Friday, July 31, 2009

Paul Krugman is nuts

When a guy that smart says things so stupid, there's only one explanation: insanity. In his latest piece he flips the script and claims that government is preventing the private market from destroying health care. From the horse's mouth:
They don’t understand, in particular, that getting the government involved in health care wouldn’t be a radical step: the government is already deeply involved, even in private insurance. And that government involvement is the only reason our system works at all.
Here's an obvious question, which came first, a screwed up system or government involvement? I don't know, but when has government done anything well? To Mr. Krugman everything the government does is de facto good and everything the private sector does is bad. The madness continues:
Yet private markets for health insurance, left to their own devices, work very badly: insurers deny as many claims as possible, and they also try to avoid covering people who are likely to need care. Horror stories are legion: the insurance company that refused to pay for urgently needed cancer surgery because of questions about the patient’s acne treatment; the healthy young woman denied coverage because she briefly saw a psychologist after breaking up with her boyfriend.
Deny as many claims as possible? Is their any truth to this argument, no. Just his ludicrous assertion. If insurance companies are denying everybody and their mother then why do people get any insurance in the first place? If I know I am not going to get covered in my time of need then why would I or anyone else purchase it? You wouldn't. The fact that people purchase it means they must get paid out. It is simply disingenuous to claim that insurers make their money by stiffing their customers. It is apparent that this is the view he takes for all profit making enterprises. Not that they exchange value for value, but one party robs the other party.

Horror stories are legion? Yet another fatuous claim with no evidence to support it. He discredits this later with:
Still, most Americans do have health insurance, and are reasonably satisfied with it. How is that possible, when insurance markets work so badly? The answer is government intervention.
How can those same Americans who have such bad experiences be satisfied?

Avoid covering people who are likely to need care? Well, duh! Here's some reality, people who are likely to need care shouldn't get insurance. Insurance is used to mitigate rare catastrophic events. Not likely events. If we want to subsidize the care of people who already have conditions, then do it! Don't blame insurance companies for this. Either Mr. Krugman fundamentally doesn't understand the concept of insurance or he is pushing his agenda (I vote for the latter). He can read up on insurance here. Wait, I am receiving some news folks, apparently he does understand the concept of insurance.
The key thing you need to know about health care is that it depends crucially on insurance. You don’t know when or whether you’ll need treatment — but if you do, treatment can be extremely expensive, well beyond what most people can pay out of pocket. Triple coronary bypasses, not routine doctor’s visits, are where the real money is, so insurance is essential.
You don't know when you'll need treatment? Then why lambaste insurance companies for refusing to insure people who do know that they'll need treatment?

Here's another gem by Mr. Krugman:
Still, most Americans under 65 do have some form of private insurance. The vast majority, however, don’t buy it directly: they get it through their employers. There’s a big tax advantage to doing it that way, since employer contributions to health care aren’t considered taxable income. But to get that tax advantage employers have to follow a number of rules; roughly speaking, they can’t discriminate based on pre-existing medical conditions or restrict benefits to highly paid employees.
He says this (I assume with a straight face, his mind is obviously in knots) as if employer paid health insurance was by design. Uh, no. It was created as a work around to wage controls imposed by...government! The employer system we have today is one of the reasons our system is such a mess and he has the audacity to claim this as a good thing. I forgot, government inadvertently did it, so it must have been divine intervention.

Restrict benefits to highly paid employees. Stop the train folks. How many Nobel's does it take not to be an idiot? Apparently more than one. Regardless of who gets health care from the employer, there is only one person who pays for it? If you guessed the employee go to the head of the class. Any benefit the company gives you is less money they would have given you. There is absolutely no reason for a company to discriminate any employee because the company doesn't pay for the coverage in the first place. You do. This whole argument by Mr. Krugman is a result of his psychologically entrenched class warfare argument that has no basis in reality.

Here's the last bit of insanity (before my head explodes):
Right-wing opponents of reform would have you believe that President Obama is a wild-eyed socialist, attacking the free market. But unregulated markets don’t work for health care — never have, never will.
Now Mr. Obama basically proposes using additional regulation and subsidies to make decent insurance available to all of us. That’s not radical; it’s as American as, well, Medicare.
Why don't free markets work in health care? Because people want services that they don't have to pay for. That doesn't work in free markets. It doesn't work in socialist utopias. It doesn't even work in the Communist Republic of Obama. There is no free lunch!

