26 November 2015

Among the Things to Thankful For: So Much of What is Alarming is Either Improbable or Unimportant

Exactly one year ago, the media was alarmed at the prospect of an Ebola outbreak here in the US. One of the many reasons for this alarm is that experts could NOT guarantee that an outbreak would not occur. We've now moved on to worry about WWIII, a conflict some think is doomed to start because Turkey just shot down a Russian jet. Again, experts cannot guarantee that this won't escalate. They can only say it is unlikely.

The probability of bad events - events like an ISIS attack in the US, Ebola spreading from Texas into 47 other states, oil prices spiking high enough to cripple the economy - are rarely zero. They could happen and any expert who predicts they are unlikely to happen has to acknowledge that they might. In that sliver of possibility lies so much in the way of ratings potential. What alarms us demands our attention. 

We know what is alarming. Probability and importance are harder to gauge. 

We're notoriously bad at predicting events because causation is so complex. This makes it hard to know what is important. Imagine that 18 months ago, when gas prices in the US were about $3.70, that I told you that by late November of 2015 Obama would have vetoed the Keystone Pipeline and that the US and Russia would be sending troops into Syria where a civil war had spread into surrounding regions and the ISIS fight had even been taken into Paris. If I could accurately predict all of that - something that of course I could not have done 18 months ago - what then would you predict for gas prices? Higher or lower by November of 2015? And by how much? 

It's unlikely that you would have predicted prices would fall from $3.70 to $2,18, a drop of 40%. If prices fall as much in the next two months as they did in the last two months, gas prices will be below $2,00 for the first time since the depth of the Great Recession. Nothing about the scenario I explained - vetoing more gas supply and turmoil in the Middle East - would suggest this.

As it turns out, so much of what demands our attention is either improbable or unimportant. 

Keystone Pipeline never represented more than a small fraction of oil supply and was never going to make any real difference to carbon emissions or gas prices. It was just a symbol of those things, a symbol taken seriously in many quarters in spite of the fact that it was a rounding error in the global market. We focused on it but it lacked importance. It made for good news but it didn't make much difference.

Ebola, by contrast, was important. There is a very real chance of a pandemic that kills millions in this century. But Ebola spreading across the US last year was improbable.

An ISIS attack in the US is possible but it is wildly improbable that you will die in a terrorist attack. In 2011, nearly as many Americans were killed by their own furniture as were killed by terrorists. 

It is important to remember that it is what is alarming that drives ratings, not what is probable or important. And given we experience so little of the world directly, we depend on the media to explain what is going on outside of our house or neighborhood. So what we know about the world beyond our immediate sphere is alarming but it is only occasionally important or even probable, much less real.

So among the things that you have to be thankful for today, be thankful that the world is never as bad as the media makes it out to be. Walk out into the streets or roads around your home and experience the peace there. That's reality. Be thankful for that and remember that with 7 billion people on this planet, there will always be a tragedy playing out somewhere but for now, it is not in your front yard and it is not happening to you. That might seem self-centered and selfish to some of you but if we have to wait for everyone to be happy before anyone can be happy, it'll be an impossibly long wait. Compassion doesn't have to be driven by fear and alarm. 

Rather than focus on what is alarming, focus on what is probable and important. So what's important?  You're alive now. What probable? You won't be in 50 years. You just have a relatively short amount of time to enjoy life and to make a difference. Don't get distracted from that.

25 November 2015

Consolation - a Poem by Billy Collins

After spending 22 of 44 days traveling, trips that included the Netherlands and Belgium, D.C. and Orange County, business, tourism and seeing friends, I am reveling in being home and turning off the work computer for a few days. This poem of Billy Collins' resonates.

How agreeable it is not to be touring Italy this summer,
wandering her cities and ascending her torrid hilltowns.
How much better to cruise these local, familiar streets,
fully grasping the meaning of every road sign and billboard
and all the sudden hand gestures of my compatriots.

