temperature has recently increased somewhat but not quite reached the 3000-year average, it is rising in perfect synchronicity with the record of solar activity. It has done so before and will do so again.”

“Just as there were times in the past where it was much colder than it is now, so there were times when our globe was much warmer. The last period of a considerably warmer climate was during the Medieval Optimum, just before the Little Ice Age set in out of which we are climbing just now.”

“Superstitions, in spite of many voices of reason, brought about the witch hunts as the climate turned colder during the Little Ice Age. (See the paper by historian Wolfgang Behringer: Climatic Change and Witch-Hunting: The Impact of the Little Ice Age on Mentalities) Superstitions, in spite of many voices of reason, bring us now the witch hunts promoted by the proponents of the Kyoto accord. Such is the power of propaganda.”

There are lots more interesting links.

I am not a climate expert. But, being a Bayesian, I note that alarmists have seldom been right in the past and exhibit a characteristic behavior that does not instill confidence in me. So, my bet is that disaster is not imminent.

Even if global warming is an imminent problem, my preferred solution is fewer people. Smaller families, anyone?

The New York Times Gives Me A Quick Laugh

2006-06-13T17:28:00.000-04:00

Logging on to the NYT’s web site and the Sunday Magazine section, I noticed an article by Niall Ferguson (no relation). The website noted the title,

“Reason to Worry”,

along with the verbal bait

“Why you could be excused for feeling a little uneasy about the collapse in household savings, the rise in home-mortgage debt, a large and growing trade deficit and the fact that Asian countries hold so many U.S. treasuries. Go to Article”

I laughed because I am not worried about debt owed foreigners by the US. I figure if we owe somebody else something, as a country, they have to be careful of us, not the other way around.

Then I scanned the article. The writing is creative. How can you not appreciate this kind of language.

“Think of the economy of the United States as a dinosaur — one of those huge herbivores whose bulk shook the ground. A brachiosaur. A brontosaur. A diplodocus. Like them, the U.S. economy is mind-bogglingly enormous — two and a half times as big as the next largest economy in the world and almost as large as that of the six other members of the Group of Seven combined. The catch is that it has to consume almost incessantly to sustain its great heft.”

“Contrary to what we used to believe, leviathans like the diplodocus were not exactly sloths. It is now thought that they had the strength to stand on their hind legs in order to reach food at the top of trees. They may even have been able to run rather than merely plod. But it seems reasonable to assume that their reaction times were slow; it was a very long way from the diplodocus's tail to its brain. If a predator sank its fangs into that tail, it might have taken the diplodocus a few moments to feel the pain.”

“The big question about the dinosaurs is, of course, What caused their extinction? Why were so many species unable to evolve in response to environmental changes? The most common explanation is that a very sudden event, like a meteor's impact, gave the dinosaurs too little time to evolve and provided smaller and more dynamic life forms with an opportunity to take over.”

“An analogous question for economists is whether the United States is capable of evolving out of its present excessive indebtedness. Or could the global economic environment change so drastically as to threaten, if not extinction, then at least decline relative to smaller, more dynamic economies?”

No kidding, metaphor has become analysis.

Did I read right? “decline relative to smaller, more dynamic economies?” Isn’t that always going on? After all, if Microsoft goes up 1% and Widgets goes up 2%, then isn’t Microsoft declining relative to Widgets? A disaster in the making. Sheer genius.

At the bottom of the first page of the article, you see that Niall Ferguson is Laurence A. Tisch professor of history at Harvard University and the author of "Colossus: The Rise and Fall of the American Empire." Well, I guess that the American Empire will eventually fall. Probably the whole Universe, too, if I can believe Kaku. I’m just not so sure it’s as imminent as Prof. Ferguson makes out.

I continued scanning the article and found this nugget.