Oh, by the way. A program that has been around for 40 years isn't exactly American like apple pie and baseball.

Executive Pay

How much is too much? I don't know, what I do know is that if I own a company I would pay the executives far less than they get paid. Why? Because they don't take the same risk as I do. Why doesn't this happen today? It's because shareholder's are passive investors and the manager's are able to skim off the top.

This is a classic case of dispersed costs, concentrated benefits. The manager's salary is huge, but as a fraction of earnings per share it is insignificant. When you have millions of shareholders they don't notice a fraction of a penny here and there. The manager notices all those pennies and therefore attempts to pad his compensation. Nothing wrong with the manager, doing exactly what any other sane person would do. This is not good for the company.

The solution is more concentrated ownership in companies. These people would feel all those pennies being siphoned away and would put a stop to it. Is there a cost? Yes, reduced capital formation. I think this is a beneficial trade off.

Thursday, July 30, 2009

Managers Suck

With rapt attention, I listened to Edmund Andrews explain his wonderment at the mortgage crisis. Andrews, author of the book "Busted: Life Inside the Great Mortgage Meltdown", was explaining the situation of companies who really should have known better than to give him, and others like him, a loan. In addition to devastating the borrowers, the companies went bankrupt. This got me thinking, is there something wrong with the market?

Yes and no. I think the free market is the best mechanism to create and allocate wealth. It has it's problems, but those problems stem from an even larger problem, people. Many have said it before and many will say it again, but people are not angels. Treating them as such is a recipe for disaster.

We have created a structure in this country call a publicly traded corporation. This entity is managed by people like you and me. Not saints nor sinners. They have their own concerns and they respond to incentives just like everyone else. So what happened in the mortgage crisis? Here is one possible explanation.

Executives like their big salaries and this means they don't like risk. They are typically judged by how well they do relative to their peers, other executives. Let's say there is a bubble forming and you as a really smart executive see it, what do you do? You can get out of the business, right? This sounds perfectly rational, but it's not. Even though you know it's a bubble, you don't know when it will burst. Let's say you get out of the business and the business continues to...bubble. At this point you are doing worse compared to your peers and you are probably going to be out of a job soon. The logical thing to do is to match what your peers do even if you know it is the wrong thing to do.

Look at it this way, when the bubble is forming the executive is in a no win situation (not really no win for him because he is compensated quite generously) with regards to his options. He can, to his own detriment, do the "right" thing for the long term success of the company. Who in their right mind would do that? Not you and your downward glare. It's human nature and only saints would be that self sacrificial. This explains why saints are so special and fiduciary responsibility such a joke.

The only solution to the problem is to change the structure and that means putting shareholders more in charge of the companies they supposedly own and knocking managers down a peg or two. Only in a backwards entity known as a public corporation are managers little gods and shareholders putty in their hands.

Tuesday, July 28, 2009

Prices ARE arbitrary

In "Predictably Irrational" the author talks about how a price can be anchored to an arbitrary number. He sets up experiments where he suggests a random number (your social security number for instance) and then has you assign a price to some object. The astonishing effect (you are meant to be astonished) is that the price people assign is influenced by the random number. Proof positive that people are irrational and prices arbitrary.

He is right, prices are arbitrary, but they are not irrational. Prices are the expression of our individual preferences and those preferences are arbitrary. At it's root all economic activity consists of bartering, i.e. trading. I have something you want and you have something I want. We then negotiate a certain "price", a quantity of one for the other, and trade. There is nothing absolute in this interaction, no set "price". The value I place on the items I am trading is completely arbitrary. Someone else may have totally different preferences and negotiate a completely different "price". In fact, in that simple example both parties value the traded items differently. There is nothing irrational about it.

We go to the store and look at prices and think that those prices reflect some underlying value. Not true. Value is in the eye of the beholder. There is no such thing as an absolute value of anything. Just individual preferences expressed in the form of actions. Not all prices reflect our individual preferences. I won't go and buy a Mercedes for the price charged. Does it mean it is overpriced? Yes and no. It is overpriced to me because I won't pay that much, but someone else will.