There are no abbeys here, no crumbling frescoes or famous
domes and there is no need to memorize a succession
of kings or tour the dripping corners of a dungeon.
No need to stand around a sarcophagus, see Napoleon's
little bed on Elba, or view the bones of a saint under glass.

How much better to command the simple precinct of home
than be dwarfed by pillar, arch, and basilica.
Why hide my head in phrase books and wrinkled maps?
Why feed scenery into a hungry, one-eyes camera
eager to eat the world one monument at a time?

Instead of slouching in a café ignorant of the word for ice,
I will head down to the coffee shop and the waitress
known as Dot. I will slide into the flow of the morning
paper, all language barriers down,
rivers of idiom running freely, eggs over easy on the way.

And after breakfast, I will not have to find someone
willing to photograph me with my arm around the owner.
I will not puzzle over the bill or record in a journal
what I had to eat and how the sun came in the window.
It is enough to climb back into the car

as if it were the great car of English itself
and sounding my loud vernacular horn, speed off
down a road that will never lead to Rome, not even Bologna.

24 November 2015

Rebates - What a Concept

I would have loved to be there when they first dreamed up rebates.
"How are we going to price this?"
"We can sell it for $1,000."
"Hmm. Our market research suggests that a lot of people will back off from that. It's a little steep."
"How about $800?"
"We can make a profit on $800 but I don't know ... It would make our margins tight."
Long silence.
"What if .... and I'm just brainstorming here, so consider this before you say no .... what if we charge them $1,000 and then give them back $200?"
"You mean give them change?"
"No! Nobody has a $1,000 bill. No. We actually charge them $1,000. And then we give them $200 back."
"That way we're not just giving them a product. We're giving them MONEY!"
"Change! We're making change!"
"No! When they pay us $1,000, that's the price of the product. It's OUR money. Later, when we give back $200, it's like WE are giving THEM money. They'll love us. It's like we're paying them to buy our product. It's brilliant."
"It's change. We're making change."
"No. Listen, you're missing the point. They buy from us and we give them product AND money. Nobody else is doing this."
"Of course not. It's ridiculous."
"Is it? What if it's brilliant? What if it works?"
"You really think this will work?"
"Well, we can give it a try but I don't see how customers are going to fall for it. What will you call it?"
"Bait? You know, like when you put a little fish on the hook in order to get a big fish? We offer a little money to get more money?"
"Bait! No. That's far too obvious."
"What about rebate?"

17 November 2015

Imagine Secular Europeans Are Bombing the KKK (Possible Complications from Bombing ISIS)

In a parallel universe ....

For reasons too convoluted to recap, the KKK had captured the attention of Northern Europeans who were appalled at this terrorist organization and also saw it as an outgrowth of the culture of the American south. It wasn't just the systemic racism they saw manifest in differences in income, employment, life expectancy and incarceration rates for minorities. Compared to countries that gave generous maternity leave and offered comprehensive sex education and family planning options, the south's apparent disregard for women was offensive to these Northern Europeans.  For them, the KKK was not just a terrorist organization: it represented a natural outcome of a flawed culture.

So, the Europeans began to speak out against the barbarity of the American south, criticizing their televangelists and traditions. They sent advisers to "help" young girls to be aware of their sexual rights and to provide contraceptives and even abortions. They empowered blacks to speak out more, to protest and began to offer legal representation for poor minorities. All of this activity seemed more like agitation than progress. Southerners were a little unsettled by this. There is perhaps a Newtonian equivalent of "for every action there is an equal and opposite reaction," because the campaign from secular humanists from Northern Europe actually fueled a resurgence in "southern values." The KKK very deftly turned this energy into larger donations and more members.

Of course, the growth of the KKK made the Northern Europeans work even harder to limit them. Things escalated until finally, KKK members coming in as American tourists coordinated an attack on city centers in Brussels, Stockholm, and Copenhagen. It was tragic.