“As a result, there has been an immense rise in foreign ownership of American securities of all kinds, but especially government bonds. Foreign ownership of the U.S. federal debt passed the halfway mark in June 2004. About a third of corporate bonds are now in foreign hands, as is more than 13 percent of the U.S. stock market. One analyst has half-seriously calculated that at the current rate of foreign accumulation, the last U.S. Treasury held by an American will be purchased by the People's Bank of China on Feb. 9, 2012.”

Let’s see. Doesn’t this conclusion follow if the percentage of foreign owner ship of US debt increases, no matter by how little, and we forecast a continuation? Better yet, let’s do Prof. Ferguson one better and find, of all the possible period lengths ending with the most recent data, the period length with the biggest average daily increase in the percentage of foreign ownership of US debt. Let’s extend that. Maybe we can move doomsday a lot closer than 2012.

I am willing to bet Prof. Ferguson $1 million that on 1/1/2013, Some US debt will be owned by US citizens. Heck, I’ll even make it 12/31/2013.

I’m all for selling a lot more debt to the Chinese and using the proceeds to buy Chinese consumer goods. Of course, my strategy would be to default on the debt when the Chinese wise up. If third world countries are any guide, perhaps the UN would pay off our debt to the Chinese for us.

Next, I found this:

“So what's the catch? A sudden increase in the dollar price of American imports could stoke inflation in the United States. There is already some patchy evidence of an upturn in inflation. Whichever measure you use, prices are certainly rising at a faster rate now than they were two years ago, . . .”

Have you ever noticed that no matter which way an economic variable goes, someone says it is a disaster? From “patchy evidence” in either direction comes disaster. Actually, assuming prices are up faster more recently than two years ago, is this a statistically significant change? Does it make disaster really likely, sort of likely, or are we jsut seeing the normal random crud?

I sympathize with Ferguson’s concern over all the mortgage debt and that a lot of it is in ARMs. I think some of us are setting themselves up for hard times (there I go playing fortune teller). But, to tell you the truth, if this disaster happens, I expect to sit back and enjoy the fun. Nor do I think it will end the American Empire. I wonder. Would it be worse than the Great Depression? Now there was a real disaster, and look where we are now.

Has the New York Times Ever Heard of Quality Control?

2006-06-11T14:29:00.000-04:00

Byron Calame, the NYT’s Public Editor has a great piece on a NYT story about an alleged standing room “seat” to be put on the Airbus A380. The piece is “Landing on Page 1 With Hardly a Wary Eye”.

Here are some excerpts from Byron’s article describe the issue.

“As the old journalism platitude goes, "If your mother says she loves you, check it out." And when there's a story that's likely to make readers go "Wow!," it should be checked twice.”

“But such a story still made its way to The Times's front page last month while hardly meeting a skeptical eye — despite crossing the path of a passel of editors at all levels, including those who run the paper.”

“The Wow! in the April 25 story was a standing-room-only "seat" for airline passengers. An attention-grabbing illustration depicted a standing passenger leaning back against a nearly vertical board and held in place by restraints. The headline couldn't have been clearer: "One Day, That Economy Ticket May Buy You a Place to Stand." And the article explained that Airbus, the giant aircraft maker, "has been quietly pitching" the idea to Asian airlines.”
“It turns out this account was wrong. Airbus had abandoned the idea no later than 2004. There was no proof that the idea had been pitched to any Asian airlines.”

“The problems didn't stop there. Despite an immediate public denial by Airbus, the stand-up seat idea stood uncorrected for a week.”

Here is the telltale comment from Associate Managing Editor Chuck Strum.

“The news desk, where experienced editors do a final read of most Page 1 articles each night, had only "routine questions" about the article, said Chuck Strum, an associate managing editor. "The news desk treated this piece as a light feature," he said. "It was a thin piece and seemed harmless enough."”

“"In general," Mr. Strum said in defense of the news desk, "we don't assume that the various ... desks submit articles in which the central premise is wrong."”

In other words, Mr. Strum is admitting that there is no effective quality control at the NYT because the premises underlying quality control are not recognized by the NYT staff, right up to the top.

