Royal Weddings Aren't News.

Heck, royalty in general isn't news. What does the English monarchy even do these days, except splatter their events and "personalities" across global news media at any opportunity?

Here's five things in the news today that I care about more than William and Kate's media circus.

1. India, Mauritius agree on Joint Working Group on Double Taxation
2. In Shift, Egypt Warms to Iran and Hamas, Israel’s Foes
3. Attorneys General Battle NLRB Over Boeing Plant
4. Space Jam: Thousands Flock to See Shuttle Fly, creating potential traffic problems on East Coast
5. Benjamin Moore's "Odorless" Paint Stinks and is Sticky, Suit Charges

Yes, the failure of paint to dry as promised is probably of greater significance than the royal nuptials.... and yet here are the top four items today from Time Magazine.

1. William and Kate: Scenes from a Dazzling Royal Wedding
2. Kate's Grace Kelly Moment
3. Kate Middleton's Sensational Wedding Dress
4. Royal Wedding: The Day's Schedule

The U.S. debt ceiling will be reached in two weeks, the American military is engaged in three different countries, and all we can hear about is royal frippery. If I cared any less, I'd be in a coma. 

Inefficiency of health, education sectors is more than coincidence or the "Baumol effect."

From The Economist, March 17:

Larry Summers, Mr. Obama's main economic adviser till the end of 2010, argues that the goods governments buy, especially health care and education, have proved much more resistant to productivity enhancements than the rest of the economy. Since the 1970s real wages in America have risen tenfold if you measure them against the cost of televisions; set against the cost of health care, they have gone down.
Mr. Summers expects that trend to continue. An ageing population will need ever more health services provided by the state...

Unintentionally, Mr. Summers has presented some truly fabulous arguments against the increase in government spending he seems to advocate.

Is it truly just random chance or amazing foresight which has led the state to invest in sectors which just happen to be resistant to productivity enhancements? The Economist article points to the so-called Baumol effect, whereby some activities are immune to improvements in labor productivity. For example, it still takes the same number of musicians to perform a Beethoven symphony as it did in the 1800s.

To me, this seems like a completely inadequate explanation for the growing costs of education and health care. Unlike symphonies, there have been many technological improvements which should make the provision of those services much cheaper. Increased access to computers has revolutionized other industries and this would seem to be especially true in health or education, where the rapid and accurate transfer of information matters especially. But that hasn't happened.

There is a much simpler explanation: more government intervention causes higher costs. As health and education became increasingly regulated, the incentive to increase productivity became smaller. Teachers and doctors have to satisfy the demands of politicians and not just the parents or patients. There's no reason to rein in costs because taxpayers will foot the bill regardless.

I'd speculate that if the government had decided to regulate and oversee the production of symphony music, it would take twice as many people as it did to perform in the 19th century (and they'd miss twice as many notes). Instead, we have a medical industry that kills 98,000 people per year with preventable accidents, and an educational system that spends the most in the world but can't keep us in the top ten for global rankings of student proficiency in basic math and sciences.

Is this really a success story for government social spending? To me, it sounds like a reason to chop down the vines of red tape choking the market for education and health care. If costs continue to rise after the government's influence has ended, there may actually be an argument for the Baumol effect. Until then it's just empty apologetics.

Real causes of debt are simple; debtors' explanations more complicated.

In my constant quest to find the pot of gold at the end of the Internet, I discovered this gem.



Does this make sense to you? As far as I know, there's only one cause of debt: borrowing money. Whether that is "bad" debt depends on the circumstances surrounding efforts to pay it back.

In short, there are two big problems with the statistics above.

1) Data are from surveys of where people say their debt came from (revealed in tiny font at the bottom of the picture). Perhaps I'm too cynical, but I think more people are apt to blame their debt on external events, such as a pay cut, rather than admit they are spending beyond their means. It's more sympathetic and less hard on the ego to say that you were forced into debt rather than led down the path willingly.

2) After losing a job or taking a pay cut, if you continue to spend at the same rate as before, in my book that still counts as "going wild in the aisles." If expectations remain static as situations change, is it really accurate to blame the situation (less pay) for the outcome, rather than one's personal failure to adapt to the new circumstances? If it were the opposite case and income had just increased, I don't think many people would say "I blame this higher wage for my not having time to go shopping and spend as much as I want" (holding hours worked constant, of course). The real problem is not adjusting behavior to fit the new constraints that reality imposes.