Individuals differ in their preferences. Prices reflect aggregated preferences. This means that not all prices will reflect the value that people place on those objects. Some will be high, some will be low. None will be irrational in any meaningful sense.

Another thing to consider is that our preferences are not entirely consistent. Can I say with surety how much an apple is worth to me? What would I give for an apple today, tomorrow, next week? Maybe my circumstances change, maybe I become sick, is the apple worth the same in those situations? We don't know ourselves and our preferences as well as we think. Next time you go to purchase a new flat screen television just try and figure out exactly how many apples it is worth to you?

Monday, July 27, 2009

That didn't take long

Yin and Yang, good and evil, the New York Times and sanity. In a rare moment the NY Times displays a clear voice of reason. They are dismayed at bi-partisan congressional attempts to stop the closing of auto dealerships for the formerly big two.
The White House is warning that the measure threatens the automakers’ hope for turnaround and endangers repayment of the government bailout loans. The legislation is also establishing a terrible precedent. What will the House try to micro-manage next? A Capitol prod to revive whitewall tires? Or inscribe patriotic slogans on front grilles?
I applaud their dismay but question their sanity. How many years, er...months did it take for this to happen? Anyone with an ounce of common sense saw this a mile away. For some reason the NY Times and their ilk continue to believe that "their" people are incorruptible despite insurmountable evidence to the contrary. Insanity, is the NY Times astonishment of this exercise in political expediency.

Wisdom of the crowds

In Today's Wall Street Journal the new President of Honduras lays out the details of recent events. The fact that the former President, Mr. Zelaya, is a scum bag is pretty clear. What should alarm everyone is that this guy was elected into office (so was Hitler but I digress). There was no chicanery, no deceit, only unfaithful promises made by all seasoned politicians. When the rationale for government control is the ineptitude of the governed, why should that ineptitude be trusted to elect the governers?

Friday, July 24, 2009

Why should it be easy?

While I rail against the apathy of investors, the NY Times wants to reward the apathy of voters. So in their latest editorial they moan and groan about the lackluster voter registration in this Country.
The registration rates ranged from 100 percent in Argentina and 97 percent in Belize to 68 percent in the United States. That 68 percent reflects poorly on American democracy. To live up to the ideal of the founders of a nation governed with the consent of the governed, the United States should aspire to get as close to full registration of eligible voters as possible.
Consent of the governed, how about active participation of the governed! I am a lazy guy and last I remember, registering to vote was remarkably simple. I didn't travel ten miles, in the snow, uphill both ways, and without a jacket to do it.

Apparently sacrifice is fine for the war on terror, the environment, and health care but ask a person to go to the secretary state and register, for shame. Worship to blind democracy is not a virtue. An active participatory democracy is what this country needs. Participation requires effort. It requires that people inform themselves on the issues. It requires that people have a stake in the outcome. In sum, it requires sacrifice. This country asks very little of Her citizens. Unfortunately, the NY Times is asking for even less.

Raise the minimum wage higher!

According to the NY Times, the minimum wage isn't high enough. I say they aren't bold enough. Let's increase the minimum wage to $50 per hour. Presto chango, poverty has been ended, what a country!

Very Good WSJ Op-ed on the Health Care Debate

From Today's WSJ:

President Obama gave up yesterday on health-care votes in Congress before the August recess, as his approval rating on the issue sinks below 50% and Democrats get the jimmy legs. The numbers will only get worse if he insists on bull-rushing a government takeover on a partisan vote in the fall. For the sake of the country, not to mention the Obama Presidency, we’d like to suggest a better path to reform that could get Republican votes.

The irony is that pretty much everyone in Washington agrees that the system needs improvement—and the double irony is that the basis for a major reform that combines ideas from both parties already exists. Yet Mr. Obama has delegated health care to left-wing committee chairmen in Congress, much as he did on cap and tax and the stimulus. While a less rushed, less divisive compromise would anger the left, it would also guarantee that a bill passes and would be far more durable.


So what might a compromise look like? For all the political fuss, the primary Democratic goal of covering the uninsured is not some insurmountable problem. About 25% or so are probably already eligible for public programs like Medicaid but haven’t enrolled. Another quarter fall in the top half of the income distribution and are either between jobs or could afford to buy coverage on their own. Those facing genuine hardships number far fewer than the 47 million figure tossed about, and the easiest way to help this group is to provide some kind of credit to those who buy private insurance outside the workplace.

