Obamacare at age 1

Here is a tweet summarizing some high-level numbers of Obamacare at the end of its first year. 10+ million people who have insurance now, who previously did not have insurance. Premiums increased only 2% this year, which is a low rate of growth compared to most years. Medical debt is down. And 0 death panels! 

While this is a very good start for the program, we need to wait a few more years to understand the full effect regarding both benefits and costs. 

Finally, behind these high level numbers are actual Americans whose lives have been transformed by having access to health insurance. Click here to read these stories. 

Happy new year and wish everyone great health in 2015! And if bad health does arrive, wishing you do not have to navigate the American health system without health insurance. 

America's dysfunctional relationship with its military

"A man who worked for decades overseeing Pentagon contracts told me this past summer, 'the system is based on lies and self-interest, purely toward the end of keeping money moving." What keeps the system running he said, 'was that services get their budget, the contractors get their deals, the congressman get jobs in their districts, and no one who is not part of the deal bothers to find out what is going on..."

"The American public and its political leadership will do anything for the military except take it seriously. The result is a chickenhawk nation in which careless spending and strategic folly combine to lure American into endless wars it cant win..."

An excellent, must-read article about our dysfunctional relationship with our military.  Fewer and fewer Americans have any personal connection to the military, which makes it easier for us to express generic platitudes without seriously considering the important questions around military inefficiency, corruption, war, torture, and how we support our troops during and after their service.  

Serial podcast

This American Life is trying a new podcast model - a weekly serial program. This year, the producer (and also lead investigator and narrator) Sarah Koenig decided to re-investigate a murder that occurred near Baltimore in 1999. 

So how did Serial do? IT BLEW UP! Nearly 40 million downloads of the entire first season (3.4 million per episode) making it the most downloaded podcast of all time. Definitely the content itself helped: Serial re-investigates an absolutely perplexing murder with tremendous detail and depth. Further, the week to week medium propagates a real-life mystery and engenders discussion, which builds momentum for the podcast. Given the right topic, I think this weekly podcast model can be incredible successful. 

You can download all 12 episodes of the podcast here. 

Spoiler alert. Stop reading if you havent listened to the entire podcast...

In addition to the sheer entertainment value, I think this podcast also introduced many people to how capricious and unjust our criminal justice system can be. Most people, including myself and my wife, feel that Adnan may be guilty but that there is absolutely no way he could be convicted beyond a reasonable doubt. Things we know with regard to the capriciousness and unfairness of the process in this case:

+ The police detectives very quickly honed in on one suspect at the expense of a thorough investigation 
+ The main evidence for the prosecution was the testimony of one individual, Jay. Jay changed his story several times. His testimony changes between the various police interrogations and continues to change across the first and second trials in significant ways. 
+ His initial account match very poorly with cell phone records and cell phone tower pings. His testimony changes slowly every time until it closely matches the cell phone records and tower pings in the second trial. There is evidence that police investigators coached him to change his story to better match those records. 
+ Now 15 years later he basically says he perjured himself (though he is still sticking with his overall story that Adnan was the killer). 
+ The prosecution yelled at Don (HML's boyfriend at the time of her death) for not presenting Adnan in a negative light during his testimony. 
+ The prosecution secured a very shady plea deal with Jay (Jay served zero time for his role in burying HML in exchange for testimony against Adnan) and provided him with a lawyer, which is unethical
+ Adnan was likely winning his first trial but then his lawyer got into a fight with the judge over something fairly trivial, leading to a mistrial. 
+ Though highly regarded, Adnan's lawyer made many mistakes and it was revealed that she was suffering from from a debilitating illness that lead to her death a few years later.  
+ The prosecution introduced false stereotyping of Muslims that tainted the jury's views of the case. 

The right direction (part II)

In my previous post, I discussed how two-thirds of Americans feel that the country is headed in the wrong direction despite overwhelming positive economic trends. Here I'd like to discuss reasons for this pessimism. 

1) The economic numbers may be good but people dont feel it in their incomes. Real median wages have been flat for several decades. That is an alarming statistic! A large fraction of the country is no better off than they were in the late 90s in terms of real income and that is genuine cause for pessimism. The one question I have is why people were more optimistic through the 2000s when this was also true?