Politicians in Northern Europe debated about how best to respond to this terrorist act. To many, all of the south looked alike. Others tried to point out that wonderfully progressive and humane people lived in the American South. And even some of the people whose values seemed more aligned with the KKK than the secular humanists were still good and decent people. Not only that but the victims - the minorities and women  oppressed by the KKK -  lived there. However, to many Northern Europeans the distinction between KKK, racists, rednecks and Bubbas was unclear. Angrier angrier voices prevailed and the promise that resonated the most was to "bomb the crap out of them."

As it turns out, the bombs dropped by the Northern Europeans did, indeed, kill KKK members. And their families. And their neighbors, many of whom had once been as offended by the KKK as were the Northern Europeans.

The bombs fell on a diverse group of people. The group that rose out of the rubble, though, was quite unified in its hatred of the Northern Europeans. The bombing incensed them. The "boots on the ground" sent later in this campaign to eradicate the KKK made the Southerners feel even more threatened. Foreigners on their soil was a threat to their way of life, an invasion that offended even the most reasonable and moderate southerners.

In ways that most Americans would not have predicted before the Europeans intervened, the KKK saw a resurgence. The confederate flag, which had fallen out of favor in the last decade, became fashionable again. Even Americans from outside the south began to fly the flag as a show of solidarity with the poor folks who'd seen their homes, schools, hospitals and even children destoryed by bombs. The racism and sexism that had been losing favor became an expression of rebellion against the Northern European troops.

The Northern Europeans were a little surprised that their bombing campaign actually galvanized support for the KKK. Or, more precisely, it galvanized opposition to meddling secular socialists who had gone from threatening a way of life to threatening actual lives. Thoughtful Europeans were confused.  Sadly, it just gave more fuel to the voices who grouped all southerners - all Americans even - into the same group of incalcitrant hillbillies, terrorists who were undeserving of sympathy or negotiation.

And the fighting escalated. Who could have predicted that so much grief could follow from a sloppy definition of "them?"

13 November 2015

Facts and Furious: The Allure of the Apocalypse and Post Recession Angst

At fivethirtyeight, Ben Casselman asks what may prove this election's most important question: The Economy is Better - Why Don't Voters Believe It?

He starts with Cyndi Diercks, a 54 year old small business owner who is the leader of a local tea party group, is a multimillionaire whose business is thriving and yet angry and convinced that the federal government is making up the numbers that suggest that the Great Recession is over.

I have seen this reaction more than once on Facebook. I post a simple fact about job creation and it inspires as much vitriol as if I'd said something racist or critical of Christians. I don't even post opinion about these facts - just lay them out there like a Rorschach test. At this point, I'm curious to see what it inspires next. (I saw a quip from some comedian the other day: Who is this Rorschach and why does he keep drawing pictures of my parents fighting?)

For instance, initial unemployment claims are the lowest they've been in 40 years (save for one week in 2000).

All indications are that this economy is getting better and yet a substantial number of people remain convinced that it is not. The ability to thread the needle between the reality of the economy and the perception of the economy might determine who wins the next election. At least within the GOP primary, it doesn't seem possible to over-state the magnitude of the catastrophe that is this current recovery but even the Democrats have to be careful not to sound too pleased with economic progress.

There are so many reasons this might be so.

  • 24-7 news and the internet magnifies every injustice, outrage and bit of bad news. Even if it is imagined.
  • The Great Recession left us in a hole that has taken years to climb out of. We've mostly repaired the economy but it still has visible damage. This from the White House
    • U.S. households saw their net worth decline by more in 2008-2009 than they had in the first year of the Great Depression.  The U.S. economy lost $13 trillion in wealth, 19 percent of total wealth – about five times the percentage reduction in wealth experienced at the onset of the Great Depression.  Employment in the United States declined by 4 percent from 2008 to 2009, the same rate as from 1929 to 1930.  Fears that we were heading into a global depression were not hyperbole: all available data suggested that this was the trajectory we were on. 
      • You don't recover quickly or unscathed from something of that magnitude.
  • Also, it simply isn't expedient to admit that things are better. For the right to admit that things are better is to confess that their dire warnings about Obama's policies were wrong. For the left to admit that things are better is to confess that their dire warnings about Congress's polices and intransigence were wrong.