The tax code already allows those who are insured through their employers to exclude the value of those plans from income, and if the government is going to subsidize health insurance, this bias for one particular type of coverage is irrational. The House Republican health plan extends a refundable and “advanceable” tax credit, which is basically an upfront cash payment. A plan released under the unlikely auspices of Tom Daschle and Bob Dole would do much the same thing.

Both Daschle-Dole and the House GOP would create state or regional marketplaces where individuals could shop for coverage and where insurers would compete to offer plans with the mix of benefits that consumers find most valuable. Above-baseline spending would ideally be paid out of pocket or from a health savings account. The Medicare prescription drug program has kept costs well below budget using such market-based mechanisms, though in this case individuals would buy insurance with tax-advantaged dollars, instead of picking from a menu of entitlement options.

Senate Finance Democrats and Mr. Obama also endorse the exchange concept, but with more public-utility-like regulation, rigid mandates and a government-run plan that would subsidize coverage and pay doctors and hospitals submarket rates. These are bad ideas in their own right, but none of them will change the incentives to purchase higher-value medicine. Our current blend of low-deductible, low-copayment insurance (really pre-paid health care) and “free” public programs means that no one has any stake in controlling costs. Even limited cost-sharing has a large effect, as White House deputy economic director Jason Furman used to argue before he joined Team Obama.

Tax credits are pricey, but they could easily be made deficit-neutral by capping the employer-sponsored exclusion. Literally every serious health economist or expert in the country recommends doing so. The majority Democrats could steal a good Republican idea, much like President Clinton did with welfare reform in 1996. A cap on the open-ended exclusion would also change incentives, given that today the more people spend on health, the more subsidies they receive. And it would avoid disrupting the current system, though people could gradually take advantage of the insurance exchanges if they chose.

The Administration also backs numerous measures to reduce waste and pare back medical spending, such as health information technology, research on medical outcomes and more prevention. These items are by definition speculative, but all of them could be tried without adding millions of new people to the government rolls. If they don’t pan out, taxpayers are no worse off. Besides, U.S. health care is hardly the feral marketplace of liberal caricature; federal and other public spending already accounts for some 46%. If the Administration really has come up with “game changers” that the private sector hasn’t, Medicare is already a large enough laboratory.

We should add that this kind of compromise is far from our policy ideal. We prefer Wisconsin Republican Paul Ryan’s plan to capitate Medicare payments and John McCain’s campaign plan (not to mention Senator Ron Wyden’s Democratic voice in the wilderness) to replace the current tax exclusion with more individual control over the purchase of medical services. But we’ll gladly settle for second best if we can avoid the terrible harm that the current House and Senate bills would do to the country.


Mr. Obama is backing himself into a corner by insisting on the false political dilemma of either doing nothing or putting U.S. health care into government hock. This leaves him trying to pick off one or two Republicans to give a facade of bipartisanship and then ramming government control into law; or else failing to pass anything and damaging his Presidency.

This political leap of bad faith is already scaring moderates in Mr. Obama’s own party, as well as voters concerned about the tax increases and medical rationing that it will require. There is a middle way to success, Mr. President, but it means pursuing policies that are true to your campaign rhetoric about bipartisanship rather than to the liberal dream of government-run health care.

Wednesday, July 22, 2009

Investors Suck

My previous post, "Dispersed Costs, Concentrated Benefits", was quite a failure. But like many aspects of my life I will push on to greater failure.

I think there is a problem with corporations and the first aspect of that problem I would like to address has to do with investors in those corporations. Value investors say that you should buy a stock as if you were buying a company such as a hardware shop. That's all well and good but there is a huge difference. Let's say I buy a stock, can I walk in and talk to the managers and ask to see the books? If we go to Adam's Hardware Shop then the answer is a resounding yes. I walk in the door and everyone knows my name and I can do pretty much whatever I want. How about with the company whose stock you own? Absolutely not! Think about how backward this is. In both cases you supposedly "own" the company but in one case you have very very little say about the company. In fact you can't even get information until the managers of the company WHO WORK FOR YOU allow you to have that information. Imagine walking into your hardware store and asking the manager for the books and being told, "You'll have to wait 3 months when we come out with our quarterly report." Asides from the heart attack you would have, the manager would be out of a job that day.