There is an old adage in the Quality Control fraternity, and it is accurate. When Quality Control reports to production, there is no quality control. The NYT is even worse. Byron Calame could be viewed as the NYT Quality Control Department. However, he doesn’t have any authority. In effect, the NYT’s Quality Control Department exists in a vacuum.

Not too surprising, considering the NYT’s accuracy.

Personally, I have never read an accurate NYT article on a topic I had first hand knowledge of.

The New York Times Statistical Intuition About Stocks Is Not Good

2006-06-10T23:59:00.000-04:00

Jeff Sommer's recent article in the New York Times, "Fear of Inflation Prompts Big Losses in Stocks" makes a big deal about the recent one-week decline of 3.2% in the Dow Jones Industrials. But if you think about it, it is not particularly unusual.

Roughly, the DJI has a mean weekly return of about zero. Its annual standard deviation of return is about 15%, more or less. Assuming weekly returns are independent as an approximation, a 15% annual volatility corresponds to a 2.08% weekly volatility. A weekly return of -3.2% is only 1.54 standard deviations from the mean.

Assuming normality, the probability of a result 1.54 standard deviations below the mean or worse is 6.2%. This sounds pretty low, but Mr. Sommer did not pick this week at random. He scoured recent history for the worst week and found that it was the worst since about a year ago.

The real question is how likely is at least one weekly decline of at 3.2% or worse in a year.

Roughly this size negative return or worse should occur about three times a year (0.062*52=3.2). In fact, the probability that it would occur at least one week a year is about (1-(1-0.062)^52)=0.964, or about 96.4%.

Something that is expected to happen at least once a year with probability 96.4% is not unusual.

It is tempting to blame Mr. Somer for either incompetence or grand standing. However, we should remember that journalists and reporters are trained as journalists and reporters, and cannot be expected to understand useful things (note the grand standing :-)).

Infinity Is Not What It Seems

2006-06-10T19:25:00.000-04:00

I have always appreciated the power of mathematics but, unfortunately, am not very good at it. Of course, in life all you have to know to succeed is a few more pages in the math book than the next guy.

One thing that impressed me was the notion that there was more than one "infinity". Like most people, I understood infinity to be connected with the number of positive integers. But on various occassions, things seemed not so clear.

One problem is how to determine when two sets of things have the same number of elements (those of you who know math will have to excuse my loose language). The example I use is to think of two sets of things in two separate bags. Suppose I draw one item from one bag and match it to one item from the other bag and I never run out of things in one bag before I run out of things in the other bag. Well, I think that is a good way to define the number of things in the two bags as the same.

So, is the number of positive integers less than the number of positive and negative integers? The above rule for determining the answer shows that the number of positive integers is the same as the number of positive and negative integers. All you have to do is start counting the positive and negative integers using only the positive integers. The correspondence goes like this 1 goes with 1, 2 goes with -1, 3 goes with 2, 4 goes with -2, and so on. It is clear that the positive integers will never run out and every positive and negative integer will have a unique positive integer assigned to it. Yes, Virginia, twice the number of positive integers is the same as once the number of positive integers.

Oy.

It gets worse. Consider the points in the plane characterized by two integers, such as (3,5). Do the number of these points in the infinite plane exceed the number of positive integers? Not if we can count them systematically with the positive integers. And we can. Start at (0,1) on the x axis and go to (1,1), then (0,1), then to (-1,1), then to (-1,0), then to (-1,-1), then to (0,-1), then to (1,-1). We have used the positive integers from 1 to 8 to go in a "circle" around the origin. Next move outward to (0,2) and complete the next largest circle. Clearly we will never run out of the positive integers but will end up counting every pair of positive and negative integers.

We would ordinarily think of the number of pairs of positive and negative integers as infinity times infinity. But this exercise shows that our suspected infinity times infinity is just infinity.

So, if we define ordinary infinity as the number of positive integers, is that what we are stuck with. It seems not, because we can find a bag with so many elements that they cannot be counted with the positive integers. The example I am thinking of is the set of infinite decimals lying between 0 an 1 (inclusive).