2) People are more pessimistic about external threats like ISIS, Ebola, North Korea, Russia etc. I suppose this is possible (the polls I have seen do not follow up and ask people why they are pessimistic about the direction of the country). This view is misinformed in my view. Ebola is not a real threat to Americans, neither is ISIS nor North Korea in my view, and the Russian economy is self-destructing as I write. And external chaos always exists - is it particularly worse now? 

3) Social changes are scaring people. Many people may be scared of the social transformations happening in this country such as gay marriage, the legalization of marijuana, a black president, changing demographics, etc. Outside of stagnant wages, this is the explanation I find most compelling. For a great swathe of America, especially white America, there have been changes to society that are too quick, too soon and you can see this rhetoric, especially over the right wing media (tv, radio, print).   

The right direction (part 1)

In the recent November, 2014 midterm elections, 67% of Americans answered that the country was on the wrong track. My response to that poll: if this is the wrong track, then wrong never felt so good!

From an economic standpoint, here are some trends across various areas of the economy:

1) Economic growth had been solid if unspectacular until early 2014. However, GDP has been growing at an annualized rate of nearly 5% over the last 6 months, which is quite good. 

2) Labor market - unemployment rate is at 5.8%, the lowest its been since 2007, 50 straight months of private sector job growth (which is a record since data has been collected), 10 straight months of 200K job growth, the longest streak since 1995.

3) The stock market has one of the longest and largest runs in decades, with the S&P 500 rising 223% since Jan 1, 2009 and more than tripling! since its low on March 9, 2009. Yes, the S&P 500 has more than tripled in less than 6 years. This rivals the other great bull market run from Jan 1994 to Jan 2000.

4) Annual inflation has been low (between 1 and 3%) since 2009. One can easily make the argument that extremely low inflation can be a bad thing, and that higher inflation would have been helpful in the recent economic context. However, since this post is about public perception and the public never views inflation positively, inflation of 1-3% is excellent.

5) Since it peaked in FY 2009 (the last year of the Bush administration), the deficit has come down each of the last year. Again, it can be argued whether deficit reduction should be a positive in the first couple of years of the crisis. However, the public does not understand that nuance and generally views it as unequivocally good.

6) Growth in health care costs have come down significantly. In fact, health care costs grew only 3.6% in 2013, the slowest rate of growth since 1960.

7) 10-15 million more people have insurance than they did a few years ago and many of them do not have to worry about the prospect of a single medical catastrophe driving them into bankruptcy or worse.

Some of these outcomes are directly due to policy, some are indirectly related to policy, and some are unknown or uncorrelated with policy. But regardless of who gets credit, almost all majors of economic performance are unequivocally headed in the right direction over the last 6 (and any subset of that) years.

In my next post, I will discuss some possible explanations for the public's view in spite of the economic record over the last 6 years.

I Highly recommend John Oliver's "Last Week Tonight"

If you have not listened to John Oliver's new program, I cannot recommend it enough. 

Click here for some examples of his work. 

Also, in a previous post I discussed civil forfeiture in the context of our tiered justice system. 

John Oliver does a much better job of bringing awareness to this topic - highly recommended!

See here. 

The evolution of racism over time

Michelle Alexander's book the New Jim Crow is an illuminating read. Her main thesis is that after each stage of ostensible social progress to overturn systemic racism, the white power establishment worked to preserve their privilege in the new regime in creative ways. Her argument is compelling and she cites two main transitions.  

First, after the abolition movement and the Civil War ended slavery in the United States, racism flourished for nearly a century under the Jim Crow system During this time, the white power establishment intimidated, killed, and then even more powerfully, encoded into law a system of apartheid - the idea of "separate but equal." It was a creative but non-subtle measure of encoding racism into the new system and preserving as much privilege for whites as possible. 

Second, as the civil right movement brought about change in "separate but equal," the white power establishment moved to preserve racism systematically via one primary system ("the drug war") and a multitude of other policy stances. But you dont have to take her word for it, you can listen to the words of two powerful Republicans during this time: 

"The whole problem is really the blacks. They key is to devise a system that recognizes this while not appearing to..."  (H.R. Haldeman, Richard Nixon's White House Chief of Staff)

"You start out by saying n*****, n*****, n*****. By 1968, you can't say n***** - that hurts you, backfires. So you say stuff like forced busing, states' rights, and all that stuff, and you're getting so abstract. Now you're talking about cutting taxes, and all these things you're talking about are totally economic things and the byproduct of them is blacks getting hurt more than whites...'We want to cut this' is much more abstract than even the busing thing, uh, and a hell of a lot more abstract than n*****, n*****" (Lee Atwater, Advisor to Ronald Reagan) 