The second problem with investors is that they are by their nature passive because of the most holy god of investing, diversification. What is diversification? Some say a means of spreading risk, I say it means spreading apathy. The logic of diversification is that by holding lots of stocks, one time events both good and bad can cancel each other out thereby reducing your overall risk. While mathematically this makes a ton of sense it ignores the effects on investors. First of all, a person can certainly not manage many companies as well as they could manage one. Your ability to keep track of what is going on must necessarily diminish with the more companies you own. This means that you are relying more and more on someone who has different incentives than you (the managers) and hence your monitoring costs must rise correspondingly. Second, if you are a particularly smart chap you lose your influence when you spread yourself around. When you diversify you become a smaller player and any talent you have is wasted. Finally, it provides a false sense of security to the average investor. Being scared is great motivation to make sure things go right with the company you own. Having a mindset that the good will cancel out the bad means you are not vigilant in rooting out the bad.

The last problem I will mention that contributes to the apathy of the investor, limited liability. I don't know the full history of this so I can only speculate. As an investor you can only lose what you put in. This sounds like a good idea because it facilitates the formation of capital, i.e. making it easier to raise money. There is a trade off in that once again the "owner" is not as vigilant in making sure that the managers run the company right. If the owners were on the hook for the company, this would reduce capital formation but definitely incentivize owners to be more cautious with the operation of their companies.

We have witnessed financial companies blowing up by lending money in remarkably stupid ways. The owners of these companies, the stockholders, have lost fortunes. It is easy to blame the executives but in reality the incentive structure for them is not aligned with the owners and their behavior is perfectly rational from their point of view. We need to rethink the benefits of publicly traded corporations and consider some reforms.

Tuesday, July 21, 2009

David Brooks is no conservative

From Mr. Brooks column in the NY Times:
Machiavelli said a leader should be feared as well as loved. Obama is loved by the Democratic chairmen, but he is not feared. On health care, Obama has emphasized cost control. The chairmen flouted his priorities because they don’t fear him. On cap and trade, Obama campaigned against giving away pollution offsets. The chairmen wrote their bill to do precisely that because they don’t fear him. On taxes, Obama promised that top tax rates would not go above Clinton-era levels. The chairmen flouted that promise because they don’t fear him.
Mr. Brooks has got it all wrong. In his admiration for Obama (between the lines folks) he paints Mr. Obama as a helpless victim of the other overreaching liberals in congress. No Mr. Brooks, the policies of congress are EXACTLY in line with what president Obama believes. Hear that silence, it is the lack of any criticism from Obama.

I can't believe what I am reading

This is what the New York Times thinks about the law:
At times, she too willingly ceded ground to her conservative questioners. We wish she had spoken out forthrightly in favor of empathy, a quality President Obama has said he is looking for in his judicial nominees. We would have liked to hear her boldly defend the idea of the Constitution as a living document, one that changes with the times. And we would have preferred if she had used the hearings to explain to the public that the much-mentioned distinction between judges making and applying the law has little meaning.
Last I checked there are three branches of government, the executive, legislative, and judicial. The legislative makes the the law, the judicial interprets the law, and the executive well, executes the law. At what point did this change? Now the judicial makes law? Also how does the constitution change? I say the constitution has changed to mean I am king. That makes sense right. The plain meaning of a document does not change. If it does then the document has no meaning. Just imagine you sign a lease for an apartment and at the end of the lease you can't get your security deposit back because the law has evolved during that time. That makes about as much sense as a living constitution. If you subscribe to a living constitution at least admit that your aim is to impose your will. I can respect honesty.

Robbing Peter to pay Paul

Can anyone tell me a coherent argument that government spending stimulates the economy? In today's Wall Street Journal I read about California closing it's $26 billion budget gap, a good thing right? Apparently not:
Economists said the spending cuts will bruise a California economy already slammed by rising unemployment and foreclosure rates. "It will certainly offset a fraction of the federal-stimulus effect this fall," said Roger Noll, a professor emeritus of economics at Stanford University. "That will mean the depth and duration of the recession [in California] will both be bigger than otherwise would've been the case," he said.
I am sure this guy is way smarter than me, but stupid is as stupid says. This increasingly repeated mantra that spending is good has got to stop. We have spent and spent and spent and no good has come of it. At what point will the "faithful" give up their insane beliefs? Once again we have someone concocting an alternative theory of the present. How does he know what would have been the case? If he and all these other brilliant people advocating spending knew, we wouldn't be in the situation we are in.