The classic approach to showing that this set cannot be counted with the positive integers is to first assume that it has been counted and a two column table has been laid out with the positive integers in the first column and the corresponding infinite decimals in the second column. Next, consider the following infinite decimal. Its first digit differs from the first digit of the first infinite decimal. Its second digit differs from the second digit of the second inifinite decimal, and so on. clearly this is a new infinite decimal that nowhere appear in column two of our table. This contradicts the initial assumption that a correspondence between the positive integers and the infinite decimals between 0 and 1 had been achieved.

We ran out of positive integers before we ran out of infinte decimals between 0 and 1.

The number of infinite decimals exceeds the number of positive integers.

Oy, again.

Here are some links on the topic. Don't ask me to explain them.

http://en.wikipedia.org/wiki/Transfinite_number

http://mathworld.wolfram.com/TransfiniteNumber.html

http://mathworld.wolfram.com/Aleph-0.html

http://mathworld.wolfram.com/Aleph-0.html

Free Will

2006-06-10T10:42:00.000-04:00

What could free will mean?

If we know someone, doesn't that mean that we know something about their personality, i.e., how they are likely to behave in various circumstances? Doesn't that imply a degree of predictability? To the extent behavior is predictable, doesn't that mean that it follows rules? If so, doesn't having an identifiable personality imply some lack of free will?

If rational behavior is something to strive for, doesn't that imply predictability, hence a lack of free will?

If predictablity is the antithesis of free will, and what else could it be, wouldn't free will have to manifest itself by unpredictability?

If someone exhibited free will, wouldn't their behavior be random? Doesn't this imply behavior that is unrelated to circumstances? If so, free will would seem to imply remarkably unproductive behavior with no survival value.

Perhaps free will is an illusion.

That is not to say that conciousness is an illusion. Conciousness and free will are entirely different things.

An Apparent Paradox

2006-06-09T22:58:00.000-04:00

In the previous post, I noted that a stock's long-term return is approximately its expected return less one-half its variance of return. This applies to portfolios, too.

Consider a stock market made up of stocks that all have the same expected return and the same variance of return. Then each stock has the same long-term return, approximately equal to its expected return less one-half its variance of return.

Now consider a portfolio of these stocks. The portfolio's expected return is the same as each stock's expected return. But, due to diversification, the portfolio's variance of return is less than each stock's variance of return. Consequently, the portfolio's long-term return exceeds that of the stocks.

Apparently, a portfolio's long-term return can be greater than the long-term returns of its stocks!

Long-term return is not expected return

2006-06-09T22:31:00.000-04:00

Most investment professionals are familiar with expected return and variance of return. Through the CFA program and in their MBA courses, they have learned about the mean-variance efficient frontier and the single period Capital Asset Pricing Model. But they haven't learned that long-term return is not expected return, and is usually considerably less.

Suppose that a stock has a 50/50 chance of going up by a factor of 1.5 or down by a factor of 0.9. Then the expected return is (0.5 x 1.5 + 0.5 x 0.9) - 1 = 0.20, or 20%. Most professional investors figure that this also is the stock's long-term return. But, here is the way to see that it is not.

Just as the percentage of tails in coin flipping approaches 50% over time, the percentage of the time the stock will go up approaches 50% over time. In other words, the typical two-period long-term result must be one up and one down. This implies that $1.00 invested in the stock will, in a typical two periods, either grow by a factor of 1.5 and then decline by a factor of 0.9 or decline by a factor of 0.9 and then grow by a factor of 1.5. Either way, the typical two-period terminal value of $1.00 is (1.2 x 0.9) = $1.35, which implies a per period long-term return of 16.2%. This is a less than 20% per period.

Just to make things interesting, consider what happens if the up factor is 2.0 and the down factor is 0.4. The expected return is still 20% per period. But now the typical two period terminal wealth of a $1.00 investment is (2.0x 0.4) = $0.8. Now the per period long-term return is -10.6%. This is a lot less than 20% per period.