I'm sure some people end up in bad debt through no fault of their own, or as a result of unavoidable expenses or unforeseen changes in income which may coincide with less opportunities for work. However, I don't think that number is large enough to make up 48% of all cases of bad debt. Further, by claiming that a pay cut is the largest cause of bad debt this chart implies that people are largely incapable of changing their consumption patterns to fit a more modest standard of living, which is not a very good lesson to live by.

If anything, the big difference between "perceived" and "real" causes of debt would be better labeled as "how I think other people got into debt" and "how I explain my own debt" respectively. Knowing only a little about psychology, it is unsurprising that respondents hold other people responsible for their choices (spending too much) but apply a much more ego-gratifying standard when considering themselves.

Maybe the 21st century version of old proverb "don't take any wooden nickels" will become "don't trust statistics off of online infographics." Less catchy perhaps, but much more common application!

How to Gain Twitter-Fame for Penny Stock Advice, with no Skill, Knowledge (or Profits) Required.

Along with upcoming rappers, Bieber fans, and ad-bots there’s a rash of penny stock advice to be found on Twitter. At first I dismissed it as one of many eccentricities of the platform, but after seeing a few dozen assorted “penny stock” accounts I started to wonder. What could explain these accounts peddling advice on securities that most investors wouldn’t line a litter-box with?

So-called "penny stocks" may range in cost from a few dollars to a fraction of a cent. For example, instead of buying one share of IBM at $164.68, it would be possible to instead purchase 4,450 shares of Double Eagle Gold Holdings (DEGH) at $.037 per share (amusingly, both stocks are currently near their respective peak historical values). DEGH had been running at an average price of about $.003 for most of the last year. If an investor had a crystal ball and could foresee this recent ten-fold run up in price, there would have been a lot of money to be made; therein lies the temptation of penny stocks.

Of course, anyone who actually had that crystal ball and put it to use in the market would be far too rich to bother with running a Twitter account. So why are there hundreds of penny stock tweeters out there? To explain, here is a theory of how ANYONE can appear blessed with penny stock clairvoyance.


The Five-Step Guide to Achieving Twitter-fame with Penny Stock Advice:

Step 1: Pick out 100 penny stocks at random, and buy $10 worth in each of them for a total cost of $1,000 plus brokerage fees (or, if you’re cheap, just consistently follow the prices of 100 penny stocks).

Step 2: Wait. As is normal for inexpensive and highly volatile stocks, the price of some will go up dramatically and others down equally dramatically.

Step 3: Ignore the stocks that go down. Out of the 100, by random chance you’re almost assured to see one go up every now and then. Get on Twitter and brag about how well your picks in the stocks that went up are going.

Step 4: Construct self-promotional statistics to describe how well an investor could have done if they had known exactly when these volatile stocks would move up and down, then tweet about anyone can generate “POTENTIAL 237% PROFITS!!!” based on your expert advice.

Step 5: Bask in fame and adulation. If you are lucky, people will buy a subscription to your newsletter. Or, if they follow your advice, it will drive up the price of penny stocks you own. Then sell off the penny stocks that went up due to your “wisdom” and leave your followers to eat the losses as the stock shifts back down. 


I can’t verify that every penny stock tweeter uses this self-serving strategy. However, it’s the only way I can think of making money off penny stocks, so I’d guess that a large ratio of those Twitter accounts have something like this in mind.

In the time it took me to write the above, DEGH – which I noticed as a result of a penny stock tweet – has dropped 35%. IBM, on the other hand, changed 0.30% in that hour. In a nutshell, this is why investing in penny stocks is probably not a good idea: you get all the risk of stock market speculation without much stake in any real value (or else why is the stock so cheap?). Markets tend to be efficient and integrate available information into stock prices, so when a stock costs a fraction of a cent, it’s probably because many people rate its investment value somewhere near a lottery ticket.

The DEGH rollercoaster, courtesy of Google Finance. Notice the peak, then sudden drop at the end.

To make matters even worse, even if you successfully buy low and sell high with penny stocks – a difficult proposition, given how quickly the values change – you’ll be eaten alive in brokerage fees. For the example above, even if one used a discount brokerage like Scottrade, the cost of each purchase would be a $7 flat fee – making a $1,000 investment cost a total of $1,700. It would take a crystal ball, extraordinary luck, or loads of self-serving information delivered to a mass audience in order to generate enough returns to cover that cost. When you see someone giving investment advice on Twitter, mentally ask which of those three categories you think they fall into.



Note: for entertainment purposes only. I’m not dispensing investment advice; the stocks named were solely for example purposes, not as endorsement. If you’re reading this and run a penny stock service I’m sure you’re the exception to the above, and love children, flowers, kittens and your advisees all equally and would never pull such a scam on them. I’m just writing about your competition. But I would awfully like to peak at your crystal ball sometime when you get a chance.