Think about it, for the government to spend money they have to first take it from someone else. How does taking one dollar from Peter and giving it to Paul create anything? It doesn't. Peter would have spent the money just as Paul would have spent the money. What else would Peter have done with it? The only thing accomplished in this transfer is the added inefficiency of government. That's it and I dare anyone to show how this is not the case.

Monday, July 20, 2009

On a related note:

Check out this link:

Dispersed Costs, Concentrated Benefits

Bums are brilliant economists! They sit on the corner and beg for change from all passersby. And while they are not millionaires, they apparently get by. Why are these guys so smart? They only ask for change and over the course of a day, that change adds up.

Actors apparently learned economics from bums (no insult to bums intended). The oodles of money that actors make is a result of millions of people giving up a few dollars to see a movie. Once again, the individual cost is small but it eventually adds up.

We have a concept; lots and lots of small amounts add up to big amounts. Not earth shattering.

Government is a collector of small amounts and those small amounts add up to a lot of money. How does government decide how to spend that money? Well, since government apparently also learned economics from bums there must be a parallel. I got it, lobbyists are the bums of government.

The simplistic answer then, is to get rid of lobbyists. This won't happen and to see why let's revisit the economics of the bum. Most of us want him to put the money to good use, but no one will follow up to ensure that their quarter is spent wisely. The bum on the other hand has collected much more than a quarter. He would fight you a lot harder for the right to waste his money than you would to stop him.

Our lobbyists are no different. The passersby are the taxpayers and each taxpayer pays a relatively small amount. The lobbyist on the other hand is vying for a say on how to spend a large amount of money. Who do you think will fight harder, the individual taxpayer who is out a few bucks or the lobbyist who stands to make millions. We know the answer, which is why DC is larded with lobbyists.

There is no way to reform the lobbyists. They are a consequence of the incentive structure and the only way to get rid of them is to change the structure. Absent that, as the sun rises, the bums will come to Washington.

Friday, July 17, 2009

What is insurance?

From Wikipedia:
Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium, and can be thought of as a guaranteed small loss to prevent a large, possibly devastating loss. (emphasis mine)
In today's health care debate there is a lot of talk about lowering the cost of insurance so I thought we should first understand what insurance is. Let's say there is a 1 in a 1000 chance of something bad happening and it will cost you $1000 dollars if it happens. Today, what does that cost you? Well today it hasn't happened so it shouldn't cost you anything, right? Wrong! In economic terms the cost to you is $1. This is obtained by multiplying the cost of something bad ($1000) and the chance of it happening (.001).

We have a problem. Clearly the odds of the event happening are very small and if it doesn't happen, you are out a dollar for nothing in return. If it does happen then your dollar is also pretty useless. How is this problem solved? Insurance! As stated in Wikipedia, you pay a small amount in order to have peace of mind in case the bad event happens. This works because in aggregate the likelihood of the event nears 100% and the total costs can be accurately predicted. So if we have 1000 people then it is almost guaranteed that 1 person will have to pay $1000 dollars and the rest will not. This means that for an insurance company to break even it must charge $1 dollar to every person.

There are few caveats. First, insurance cannot be used for events that have already happened. If we have 1001 people, 1000 of which have not had the bad event happen and 1 that has, then what is the expected cost? $2000 ($1000 for everyone else and $1000 for that 1 person). We could solve this problem two ways: deny insurance to the unfortunate person or raise the premium on everyone else. The first case is difficult in that it seems very cruel and it is. However it is nature that is cruel and not us. The second case will inevitably make insurance unaffordable because the unfortunate person is being subsidized by everyone else. Remember, the economic cost to everyone else is really only $1, so the extra dollar does not have value for them. If everyone waited until they had a problem and then wanted insurance, they are really asking society to subsidize known costs (i.e. after the event happens we know you will have to pay $1000). This is a public policy question, not an insurance question.