Evidently, long-term return is always less than expected return and the difference is large to the extent the variance is large. In fact, long-term return is approximately expected return less one-half variance of return.

One reason why leveraged investments are so dangerous is because, ultimately, leverage increases variance of return a lot faster than it increases expected return.

Moral: Leverage and volatility are dangerous.

Thinking About The Stock Market (written about 2000)

2006-06-09T22:24:00.000-04:00

Well over one hundred years ago, Charles MacKay published a book titled "Extraordinary Popular Delusions and the Madness of Crowds and Confusion of Confusiones". The book is still being published, which attests to its insight. Even a casual reading should convince you that the current stock market will go down in history as one of the great bubbles. In case MacKay's treatise is not enough to convince you, here's more to think about.

The stock market has more than tripled in recent years. Sales and profits are up, but by nowhere near as much. Financial valuation ratios, such as price/book and price/earnings ratios have skyrocketed. For example, the S&P500 index's price/book and price/earnings ratios are about 5 and 30, respectively. Can this divergence from historical levels be justified?

According to the stock valuation theory taught in graduate business schools, a stock's value stems from its ability to throw off cash. In particular, a high price/book or price/earnings ratio is justified only to the extent that the company will be able to earn unusually high profits on its investments (abnormal profits).

Assume that the S&P500's risk is such that investors require a 10% expected return on their investment (If you want to use a higher number, the implications will be worse.). Suppose the index's return on equity is 10% and its growth rate is 0% annually. Then the theory says that the index should sell at a price/book ratio of 1.0 and a price/earnings ratio of 10.0. These two numbers are not far off the S&P500's long-term historical averages. They imply that the market should be selling for well under half its current price.

Leave the index's return on equity assumption at 10%. Posit a growth rate of 20% annually for the first ten years and then let its growth rate decline one percentage point per year until it reaches 5% in year 25. Thereafter, let the growth rate be 5% annually. Make no mistake, this is a wildly optimistic growth rate forecast. The index's fair price/book and price/earnings ratios still are only 1.0 and 10.0, respectively. Growth alone does not bestow value. Betcha that was a surprise.

Now, keep the optimistic growth forecast, but increase the forecast return on equity to 20% for the first ten years with a decline of one percentage point per year until it reaches 10% in year 20. Thereafter, let return on equity be 10%. Make no mistake, this is a wildly optimistic profitability forecast. Now, the index's fair price/book and price/earnings ratios are about 3.6 and 17.8, respectively. This illustrates that abnormal profitability is required to justify high valuation ratios. However, even this wildly optimistic forecast of growth and profitability implies a fair price for the S&P500 about 30% below its current level.

Let's apply this theory to the internet retail stocks, like Amazon.com.
Relatively cheap talent is available to set up and run web sites, and to handle operations, i.e., ordering and delivering merchandise, and inventory management. Thus, this industry has essentially no barrier to entry.

A low barrier to entry fosters competition. This has happened in the Internet store industry. Barnes and Noble was able to compete with Amazon.com in the Internet book business as soon as it made economic sense. Neither Internet store has been competitive in books for some time. Other, smaller, Internet book stores undercut them regularly.

The availability of shopping "bots" that locate the Internet stores selling the merchandise you want at the lowest price has created, for the first time, the economist's dream of the perfectly competitive market. A fundamental characteristic of a perfectly competitive market is the absence of abnormal profitability. Thus, it is unrealistic to think that the Amazon.coms of the world will ever be unusually profitable. If so, Internet retailers' current valuation ratios never will be justified.

Even if my analysis is right, it does not imply a market crash. Valuation ratios can decline because prices come down, earnings and book values rise, or a combination of the two. Personally, I'm hoping for a really big crash, because it's so exciting.