Self-Educate on Economics – Seven Books to Read.

Selected based on three criteria: content (the book does a thorough and exhaustive review of the material) relevance (the book speaks to issues which matter in terms of current world events) and readability (writing style is accessible and engaging). With that said, here are seven good books for an economic self-education.

1. Exchange & Production: Competition, Coordination & Control. (1983) by Armen Alchian & William R. Allen.

Any student of economics has to start with solid principles textbook. While many different books could suffice, this Alchian & Allen book is readable, comprehensive, and avoids unnecessary complexity while providing excellent coverage. In spite of being several decades old and out-of-print, copies of this book are still available from various online retailers.

2. The Wealth and Poverty of Nations: Why Some are So Rich and Some So Poor (1999) by David S. Landes.

Landes’ book covers a broad spectrum of history, and has the benefit of being an easy read. The general thesis: richer countries tend to be those that embraced trade, private property rights, and intellectual inquiry (these three, historically, tend to occur together). Europe gained a developmental advantage because, by accident or historical circumstance, the conditions for innovation which made the Industrial Revolution possible happened to thrive there. Lest this seem overly Anglo-centric, Landes also does an interesting coverage of other civilizations, and attempts to explain what factors prevented them from making the same leap that occurred in Europe. This book situates the global context of wealth and poverty that exists today.

3. The Wisdom of Crowds (2005) by James Surowiecki.

A recently-published book that has already become a classic in some circles, The Wisdom of Crowds explains why decentralized knowledge informed by self-interest can result in highly accurate predictions. Contradicting the common opinion that experts are better at predicting outcomes than ordinary people, Surowiecki finds that not only are supposed “experts” much less accurate than they claim, but that guesses taken by ordinary people when aggregated are far closer than any single estimate. As this is the principle which guides most markets, it offers a compelling insight into why those systems work so well.

4. The Housing Boom and Bust (2009) by Thomas Sowell.

Probably the most important and relevant book on recent financial history there is to read. Unlike many other treatments of the financial crisis which focus the blame on one particular party, Sowell constructs a multi-faceted picture, including all the relevant policies, government decisions, and lobbying groups whose efforts unintentionally led to the recent financial crisis. He also debunks the common perception that “markets run amuck” caused economic downturn, and instead traces the series of government intervention which built the housing bubble and then led to its collapse. For anyone is convinced that more regulation can save the economy, this book will give reason to rethink that position.

5. Failure and Progress: The Bright Side of the Dismal Science (1993) by Dwight R. Lee and Richard B. McKenzie.

An interestingly prescient (but little known) book, this short publication by the CATO Institute explains why it’s best if the government stays out of the way when a business begins to fail. It exposes the inherent contradiction in political positions which desire the wealth which capitalist systems can attain, but also want to prevent the painful dislocations created by business failure or bankruptcy that occurs under a free market. Lee and McKenzie convincingly explain why wealth for all is impossible without failure for some enterprises; unprofitable businesses represent a misuse of society’s resources, so it is better they fail so those inputs can be put to better use by other firms. When government becomes involved in preventing failure it ends up creating further deprivation, by favoring producers with connections over those who can provide goods using the fewest resources. Political victories for inefficient producers are a loss for society.

6. The Mind of the Market: How Biology and Psychology Shape our Economic Lives (2008) by Michael Shermer.

This book does an excellent job of summarizing recent research in behavior psychology, neuroeconomics and similar fields, and explaining how they relate to behavior in a free market economy. While many studies show that humans have an altruistic, egalitarian and cooperative element to their interactions, this does not deny the role or importance of markets in shaping social behavior in positive ways. While a slightly more challenging read than some of the other books, The Mind of the Market provides a comprehensive look at how psychology and evolution have played a role in shaping economic interactions.

7. The Only Investment Guide You'll Ever Need (most recent edition in 2011) by Andrew Tobias.

The first edition of this book was written back in the 70s, and since then it’s sold millions of copies world-wide. The premise: if a deal sounds too good to be true, it probably is. Tobias happens to be both very smart about money and also a highly enjoyable read. I went through this book several times as pleasure-reading when I was too young to understand what money, investing, or economics even was and still found it very entertaining. To secure your future wealth and have a good time doing it, this is probably the best book you could purchase.