Or maybe it has to do with the lure of the apocalypse. The brilliant Dictionary of Obscure Sorrow has proposed a new word: Lachesism they define as the longing for the clarify of disaster.

If indeed these are the worst of times, life has a certainty clarity. Catastrophe gives us license, purpose, and the sort of nobility that the magic of boring compound interest does not. Progress is rarely made in one fell swoop. Instead, it accumulates slowly over time, making our lives 2%, 5%, 7% better every year in ways that are imperceptible any given day but are undeniable and profound over the course of a lifetime. Progress is boring in the moment. The apocalypse, by contrast, makes for great drama. Also, if things are catastrophic, what is to lose? We don't have to be careful or thoughtful. We just have to do something. Anything. And in an apocalypse, there are no experts: every opinion about the unprecedented is of equal weight, which seems the epitome of democratic thought.

Why no acknowledgement of progress? Perhaps it is because the narrative of decline is so much more captivating, and has been since medieval times when folks were convinced that life had only grown worse - was destined to grow worse - since Adam and Eve were chased out of the Garden. Catastrophe drives ratings, rallies the base, and makes the individual feel big. Take that away from people with your cold facts and risk their fury.

12 November 2015

The Four Quadrants of Politics (or, The Ratio That Makes a Political Candidate Dangerous)

There are two dimensions to a politician. One is her politics and the other is her policies. The ratio of those two determines whether she is ineffectual or beloved, dangerous or harmless.

Policies are the wonky stuff. What sort of educational reforms do the most for inner-city kids? Which educational reforms are the hardest to sell to parents? What are the best ways to lower commute times? What sort of training programs give workers the most flexibility in a dynamic economy? When should we intervene in foreign affairs and when should we stand back and watch?

If you get policy wrong, people notice. Our troops get stuck in quagmires on foreign continents. Wages stagnate. Banks need bailing out. Drug addictions rates rise.

Get policies right and everyone is convinced that they've worked magic. Home prices go up even as homelessness goes down. Businesses are more likely to form and thrive. Suicide rates drop. 401(k) accounts rise. Unemployment is low. People even make more babies.

Politics can be judged in the short-term. Your performance in a debate. The way that audiences applaud when you make a point or laugh when you crack a joke. Your poll numbers in swing states.

If you get politics wrong, you aren't much of a politician. You might get hired to work in someone's cabinet or back office but you won't be elected.

If you get politics right, you win. You head off to the state capitol or city hall or to Congress. These politicians - the ones who get politics right - are the only ones we hear from. The only way you impact policy is to be good at politics.

So with that in mind, here are the four quadrants of politicians: the dangerous and beloved, the harmless and ineffectual. Imagine a scale of one to ten for politics (ten, you win any election you enter, 1, even your own mother hesitates to endorse you) and a scale of one to ten for policy (ten, your initiatives improve prosperity and quality of life even for people they are not intended for and one, your initiatives ruin the lives of people you hadn't even considered).
If your ratio of political skill to policy skill is 10 (10 / 1 = 10), you are dangerous. You know how to win. You know how to rally a nation. Yet your actual policy ideas are disastrous.

If your ratio of political skill to policy skill is 0.1 (1 / 10 = 0.1), you are ineffectual. You'll never get into office and no one much knows your name.

The trick for voters is to make sure that the ratio is close to 1. If you are bad at politics and policy (1 / 1 = 1), you are harmless, expounding on your political philosophy to some patient waitress who certainly hopes there is tip waiting at the end of your rant. If you are great at politics AND policy (10 / 10 = 1), you get into office and make magic happen.

Of course the problem is that there is no policy equivalent to polls. We can tell at a glance that Donald Trump is more electable than Bobby Jindal. It's harder to tell that Donald's policies are less credible than John Kasich's.

Still, this is not an impossible problem. It would be fascinating to have the equivalent to a poll number for policy: scores from policy experts for various policy proposals. Almost like a Consumer Report to evaluate policies.

Meanwhile, we'll have to plot the candidates on our own and just hope that this year we don't let the politics to policy ratio drift too far above one.