Delusions of Grandeur (written a while back)

2006-06-08T23:25:00.000-04:00

Roughly speaking the stock market is ten times higher than it was not much more than ten years ago. It would seem that we are all a lot wealthier. In a sense we are. Each one of us can sell our stock and buy many things we could not afford before. However, we can't all do this. If a significant fraction of us tried to, our attempts to sell would drive the stock market down to where it started. Evidently, the recent stock market rise has not made us wealthier, as a group. We are simply suffering from delusions of grandeur.

Paper wealth is wealth only to the extent we can use it to buy things we like. But we can only buy things that exist. The stock market's rise has not been matched by a significant increase in the number of things that exist. There is not much more production equipment and plant. Neither is there much more of anything else that we like to have, such as cars and houses. Thus, the per capita number of things we like to have has not increased significantly. Indeed, things per capita can't change much over the short term, because it takes a lot of time to make a lot of things.

If things per capita can't increase significantly over the short term, it is plainly impossible to buy or hold significantly more things per capita over the short term. In other words, society as a whole is not wealthier just because the stock market goes up a lot over the short term, no matter how far it goes up.

If you need more convincing, consider the implications if the stock market were to rise so high that all of us were worth ten million dollars, on paper. This is enough for all of us to retire, if you believe that stock market wealth is real wealth. Suppose everybody did retire. Nobody would be working, so production would cease. Consequently, there would be nothing to consume, and consumption would cease. We would all be poor, no matter what we were worth on paper.

If a big stock market rise doesn't make us significantly wealthier, as a group, then a big stock market decline doesn't make us much poorer. So, when the crash comes, just don't read the paper, listen to the radio, or watch TV, and you'll be all right if you've avoided undue borrowing. This, of course, presumes that Government, various regulators and experts, and business leaders act sensibly. Hmm, maybe you should be a little concerned, after all. You never know what will go through these peoples' heads.

Is the stock market likely to crash, or at least have very disappointing performance? All it takes is the reverse of what made it go up so high. What was that? Simply investors' desire, on average, to have a little more of their portfolios allocated to stocks.

Consider an example. Suppose the financial market consists of $50 of cash and $50 of stock. Then total wealth is $100 and the average investor's equity allocation is 50%. Suppose the average investor decides that he wants an equity allocation of 60%. Then stocks must go up until they represent 60% of the total market. This means that stocks must rise from $50 to $75. The stock market rises 50%. This may make investors so optimistic about the stock market that they decide stocks should be 75% of their portfolios. This requires a stock market worth $150. Stocks are now up another 100%, for a total of 200% (You did catch that 50% plus 100% equals 200%, didn't you?).

At some point, investors' are satisfied with their stock allocation, and the stock market stops rising. Then, the average investor may decide the action is over. He may try to enjoy his newfound wealth, say by selling some of his stock to buy a bigger house. Put more precisely, the average investor may decide to reduce his equity allocation proportion to 60% from 75%. The stock market then drops, instantly, from $150 to $75, a decline of 50%. This happens before the average investor can sell his stock. He doesn't even get to buy his house.

Counting Ballots

2006-06-08T23:19:00.000-04:00

One often hears that the one-person-one-vote principle must prevail. Presumably, the reason is that it is supposed to assure a final tally consistent with voters' choices.

The assumption implicit in the one-person-one-vote principle is that including more ballots in the count increases the accuracy of the final proportion of votes assigned to each candidate. This is true for one unbiased counting process. However, actual counting processes usually are biased even if they are impartial. Combining the results of two impartial counting processes having significantly different error rates can reduce accuracy relative to using only the results from the process with the lowest error rate. For example, reasonable assumptions imply that adding the results of a hand count of machine rejected ballots to the results of a machine count reduces accuracy.

In all likelihood, applying the one-person-one-vote rule rigidly will work against what it was designed to achieve.

What could the one-person-one-vote principle have been intended to achieve? Probably, a result that is consistent with voter's choices. If so, then the appropriate goal should be to count ballots only if doing so increases the accuracy of the final proportion of votes assigned to each candidate. Counting all ballots is not usually consistent with this goal.