The second caveat is that insurance should only be used for large costs. The value you principally derive is due to the fact that you don't have a million bucks lying around to replace your house. You probably have access to a few hundred dollars so there is significantly less value as the potential losses decline. At some point the overhead of the insurance company outweighs the potential benefits.

Hopefully this clears some things up.

Wednesday, July 15, 2009

Put your money where your mouth is

I firmly believe that actions speak far louder than words and here is yet another example:
[Susan Buffet's] death at 72 forced Warren Buffett to confront how to start giving away his fortune. He settled on directing the bulk of his Berkshire Hathaway shares to the Bill and Melinda Gates Foundation. He trusted Mr. Gates, a Berkshire Hathaway board member and friend who played bridge with him. What’s more, the Gates Foundation had the infrastructure to handle a gift of such size.
Later in the article:
Warren Buffett went to Congress in November 2007 to argue in favor of the estate tax, saying it counters an unhealthy concentration of wealth.
What Mr. Buffet is saying is this: For compassionate people like him who voluntarily give their money away, private charity is superior to government aid. For those that are less compassionate (i.e. don't do what he thinks is the right thing to do) then the federal government has a duty to make them compassionate by taking their money involuntarily.

Why should we wait until people are dead to make them compassionate. Let's take Warren's money away from him while he is alive one way or the other.

Tuesday, July 14, 2009

Outstanding letter in the Wall Street Journal

Radley Balko's point about immigrants helping to make El Paso, Texas a safe city ("Notable & Quotable," July 9) is valid, but it doesn't go far enough in explaining why this might be so.

Since the publication of the 2007 CQ Press survey that labeled Detroit the nation's "most dangerous" large city, I have worked with a group trying to identify the obstacles to significant crime reduction.

El Paso, the third "safest" city in the survey, is about as poor and the people as undereducated as in Detroit. The most distinctive socioeconomic difference between El Paso and Detroit is the Texas city's far greater number of married couples as a percentage of total households: 48% versus Detroit's 24%.

Looking at the 2007 survey's 10 "safest" and 10 "most dangerous" large cities, the "safest" city, San Jose, Calif. has the highest number of married couples as a percentage of total households; the second "safest," Honolulu, has the second highest number; the third "safest," El Paso, the third highest number. The five "most dangerous" large cities have the lowest number of married couples as a percentage of total households. Today, 91,000 of Detroit's 288,000 households are headed by single females, with no husband present.

There was a time, not so long ago, when women in this predicament were called "welfare queens." In reality, they are the result of a long and lamentable national history, poor leadership at many levels and poorly conceived public policies.

These public policies have afflicted whites as well as blacks. Thus the total out-of-wedlock birth rate in 1960 of 5% had grown by 1992 to more than 30%. The figure for blacks has now reached more than two-thirds of births.

Welfare reform in the mid-1990s moved in the right direction, but much more needs to be done. Policy helped create this situation, and policy should be used with far greater focus and purpose to redress it. At a minimum, the mere contrast between El Paso and Detroit should lead policy makers to look at the issue of family structure and its influence on crime rates.

Lewis I. Dale
Grosse Pointe Farms, Mich.

Monday, July 13, 2009

Comment on Senator Kohl's opening remarks

Mr Kohl's full remarks can be found here.

A Supreme Court Justice must be able to recognize that real people, with real problems are affected by the decisions rendered by the court. They must have a connection with and an understanding of the problems that people struggle with on a daily basis. Justice, after all, may be blind, but it should not be deaf.

I guess it depends on who is struggling. I am sure that in the case of the New Haven firefighters Mr. Kohl wasn't listening to those who were denied promotion. Unfortunately on both sides of the aisle the law is twisted to support prejudices. The liberals, however, are much more egregious in this manner than the conservatives. The conservatives at least claim to follow the plain meaning of the constitution because it is, in fact, the law. The liberals don't even care what the constitution says because it doesn't fit with their view of what the law ought to be.
As Justice Thomas told us at his confirmation hearing, it is important that a justice, “can walk in the shoes of the people who are affected by what the Court does.” I believe this comment embodies what President Obama intended when he said he wanted a nominee with “an understanding of how the world works and how ordinary people live.”
Justice Thomas' comment can be interpreted (a liberality on my part) as understanding the view from the multiple parties in the case. Note that Mr. Kohl, in paraphrasing President Obama, only talks about ordinary people. It's as if only specific parties in the case have rights that need to be defended. Every party in the case, even those that are generally disliked, have the same rights. I hope my reading between the lines is inaccurate but I fear it is not.