The "war on drugs," was launched by Nixon in 1971 but fully burgeoned in the 1908s under the Reagan administration. The confluence of the crack epidemic, HIV, and perceptions of increasing crime presenting the Reagan administration with an opening they desired. For example, only 2-6% of Americans saw drugs as the most important problem in the country in 1985. In 1989, it reached a remarkable 64%!  The Reagan administration used this opportunity to institutionalize draconian and racist drug laws that have eviscerated black society for decades. Somewhat conveniently, the same figure stood at 10% by 1990. This despite the fact that violent crime was as high or higher in 1991 and 1992 as it was in the late 80s.  The war on drugs continues today even though (1) it has been an absolute failure in ending the drug trade and (2) even though all crime has steadily fallen 50% from the peak in 1991! It has been successful in one way though: incarcerating an unprecedented number of black Americans, which could be argued was the original goal. The leading cause of the incarceration of African American men is non-violent drug offense. 

Drug laws provide a clever cover for racism because ostensible, because drug laws seem like a good thing. And as Atwater so eloquently stated, the war on drugs is not obviously racist. But dig underneath and it becomes clearer. . 

Drug laws encode racism in three ways. First, the sentencing of laws is racist. For example, sentencing for drugs used predominantly by poor blacks (crack) were 100 times as punitive as laws for drugs used by more diverse populations (cocaine) even though crack and cocaine are not substantially different. Second, the drug market has a long value chain, from inputs, to production, to transportation and distribution, to dealers, to consumption, to money laundering. In this process, street-level dealers and consumers are the least powerful and most black and also the most punished.  It makes no sense to primarily target street-level dealers and consumers if your goal is to end the drug trade. It makes a lot more sense when you goal is something else. Third, drug laws are selectively enforced.  

There is much more to think and write about on this topic but in the meantime I recommend reading Michelle Alexander's book. 

Mid-life crises

I was surprised to learn that the concept of a mid-life crisis has surprising amounts of research and data behind it. Happiness falls from one's early 20s to mid / late 40s. Then, it rises again and keeps rising until the body or mind breaks down just prior to death. In fact, happiness is higher late in life than levels even experienced in youth. Further, this finding seems to be a fairly robust across generations, socio-economic status, countries, and even across species!

Happiness is often described as the gap between reality and expectations. An interesting hypothesis is that our gap between reality and our expectations grows during our 30s and 40s but that in later years, wisdom allows us to better appreciate reality while simultaneously have more meaningful control of our expectations. If happiness = reality - expectations, then wisdom is about how to measure those two variables better.

There is more here. 

What do we mean when we say America is resilient and will not lose to terrorists?

On numerous occasions right after 9/11, President Bush said, "the terrorists will not win." Ten years later, President Obama on the 10th anniversary of 9/11 said that American is resilient and "we emerged stronger than before."

I understand that these words and phrases are meant to stoke patriotism at a time of national mourning and are very valuable for that purpose. It is the responsibility of the leader to be strong and inspire strength in difficult times and that is what Presidents Obama and Bush were doing.

But taking a more sober view, what does it mean to say that the "terrorists will not win." The metrics for winning are obvious in sports, politics, and even conventional warfare. What metric can we use to declare if the terrorists have won or lost? Similarly, I understand when we describe a person as resilient. But what does it mean to say that a country is resilient?

Take a minute to think about it yourself before reading my answers to those questions below. In particular, think through what would have to transpire for you to say that a particular country has not been resilient after a significant terrorist attack.

One way to measure is to count the number of terrorist attacks since 9/11. Since there have been 0, that is one way to claim "victory" or "resilience." Though not a perfect metric, because there is definitely much luck involved in having had 0 attacks since then. Also, when there is another attack (and there probably will be one someday), that doesn't immediately make us "losers" or not resilient.

I would define winning and resilience differently. My definition: conditional on protecting our population, have we maintained aspects of what makes American unique (our values, our exceptionalism). I would argue that in several ways we have not satisfied this definition.

First, America has compromised its ethical standing in the world through the use of torture. There is no longer any doubt that America engages in torture during the Bush/Cheney administration, which is against both the Geneva Conventions and our own core values. We have lost a large element of the moral high ground and that is truly tragic. While the Bush/Cheney administration destroyed the soul of America in this regard, Obama also deserves some criticism for white-washed this history instead of healing it. Andrew Sullivan has written prodigiously and passionately about this topic and I highly recommend reading his pieces.