Here is an example (albeit extreme) that proves the point. Suppose an election is held to choose one of two candidates and:

¨ 6,000,000 people vote.

¨ Machines count 5,999,000 of the ballots.

¨ People count 1,000 of the ballots.

¨ The proportion of the votes for each candidate is the same for the machine and people counted ballots.

¨ Machines make errors at the rate of one per trillion ballots.

¨ People make errors at the rate of one per two ballots.

For all practical purposes, the machine count will be completely accurate. The error in the counted proportion of the votes for each candidate is far less for the machine count taken alone than for a combined machine-people count. The people count just adds noise. It is best not to include the people count in the results.

The previous example overstates the accuracy of machines relative to people. The next example probably understates it. If so, the truth is more discouraging than portrayed.

¨ 450,000 people vote.

¨ Machines count 405,000 of the ballots.

¨ People count 45,000 of the ballots.

¨ The proportion of the votes for each candidate is the same for the machine and people counted ballots.

¨ Machines make errors at the rate of one in a thousand.

¨ People make errors at the rate of one in a hundred.

¨ The true vote is 65/35 for candidate A over candidate B.

The machine determined proportion of votes for each candidate has a typical error (root mean square error, for the techies) of 0.000608. The corresponding figure for the people count is 0.00607 (898% greater than for the machine count). The figure for the combined count is 0.00115 (89% greater than for the machine count alone).

An unbiased counting process is one where votes assigned in error are assigned to each candidate with a probability equal to his true proportion of the vote. For example, suppose Candidates A and B received 65% and 35% of the votes, respectively. Then when an unbiased counting process makes an error, the probabilities of Candidates A and B being assigned the vote are 65% and 35%, respectively.

Unbiased counting processes are desirable. However, for all practical purposes, they do not exist. For example, as shown below, an honest count generally is biased.

An impartial ballot counting process is one that is blind to the candidates. Counting errors occur at the same rate for each candidate and each candidate has an equal chance that the vote will be assigned to him.

According to this definition, a typical machine or honest person can be considered an impartial counter.

Impartial counting processes are feasible, at least approximately. However, as shown below, they are virtually always biased.

Any counting process assigns a proportion of the ballots to each candidate. Counting errors cause the assigned proportion to differ from the true proportions (the will of the voters). A counting process is unbiased if the expected error in the assigned proportions is zero. It is biased if the expected error in the assigned proportions is not zero. Bias is defined as the expected error in the assigned proportions.

Consider an impartial machine that is so poorly functioning that it errs on every ballot. Then it assigns about 50% of the ballots to candidate A and the other 50% to candidate B. There are four possible outcomes.

¨ A ballot marked for candidate A is assigned to candidate A.

¨ A ballot marked for candidate B is assigned to candidate B.

¨ A ballot marked for candidate A is assigned to candidate B.

¨ A ballot marked for candidate B is assigned to candidate A.

If each candidate truly has 50% of the votes, then these outcomes are equally likely. Consequently, the expected number of net votes received by candidate A due to machine error is 0, and the counting process is unbiased. Nevertheless, the likelihood that the true vote in any election will be perfectly equally divided among the candidates is essentially zero.

If candidate A truly has 100% of the votes, then these outcomes are not equally likely. The second and fourth outcomes are impossible. The first and third outcomes each occur about 50% of the time. Each candidate will be assigned about 50% of the votes. Candidate A, who received 100% of the true votes will tally about 50% of them. Candidate B, who received 0% of the true votes also will tally about 50% of them. The bias is 50% in favor of candidate B.

The second example illustrates a fundamental fact. To the extent an impartial machine makes mistakes, the expected result is bias in favor of the underdog. A person can be thought of as an unusually error prone machine. Thus, impartial hand counts are particularly biased when the true vote favors one candidate.

