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.
Saturday, July 29, 2006
Wednesday, July 26, 2006
Tradeoffs: Subsidized housing is a waste of money
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.
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.
Tuesday, July 25, 2006
Freakonomics author Steven Levitt: Incompetent? Unethical?
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.
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.
Monday, July 24, 2006
STATS on PCBs in salmon: The media, activists, and others are wrong again
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.
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
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.
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 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.
Sunday, July 16, 2006
The Miami Herald's bad logic, bad statistics, and possible contribution to a higher death rate
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.
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.
Friday, July 14, 2006
Tradeoffs: Walter E. Williams knows how to spot them
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?
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?
Wednesday, July 12, 2006
Why investment managers' performance tends to be disappointing after they are hired
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.
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.
Tuesday, July 11, 2006
Anti-gun academics cannot be trusted
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.
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.
Sunday, July 09, 2006
Hawala money laundering
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.
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
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?
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?
Friday, July 07, 2006
A Wall Street Journal statistical oops
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.
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.
Thursday, July 06, 2006
Personal observations about handgun sights
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.
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
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.
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.
Wednesday, July 05, 2006
Tradeoffs: The Euorpean Parliament's green tax
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.
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.
Tuesday, July 04, 2006
Tradeoffs: Guns
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
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).
Sunday, July 02, 2006
Global warming: Are we the enemy?
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.
http://www.opinionjournal.com/extra/?id=110008597
Enjoy.
Tradeoffs: Wearing helmets
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.
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.
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