Second, I have been shocked at how easily and quickly the American public has acquiesed to the government's prolific spying and information gathering of ordinary Americans. The American public rails against governmental over-reach in innumerable ways, but in one of the most important ways, incredible information gathering and the loss of privacy, the public has completely capitulated. Even after the Snowden files were released, there was almost no accountability and little public debate on the trade-offs, which still shocks me.

Third, I have been utterly disappointed by America's constant sense of pessimism and fear in the last 13 years. In the past, our attitude of optimism, which in many ways is uniquely American, is inspiring and is something I always valued and cherished. However, that optimism has given way to constant state of anxiety and fear it seems. I think this anxiety started after 9/11 but over the years, the Republican party and the mainstream media, each using its own brand of crazy/stupidity, has stoked these fears and brought out the worst in America. From immigration to ISIS to Ebola, American seems scared about everything right now. This despite the fact that the latter two have led a combined death of five Americans so far.

Even if terrorists don't kill another American, they have fundamentally changed core aspects of American exceptionalism. When a person or country has changed aspects of its core values for the worse, it becomes harder to argue that it has "won" or is "resilient."

My slow disassociation from college sports (in particular the NCAA)

Recent evidence of corruption at the University of North Carolina:

"For 18 years, thousands of students at the prestigious University of North Carolina took fake "paper classes," and advisers funneled athletes into the program to keep them eligible, according to a scathing independent report released Wednesday."

Given that NCAA is brutally tough when athletics programs "lose institutional control" (see USC, Ohio St. etc) because players took some cash on the side, we can expect the hammer on UNC right?

Ummmm. Silence from the NCAA. 

The more complex and generous answer is that that is the problem with imposing draconian laws for something that is arguably not wrong. If you impose bowl bans for players making a little money on the side, what possible punishment would be fair for 18 years of institutional corruption of the charade known as "student athletes." Permanent ban. But of course the NCAA will not do that or anything even remotely close.  

The simpler answer is that the NCAA is a corrupt monopoly where morals, ethics, and consistency are all casualties of maximizing profits for the NCAA. When students take money on the side, it undercuts the NCAA's profits so in their world view, that is the real crime. On the other hand, academic corruption allows "should be professional athletes" to be "student athletes" and make money for the NCAA. Nothing to see here folks, move along. 

In this country that loves free markets, let me count the ways that college football is like Soviet-style communism: 

(i) the NCAA is like the communist party; a monopoly that arbitrarily assigns punishment depending on whether it benefits;

(ii) all workers get the same wage (stipends, scholarships) no matter their relatives capabilities, some well below their market value; 

(iii) the senior members of the party appropriate the rents (coaches, NCAA executives, etc); 

(iv) restrictions on the labor market (players are not eligible to enter the NFL draft for 4 years until the graduate high school!). How else can you get the best players to come to college and earn $0? By not allowing them the opportunity that every other person in the US has: become a professional and earn money for their craft.  Also, "student-athletes" must sit out a year of eligibility when they transfer schools (while coaches have no such restrictions).

I am disgusted by the NCAA and will be avoiding their products.

Lead and crime

One of the most astonishing facts that I learned recently is the steady and incredible fall in all types of crime in the last two decades years. Overall crime and violent crime have fallen 55% and 51%, respectively since they peaked in 1991.  Yes, you read that right. Across the board, crime has fallen over 50% in the last two decades. You would think that such an incredible improvement in one of the most important aspects of life (safety) would be an indelible part of the American experience in the last 20 years. However, Americans think crime is getting worse every year and feel as unsafe as they did in the 90s, when crime was over 90% higher!

The question as to why there is such a significant gap between perception and reality when it comes to crime is an interesting and important question. Why is the American public unaware of this incredibly good news?!?

Crime increased drastically in the 70s and 80s in the US and peaked in the early 90s. Since then, it has been falling precipitously and now is back to the the levels of the halycon days of the 60s. Understanding the causes of the incredible rise and fall of crime has incredible consequences for society. There are numerous explanations for the crime pattern: more and improved policing, economic conditions, the reversal of the crack epidemic, and demographics are a few of the explanations. However, in my reading, the most compelling explanation is one that you have likely never heard of: lead exposure.