Other things equal, an impartial counting process's bias is large to the extent one candidate is favored over another. Thus, a recount of ballots already counted should, on average, show a net gain for the underdog if the recounting process has a higher error rate than the original counting process and both counting processes are impartial. Arguably, hand recounts of ballots already counted by machine that increase the winner's margin are evidence against impartiality.
To the extent that voters truly favor one candidate over another, it is likely that this kind of bias will overwhelm other sources of impartial counting error. In the second example, the bias in the machine count proportion is 0.000600 in favor of candidate B and that in the people count proportion is 0.00600 in favor of candidate B. The bias in the machine-person count is 0.001140, about 90% greater than for the machine count alone. All three bias figures are almost 100% of the corresponding total typical errors.

Impartial counting process errors tend to cluster around the bias. The error standard deviation is a measure of the typical difference between the proportionate error and the proportionate bias. In the second example, the error standard deviations for the machine count, person count, and machine-person count are 0.0000993, 0.000938, and 0.000130, respectively. The machine-person count figure is about 31% greater than for the machine count.

The total typical error due to both the bias and the clustering of errors around the bias is measured by the root-mean-square error, or RMS for short. This is the measure of counting process error used in the second example.

All impartial recounts simply replace one error series with another. This makes it possible to convert a loss to a win. Thus, the underdog benefits from any impartial recount, complete or partial. Impartial counting of representative ballots not previously counted also helps the underdog, for the same reason.

The higher the recounting process's error rate, the more the underdog is helped. Suppose the recounting process's error rate is higher than that for the original counting process. Then the bias in favor of the underdog is increased. The typical cumulative error also is increased. A recounting process with the highest feasible error rate maximizes the probability of a net gain for the underdog large enough to win. Replacing a machine count with a hand count is an example of this.

Think of the proportion of the ballots assigned to the underdog after a count as a stock price. Then the underdog's situation is akin to holding an out of the money call option that has just expired. This call option is worthless. An impartial recount will result in a new proportion for the underdog, either higher or lower. This change is like a stock price change. Allowing the recount is like extending the call option's life. It adds value. Allowing recounts is equivalent to forcing the candidate who is ahead to give a free call option to the underdog.

The proportion of all uncounted ballots representing votes for the underdog should be about the same as for the counted ballots. However, it is easy to find localities where uncounted ballots particularly favor the underdog. Counting only or predominantly these ballots introduces unusually large bias; hence is particularly likely to convert a loss to a win. This practice is equivalent to an error process that is not blind to the candidates, hence does not satisfy the criteria for impartiality.

Just Wondering

2006-06-08T22:55:00.000-04:00

Is a big US trade deficit really bad? Are foreign workers willing to work for low wages really unfairly stealing away US jobs?

Doesn’t a US trade deficit imply that we are buying more foreign goods than foreigners are buying US goods? Why is it a bad thing when foreigners are sending us more valuable stuff than we are sending them? It sounds like a good deal for us.

Wouldn't it be even better if we didn't have to send foreigners anything in return for their goods? That would mean that we were getting their goods for free. It would also make our trade deficit bigger.

If foreigners decide to exchange their dollars for US goods, doesn’t that reduce our trade deficit by making us work for them?

Are foreign workers who receive low wages being taken advantage of? Is it immoral to buy goods made with cheap foreign labor? What if foreign workers are better off with these jobs than without them?

It must be that foreign workers are better off with jobs exported from the US. Otherwise, they wouldn’t take them. Does fairness to foreign workers require not providing them with jobs that they want and that make them better off?

Is such outsourcing really unfair, even if some displaced US workers end up with lower paying jobs? Suppose these US workers, perhaps through political pressure, have been preventing firms from using cheaper foreign labor. Isn’t the fair value of their labor what foreign workers charge? In this case, aren’t domestic workers forcing US consumers to pay more than fair value for their labor and for the goods produced with it? Isn’t this coercion and theft? Isn’t it disingenuous to argue that fairness requires that coercion and theft be allowed to continue? Doesn’t fairness require that those who steal return to their victims what was stolen and that those who would steal be prevented from doing so?