It might seem from these summaries that I’ve chosen a highly partisan, libertarian or even “conservative” set of books to represent economics. While I will not claim this is the definitive “best books” list, in my personal and limited experience, I found the ideas contained very useful in interpreting economic events. There are obviously some giants not represented (Friedman, Hayek, and so on) but most of the relevant ideas can be found above. The summaries are just my biased take, but I honestly believe that all of these books are written from an open (if not apolitical) perspective. Even if you disagree with the conclusions, the analysis contained is worth thinking about for anyone.

The point: If someone wanted a crash-course on economic thought with a minimum of fluff, jargon, or general verbosity then the above list would be the direction I’d point them. If you think I left off something important or just disagree with all the above then let me know in the comments.

How to live rent-free the rest of your life. OR, Five Big Mistakes Criminals Make During Police Interrogations.

 "...the technique of violence was first developed in 2 million B.C. by the australopithecines and tried by forthwith primates, who had no brains to speak of, but nonetheless invented the tomahawk and used it on each other. This practice led to the enlargement of the brain, another useful weapon. Yes, murder was invented even before man learned to think. Now, of course, man has become known as the 'thinking animal.'"
- spoken during the credits of Death Race 2000 (1975).

One of the reasons I love reality television is that it can make you feel like an expert in fields you have no personal knowledge or training in whatsoever. From watching many episodes of A&E's crime show, "The First 48" I feel pseudo-enlightened about the workings of the criminal justice system, and I'm here to share that almost-wisdom with you.

The printing presses have broken down; how will we inflate the currency now?

This just in. A recent printing run, in hundred dollar bills, has substantial defects that make many of the notes unusable. How big of a printing run? Just $110 billion worth. From CNBC:

At the time, officials announced the new bills would incorporate sophisticated high-tech security features, including a 3-D security strip and a color-shifting image of a bell designed to foil counterfeiters.
But the production process is so complex, it has instead foiled the government printers tasked with producing billions of the new notes.
An official familiar with the situation told CNBC that 1.1 billion of the new bills have been printed, but they are unusable because of a creasing problem in which paper folds over during production, revealing a blank unlinked portion of the bill face.
A second person familiar with the situation said that at the height of the problem, as many as 30 percent of the bills rolling off the printing press included the flaw, leading to the production shut down.
The total face value of the unusable bills, $110 billion, represents more than ten percent of the entire supply of US currency on the planet, which a government source said is $930 billion in banknotes. For now, the unusable bills are stored in the vaults in "cash packs" of four bundles of 4,000 each, with each pack containing 16,000 bills.
Officials don’t know exactly what caused the problem. "There is something drastically wrong here," a person familiar with the situation said. "The frustration level is off the charts."
Because officials don’t know how many of the 1.1 billion bills include the flaw, they have to hold them in the massive vaults until they are able to develop a mechanized system that can sort out the usable bills from the defects.
Sorting such a huge quantity of bills by hand, the officials estimate, could take between 20 and 30 years. Using a mechanized system, they think they could sort the massive pile of bills, each of which features the familiar image of Benjamin Franklin on the face, in about one year. [Emphasis added.]

The total cost of producing the bad bills was $120 million, excluding whatever it will take to sort the good from the bad. The unusable bills will have to be burned; frankly, it might be cheaper to just burn the entire print run, compared with sorting over 1.1 billion items of currency.

Apparently, during this print run of 1.1 billion, no one checked at the beginning/middle for quality control. A private firm that operated like this would be out of business. With almost a third of the prints unusable, I can't imagine many repeat customers... other than the federal government.

Kidding aside, this poses some tangible problems for the Federal Reserve, whose strategy has depended on getting currency flowing in the economy. With at least a year's delay before this money will actually be reaching consumers' hands, it complicates monetary policy. Facing an already Herculean task of managing market perceptions and signals, having this additional lag between action and effect could make the results of Fed decisions even more difficult to anticipate.

"Coupon Lady Money Saving Madness" is madness indeed.

So, I found a video on the internet which should have bargain-hunters, cheapskates, and economists (to be redundant) foaming at the mouth. By using coupons and mail-in rebates, a woman was able to cut her grocery shopping bill down from over $150.00 to just $9.43. Find the video here. So why isn't everyone saving 97% on their shopping, and putting the grocery stores out of business?

The reason most people don't do this (and never will) is because it's inefficient. Yes, it's very impressive to see someone save ~$145 off their groceries, but the real question is how much time did it take, in coupon saving, organization, and so on, in order to accomplish that? The woman in the video said she collects coupons, sends in rebates, and plans all her shopping in advance... If it took her 14 hours, she effectively earned $10/hour for her coupon-clipping work. However, I'm guessing it took longer than that, and her "wage" was actually much lower.