The graph above shows the time trends of two variables with a 23 year lag: (1) violent crime per capita; (2) childhood exposure to lead. Incredibly, there is almost perfect correlation - higher/lower exposure to lead as a child is correlated with higher/lower crime committed by those kids 23 years later. The 23 year time lag is important because most crime is committed by adults in their 20s.

But as we all know, correlation is not causation - there may be many other variables with a similar time trend.  In an example of quality journalism, Kevin Jones documents and summarizes the economic and scientific literature linking lead exposure and crime.  Researches have found the same pattern above, not just for the US, but for many other countries as well. Also, they find that variations in lead reduction at the state-level can largely explain difference in crime reduction across the states. They find the same patterns at the local level. In addition to the strong econometric findings, there is also physiological evidence linking lead exposure to cognitive stunting, poor decision making, attention problems, and higher aggression., characteristics of criminals.

While the book is not closed on this debate, I found the evidence of the link between lead exposure and crime truly compelling. What is remarkable is that the EPA's mandate of the phaseout of leaded gasoline in 1973 and the banning of lead-based paint may have been some of the most socially beneficial policies of our time. And the not full understanding the causes of the dramatic rise and fall of crime led to the mistaken belief that the 3 strikes law in California (which is now finally being rolled back) or the broken windows theory of crime punishment, which were originally believed to have helped reduce crime may have not had a huge impact on crime while locking up millions of people behind bars for petty crimes and destroying their lives unnecessarily.

2014 Ryder Cup and leadership

The Europeans put a pretty sound whipping on the Americans this year at the Ryder Cup. Their 6th win in the last 7 Ryder cups. The Americans are often higher ranked but seem to underperform the Europeans in this team competition and this year was no exception. That being said, I thought Tom Watson made some absolutely atrocious decisions. At the post-match conference, Phil Mickelson called out Watson's leadership and was roundly criticized for his disloyalty. As more news comes out, it seems that Watson not only made horrible decisions as captain, he is as terrible leader. 

      Four sources who witnessed the proceedings in the U.S. team room at the Gleneagles Hotel said that Watson took no responsibility for any shortcomings, scoffed at a gift that the U.S. team members gave him, ridiculed several European team players and started the proceedings by denigrating the Americans' play that afternoon. According to all of the sources, he said: "You stink at foursomes.''

It is true that the players play and ultimately are responsible for pointing up points on the board. But Watson has revealed himself to be a very mean-spirited person with zero leadership skills. 

Another incredible graph on inequality

Pictures are worth a thousand words. So are some charts. 

Anyone else notice that ironic timing of "trickle down" economics espoused by the Reagan administration marking the exact opposite...  

If Fabiana Caruana accomplished an unprecedented chess feat a few weeks ago and almost no one saw it, did it happen?

Fabiana Caruana accomplished an unprecedented feat in chess history a few weeks ago. Against the best chess players in the world (considered as possibly the strongest field ever assembled) he won 7 matches, lost 0, and drew 3. In fact, he won 7 in a row, which is unheard of in top chess competitions, where a super-elite players can engineer draws quite reasonably. During his run he beat Magnus (world #1 with the highest chess rating ever recorded) with black. That is virtually impossible. 

However, this feat got such little attention. I understand that chess is not in extremely popular but a feat like this deserves more attention than Lebron's recent weight loss due to cutting sugar out of his diet (which is what is being discussed on ESPN right now). 

Chess requires intense focus and being in the moment, which in the age of smartphones and social media, is probably hurting the popularity of this wonderful game. 

    

Our closest animal relatives - the Great Apes

How "smart" are animals? What do they "feel"? And how much of the differences between us are nature vs nurture?

A fascinating research project demonstrates that chimps are "smarter" than humans in some ways: two chimps beat two humans in a game of memory and strategy. 

Lucy the chimp was raised in a human household, and could make and serve tea. Koko the Bonobo could sign hundreds of words and could take care of pets.

In the US, we still do scientific testing on chimps, though it is increasingly outlawed in other parts of the world...

As we find out more about the intelligence of animals (and the Great Apes in particular), I think we are increasingly moving in the right direction by prohibiting research on these animals. However, I think this is still a difficult question and not as simple as Peter Singer, perhaps the greatest advocate for the Great Apes, makes it seem.