10 November 2015

Ted Cruz Promises a Country of Prosperity, Hope, and Freedom from Math

 What new ideas did we bring? I always give a one-word answer: arithmetic.
- Bill Clinton, only president since 1949 to preside over a budget surplus

Evidence is not all that compelling. - Daniel Kahneman

In tonight's debate, we heard Rand Paul, Marco Rubio, Ted Cruz, and Ben Carson make promises to radically cut taxes. And balance the budget.

Ted Cruz's promised tax cut might be the most interesting to examine. Cruz promises a flat tax of 10%, but only on income over the first $36,000. So what does that mean for tax revenue and what does that imply about budget cuts?

Well, social security reported that nearly 100,000,00 people made $39,999 or less a year in 2014. That's nearly $1.7 trillion in wages - or GDP - that Cruz would not tax at all. Additionally, there are another 58,750,986 wage earners who earn more than $40,000. They, too, would get to deduct the first $36,000 in income before they started counting the amount that would need to be taxed at 10%. So that's another $2.1 trillion in wages that would be tax exempt.

So, only $3.3 trillion of the $7 trillion in wages would be taxed. At 10%. That makes for $330 billion in revenue.

Now, let's assume that all the rest of GDP - the other $10 trillion made up of profits, rental incomes, dividends, etc.  - were also taxed at Ted Cruz's 10%, offering no deductions for businesses or investors. So, that yields $1 trillion more in revenues.

With Cruz's tax plan, total federal revenue would total $1.3 trillion. 

This suggests a problem. Federal spending was roughly $3.5 trillion in 2014. 

So, if Cruz will balance the budget, he's going to cut $2.2 trillion from the budget. That's 63%. Let's put aside the fact that he'd instantly reduce GDP by 13%. Let's just focus on how a person might cut the budget enough to make this math work.

One approach is just to cut from the bottom up. 

"All other" includes silly things like federal courts, FBI, Treasury Department, IRS, Secret Service, etc. We could try living without money or courts. That's $63 billion and we need to cut another $2.137 trillion.

So let's close all of our foreign embassies. Those governments can email us.

Cut all research into cures for cancer and heart disease and ... well, any research at all.

Then we cut all education funding, federal grants that help with student aid and student loans.

We will stop spending on infrastructure. No need for airports, roads, bridges, or docks.

We can cut all retirement pay to all military and federal employees. They can move in with family.

Interest we'll have to pay in order to keep our credit rating but we can cut all welfare and job subsidies. People in this country have already proven that they can live on the streets.

This leaves only three items on the list: social security, medicare, and defense.

In order to make the numbers work, we'd only have to cut each of those by 54%. More than half.

One beauty of this is that we'd have no impact on the economy (the folks who collect data on economic growth and revenue would be laid off), no complaints to Congress (no money to pay Congress or their staff or perform maintenance on the building or the grounds in DC), and no silly complaints about veteran's healthcare (again, no one on staff to handle complaints about the lack of staff to treat veterans). 

Maybe you have a different way to make the math work. $2.2 trillion out of $3.5 trillion doesn't leave you many options, though.

Of course candidates know that they get far more applause promising huge tax cuts than they do by itemizing what actual cuts they'll make. Still, the degree to which these GOP candidates are allowed freedom from math is unprecedented.

06 November 2015

Officially the Best First Half Decade of Job Creation in History

At 5%, unemployment is now exactly half of what it was exactly 6 years ago at the very peak of the Great Recession. That is cause for celebration. Additionally, today's strong number means that 2015 still could become the second best year in the last decade.

But it gets better.

During this last week, Congress finally agreed to a budget plan that will keep the government open for two more years. Next October, there will be no anxiety about whether this government that comprises roughly 20% of the economy might suddenly lurch to a stop. Further, defense and domestic spending alike are going to increase over the next couple of years. For the first time since the height of the Great Recession, the federal government will be stimulating rather than dampening the recovery. This alone could be good for an extra half a million jobs next year.