For people who have jobs, it'd be more effective to spend those extra hours working than clipping coupons. If you don't have a job or are paid a very low wage, coupon clipping could make sense. However, there are a variety of other ways to make money on the internet - filling out surveys, using ShortTask, or advertising on Twitter - to name just a few. For an hourly rate, you can almost certainly do better than coupons.

If you're a college student, spend that time studying instead -- you're going to school to make more money later, so focus on grades, not penny-ante coupons (unless you're studying english or sociology, in which case I suggest dropping out and coupon-clipping full time, because it'll be more profitable).

There's an efficient level of coupon saving, which depends on your income and how you value your time. For highly paid professionals, the efficient amount of coupons might be zero, while some others may gain a small benefit from spending their time that way. Taking coupons to an obsessive level, as this woman appears to have, is just wasting time for yourself and everyone in line behind you.

Scary statistics for the medical economics debate.

[The shaded box is around my response.] Survey Source.

Stumbling around the internet awhile back, I came across this medical ethics questionnaire. In addition to providing a haven for procrastinators, this survey also shows the distribution of answers that others have made. Most of the questions were fairly ho-hum with predictable splits of opinion. However, the skew of answers to an economics-related question startled me.

When asked "what level of involvement should the government have in setting prescription prices?" a whopping 56% of the responders said "Create Price Ceilings" and 8% more thought the government should set all prescription prices. Apparently, 64% of those polled trust bureaucratic regulators more than the market when it comes to pricing medicine.


I can appreciate the sentiment behind price ceilings on prescription medication: it's undeniable that many people can't afford treatment they need to stay healthy. However, price ceilings are just a bad idea. 

Source.

For those unfamiliar, a brief rundown on the economics of price ceilings. When the government mandates a below-market price for a good, it creates several negative side-effects. Most immediately, amount supplied decreases. Faced with a lower price, manufacturers will cut back on production. In context of prescription medications, this means less drugs being developed, tested and sold to the public. Ailments that could potentially be treated will continue to harm people. Slightly more subtle is dead-weight loss, which represents market transactions which could have occurred, but did not. In other words, some people could have benefited by paying the higher price to get the drug, but the price ceiling prevented them from doing so. As a result, both consumers and producers lose out, although the outcome for the person seeking medication is perhaps most tragic.

High costs for prescription medications are definitely a problem; health care costs in general have been rising much faster than the general rate of inflation, putting important treatments out of reach for many people. High drug prices have also helped drive up health insurance costs, presenting a large drag on businesses.

Instead of an artificial cap on prescription prices, it would be more productive to look at the supply-side factors which keep those costs high. The lengthy FDA approval process alone costs "about $800 million per approved drug" and creates instant pressure for the company to charge high prices and recoup their investment upon release. Taking aim at these restrictions would be better than capping prices and ultimately smothering the development of life-saving medications.

Fermi Paradox makes discovery of new habitable planet a good news/bad news situation.

In the latest science news, a planet has been discovered which could potentially support life. A neighborly 20.3 light years away, Gliese 581g has liquid water and enough gravity to maintain an atmosphere -- making it a fairly good imitation of earth.

Great news, right? Homo sapiens now has the potential to spread across the galaxy, leaving the barren rock of Terra behind as we forge into the great empty unknown. Unfortunately, the actual "getting there" part is still a ways off. Even worse, this discovery may not bode well for the future of humanity.

Laws against 'texting and driving' haven't made us any safer.

We've all seen it: alarming, dangerous driving behavior perpetrated while under the influence of cell phones. In response to this threat, many locales (including my home state of Washington) enacted bans on texting-while-driving. Has the menace of distracted drivers been curbed?

According to a USA Today article, traffic accidents have actually gone up in areas where anti-phone laws were enacted. To quote the most interesting part:

"Texting bans haven't reduced crashes at all," says Adrian Lund, president of the Insurance Institute for Highway Safety, whose research arm studied the effectiveness of the laws.

Teamster wisdom on political economy

If God allowed everybody to die in bed, the government would regulate that we'd have to sleep standing up."

-Alex (on History Channel show Ice Road Truckers, Season 2 Episode 4).

------------------------------------------

For context: Alex is driving a big-rig and hauling a 45-ton piece of mining equipment across the arctic ocean. The road he's driving on consists of nothing but frozen ice, and there's a blizzard rapidly approaching.

In addition to steady nerves and a dry sense of humor, the man has an intuition for political economy. I'll just let the quote above stand on its own. Thoughts?