Friday, July 10, 2009

Is it possible?

I have always wanted to touch a basketball rim but unfortunately I am very short. I used to be able to jump very high, but not high enough. That's what is called an unattainable goal. No matter how badly I wanted it, physics and biology have already decided it's not going to happen.

Politicians like to think their decree is enough to get something done. A stated goal like universal health insurance, peace on earth, or an end to poverty as we know it sounds nice. It may not be possible and we ought to consider that possibility before setting an unattainable goal.

Thursday, July 9, 2009

Altruism is dead

In school I learned something pretty interesting about opportunity cost. One of the first cases we did was about a blood bank that was dispensing contaminated blood. It turns out that this was happening due to financial incentives tied to increasing the amount of blood processed. In order to increase their pay, the workers ended up taking short cuts which lead to a higher percentage of contaminated blood. The point of the case is not that the workers are inherently dishonest, but that the new financial incentives imposed an opportunity cost for acting honestly. Before, their honesty costs them nothing, now it cost them the increased money they could get by being dishonest, "The fault, dear Brutus, is not in our stars,
But in ourselves..."

Altruism, according to Merriam-Webster, is the "unselfish regard for or devotion to the welfare of others." Well, it's really not. We all do things because they make us feel good and the NY Times is finally starting to see the light:
Perhaps this is because, as some research suggests (emphasis mine), people give in large part to feel good inside.
Every thing has a price. It just turns out that doing good often pays that price and more. That's a great thing and I for one feel pretty good about it. (selfish bastard).

Wednesday, July 8, 2009

Fiduciary Failings

Very good article from Ben Stein on Yahoo Finance:
2. By the same token, the investment advisors who guided billions into Madoff's phony accounts have to be held to account. They are required to behave according to fiduciary standards. That means they have to put the client's interest ahead of their own, do stringent investigation, and avoid even the appearance of conflict of interest. Clearly, in many, many cases, none of these requirements were met.
I am going to start collecting references to failures of regulators and others entrusted with doing the right thing. Perhaps, one day we will realize that people are severely flawed and will see that "fiduciary responsibility" is as meaningless in practice as "next time we will try harder" or "this time it will be different".

Monday, July 6, 2009

The subjunctive present

Amid attacks by Republicans claiming that the 9.5% unemployment figure proves the stimulus' failure, the Obama administration says it would have been worse.

In January, the incoming administration predicted in a white paper study that without a huge stimulus package, unemployment would reach just over 8%, and would be contained at under 8% with a stimulus package.

(When asked about this discrepancy, one of the authors of the study – Jared Bernstein, the top economic adviser to Vice President Biden – recently said that “when we made our initial estimates, that was before we had fourth-quarter results on GDP, which we later found out was contracting at an annual rate of 6 percent, far worse than we expected at that time.” The bottom line, Bernstein said, is that without the stimulus the unemployment rate “would have been between 1.5 and 2 points higher than it otherwise will be.”) (link)

Anyone can say anything but we should be skeptical. In concocting versions of what today would be like we can create many colorful stories. Had I not went to college I would have won the lottery and would be living in Hawaii right now. Right! Mr. Bernstein has no idea what would have happened had they not passed the stimulus package. Had he known, he would not have made the incorrect prediction in the first place.

Wednesday, July 1, 2009

As long as people believe in absurdities, they will continue to commit atrocities. - Voltaire

From the NYTimes:
"[Justice Ruth Bader Ginsburg] noted that New Haven’s test was flawed, and that other cities used better tests, with less racially skewed results."

The "debate" on race is a debate over truth. There are differences between races and every bit of evidence confirms this. The case of New Haven is simple in that it showed those differences in the form of a test. The "problem" is that people are unwilling to accept the truth and instead claim the test is flawed. Why? Because racially skewed results don't coincide with their idealized vision of the world.

Reality is unforgiving and no amount of wishing can change it. I wonder how much harm we have done and what atrocities we are willing to commit to continue with this absurd "debate".