As a utilitarian, Peter cares about actions that maximize total welfare. But in that calculation, how would Peter weigh Great Apes against humans? If testing 1 ape could save 1 human, would he be for it? What about testing 2 apes to save 1 human? What is the exchange rate in his mind and how did he derive said exchange rate?

Peter notes that the mental capabilities of apes can often be superior than that of children and mentally disabled people. But if intelligence and emotive capacity are his point of comparison and not speciesism, then another question arises: if human privileges are extended to apes, should human responsibilities also be extended to apes? What happens if an ape commits a human crime? Should it be treated similar to a mentally disabled person? 

Bastardization of the word pandit/pundit

The word pundit in the American lexicon comes from Sanskrit word pandit. Pandit, in Sanskrit, means an scholar, teacher, and expert. The word ostensibly has the same meaning in the US but in fact means something close to someone who opines a lot without any correlation to expertise. 

In 2012 and 2013, as Bashar al-Assad was terrorizing his own country, John McCain lead the rhetorical charge to arm the Syrian rebels, consistent with his philosophy of fight first, ask questions later. Now we know that one of the rebel groups was ISIS, one of the most evil groups in the world today. In fact, McCain went to visit some Syrian rebels in 2013, who turned out to be part of ISIS. Imagine if he we had followed his advice and armed some rebels, which no doubt would have led to arms to ISIS. What tremendously horrible advice from a supposed "pundit." Being wrong though is not a pass time for John McCain, it is his passion. He is wrong about almost everything he has uttered in the last decade and these are not small matters to be wrong about. For example, in addition to the horribly bad advice on arming Syrian rebels, John McCain was wrong about Iraq in pretty much every way that someone can be wrong about foreign policy. 

Being wrong over and over and over again and not have any shame; that can happen in extremely old age and in fact, if your uncle John was even half as wrong as Senator McCain, you would chalk it up to senility. But McCain is the politician most often brought on Sunday morning talk shows as a "pundit." What is the excuse of the media? Where is the accountability? Why is there least accountability for those who preach accountability for others? Shouldn't being wrong so often and so catastrophically have consequences?

While McCain is too easy a target, he is not the only one who is wrong so often and yet gets valuable space on tv, newsprint to opine as a "pundit." For example, numerous economists and policy makers have been wrong a lot. Michael Boskin of Stanford University has been embarrassingly wrong on numerous economic topics. Others like Charles Prosser and Marty Feldstein, among others, have been wrong over and over again about inflation. And yet they continue to write their next round of opeds in the WSJ predicting that inflation is just around the corner this time. Maybe it will be on what basis do they have any credibility? We know that politicians have no concern for being consistently wrong but it is troubling when academics and policy makers have lost that sense of shame too.

I think we should stop bastardizing the word pundit. We already have a word to describe these charlatans - "derps." 

A assortment of links

Some excellent links: 

Roberto Solow on Hayek and Friedman

Robin Williams on how only Scotsmen could have invented golf

Noah Smith with an old but excellent piece on libertarianism (local bullies dont like being told not to bully) 

Max Schireson on being a dad and a CEO (h/t from Andrew Sullivan)

Poverty is terrible even if you have nice clothes and a flatscreen TV

In the discussion of inequality, one common retort is to argue that the poor are not really poor since they often wear excellent shoes and clothes, have iPhones, flatscreen TVs, XBox, and drive decent cars. This is a terribly bad argument for two reasons. First, it reveals a poor understanding of the economy. Amenities like clothes, tvs, iPhones, and even cars constitute an increasingly small faction of the average American budget. This is because continuous productivity improvements drive down the prices of these types of goods. That is like saying because you eat as much fruit as a billionaire, you must be extremely rich.  Meanwhile, education, healthcare, housing, and childcare constitute an increasingly large fraction of the American budget. These goods and services are susceptible to Baumol's cost disease: productivity improvements are very difficult in certain areas and hence prices continue to rise. And in these very important areas, the poor are indeed falling significantly behind.  

The second point is about risk. The ability to manage risk is one of the most important components of well-being in life, yet often gets overlooked. Shoes, TVs, and Xboxes will not help if you need major medical surgery or need to spend exorbitant amounts of money to defend yourself properly in the legal system. The threat, worry, and concern of becoming bankrupt at any given point in time because of the vagaries of life is something unique for the poor and lower middle class. The ability to completely manage risk by the upper middle class and rich manifests itself in many ways. First, not having to deal with the stress of bankruptcy is an incredible boost to one's quality of life. Second, not having to worry about risk afford freedom in a variety of ways: the freedom to move geographically anywhere, the freedom to leave a job you hate, the freedom to leave a bad relationship, etc. Imagine having to give up these freedoms because of the inability to cope with risk and tell me if that compares to having nice sneakers or a TV. 