2016 is poised to be a record year for the decade. As previously mentioned, I think that we'll look back at 2010 to 2015 as the years in which the American economy recovered in terms of jobs created (it will be more than 13 million jobs created in the first five years); and 2016 to 2020 as the years in which the American economy recovered in terms of wage growth and household income. Now that unemployment is at 5.0% (it will drop below 5% before year end), the labor market will put steady upwards pressure on wages.

Not only does this month's jobs number mean that we're now at 61 months in row of uninterrupted job growth and counting, but it means this is easily the best first half a decade in history.

Jobs created in first half of decade
1980s 7.9 million
1990s 9.5 million
2000s 4.3 million
2010s 12.9 million (and with November and December's numbers, this is like to finish at  ~13.3)

Just to make sure you got that, this first half is roughly 9 million more jobs - about 3X - as many as last decade's first half and 3 million more than the 90s's first half.

Finally, a common rebuttal is "Yes, but the broader measure of unemployed is higher than this." That's true and it always is true. During the first year of the recovery, the narrow unemployment measures began to drop before the broader measure (which includes the discouraged workers and folks working part-time when they'd rather work full-time). But the gap between these two measures is beginning to narrow, coming closer to its pre-recession numbers, as you can see in this graph.

All that is good news.

04 November 2015

Those Democrats Are Such Incompetent Communists that They're Actually Good for Capitalism

Here are interesting statistics that compare stock market performance under Democrat and Republican presidents.

This is hugely simplistic. It doesn't account for global recessions, wartime spending, demographic changes, the fact of a legislature that opposes everything or willingly goes along. And causation of today's economic conditions is often the function of variables tweaked years - maybe even decades - earlier and there is no attempt at time lag that traces back to specific policies or events.

All of that said, it is a fun way to examine the claims that Republicans are better capitalists than Democrats. The performance of capital markets is one pretty simple measure of whether a government is good or bad at this capitalism thing.

This table starts at the bottom with Teddy Roosevelt (Republican - and a great one) in 1901. At that point the Dow Jones was at 73.27 and it rose 20% during his administration. 

Now imagine that you have two investors. One investor is a rabid Republican and every time a Democrat gets into office, his puts his money under his mattress. Every time a Republican gets into the Oval Office, he puts all of his money into an index fund that tracks the Dow. The other investor is a rabid Democrat and he moves in the opposite direction of the Republican investor: he goes to the mattress every time a Republican is sworn into office and bets everything on the Dow index fund every time a Democrat moves his paperweights into the Oval Office.

So, during Teddy Roosevelt's time in office, the Republican gets this 20% gain and the Democrat sits on the sidelines, completely missing out on the gain. And so it goes. Whoever is sitting it out misses the boom or bust that happens when their money is under the mattress.

So, over the last 114 years, how have these two investors done? You can see the numbers through yesterday's close. Our Republican investor who started with $100,000 would now have $504,951. By contrast, the Democratic investor would have $4,843,040, nearly 10X as much.

At best, Republican defenders faced with this data could say that it makes no difference who is in the White House. These results might be random. At worst, Republican defenders would have to admit that investors prefer Democratic presidents. After a century of data, it might be possible to start drawing conclusions. In any case, if Democratic presidents are anti-capitalists, they're not very good anti-capitalists, so maybe the staunch Republicans could still argue that this is further proof of Democratic incompetency. "Obama is a communist! He's just such an incompetent communist that his attempts to bring down capitalism drive the market up!"

Refugees Could Make Europe Stronger

The stream of refugees coming into Europe could be the boost it needs.

In 2003, the average age in Europe was about 37 years. By 2050, some analysts predict it'll rise to 52 years. This puts a huge burden on a population. The ratio of workers to retired people may drop to 2 to 1. Each worker will not only have their own costs but 50% of the cost of a retired person. That's tough.

The refugees streaming into Europe are younger and more fertile than the Europeans. Given there are millions of them, they might even be able to significantly lower the average age and to raise (albeit slightly) the ratio of workers to retired people.

European nations might look back at this as a lucky break, however harsh it seems now.