Because of the the importance of managing risk, wealth inequality is a better proxy for capturing real inequality. Wealth captures both consumption and the ability to manage risk. And wealth inequality is more extreme than consumption and income inequality in the US and is getting more extreme. And even wealth inequality underestimates the real separation between the poor/lower middle class and everyone else. The upper middle class/rich have not only their own wealth but also access to the wealth and support of their significant social networks (social capital). If they need money in case of an emergency, they have wealthy families. If they lose their jobs, they have connections that will help them get another job soon. 

So next time someone argues that the poor dont have it that badly, remember two things: (1) differences in access to goods and services such as education, healthcare, housing, and childcare; and (2) the ability to deal with risk in life. It really, really sucks to be poor and we shouldn't let disingenuous arguments about the consumption of amenities obscure the reality.  

Individualism and sports

Today's Men's Wimbledon Finals was an instant classic with Novak Djokovic defeating Roger Federer in 5 thrilling sets. The drama was intense partly because this was such an important finals for both players.

Djokovic came in to the Wimbledon finals with a 6-7 record in grandslam finals. With a loss today, he would be approaching Ivan Lendl territory: one of the finest players of his generation but with a losing record in grandslam finals (8-11) that defined his legacy downwards. I thought Djokovic had turned the corner with his 2011 campaign, one of the best ever, with 3 grandslam wins, a 70-6 record, and 6 wins in finals over Rafeal Nadal. He then followed that up with a win at the 2012 Australian open over Nadal in one of the longest and greatest tennis matches ever. It was perhaps the height of the reign of Djokovic. Since then Djokovic's level has dropped off and more troubling has been his inability to close out matches in the late stages of grandslams, leading to a 1-5 record in the finals of grandslams in the last 2 years. 

On the other side of the net, Roger Federer is on the shortlist of greatest tennis players ever. At 32 he is likely in the twilight of his career but he had stormed through Wimbledon 2014 like it was 2006 with only one service game and set dropped through 6 matches. This may have been one of his best remaining opportunities to capture grandslam win #18 at his favorite tournament. 

The high quality match had incredibly twists and turns, especially in the 4th set, where Djokovic blew a 5-2 lead to lose 7-5. His inability to close out the match, combined with his recent struggles must have played havoc on his mind. Add to that a slight ankle injury, no tie breaker in the 5th set, and the unflappable Roger Federer on the other side; that Djokovic was able to win the 5th set was truly a testament to his mental fortitude. 

I've always wondered something about Americans' passionate love affair with sports. Team sports such as football, basketball, and baseball sit atop the pantheon, which belies another observation: Americans value the rugged individual. A tennis match is truly an individual effort. Preparation itself involves a team but during the match, there are no teammates, there is no coaching, there are no breaks for being tired. It's you and the opponent and nothing else. In that 5th set, Novak Djokovic had no one else to rely on except himself. No teammate to pass the ball to as the doubt crept into his head. No sub to take his place for a few minutes while he got treatment for his body. No coach to give him a pep talk or offer strategy. The pressure, the mind questioning, the body breaking down, legacy on the line. Djokovic re-wrote his today. Tennis tests the physical and mental limits of human's capacity for resilience in sports that team sports simply cannot match. This is why I love tennis.

Some fun with the Fermi Paradox

And here is a fun read about the universe. Read it when you have a few minutes to go through it slowly, allowing yourself to get absorbed in the possibilities. The Fermi Paradox.  

Links on "Capital in the 21st Century"

Piketty's Capital in the 21st Century has generated many comments and thoughts. Here is a non-exhaustive list of the some of the better comments: 

1. Branko Milanovic
2. Brad Delong
3. Justin Wolfers
4. Matthew Rognlie
5. Debraj Ray
6. Robert Solow
7. Larry Summers
8. Paul Krugman
9. Tyler Cowen
10. Suresh Naidu
11. Noah Smith
12. Thomas Edsall (with a good comment from Daron Acemoglu)

Capital in the 21st Century (part II)

In my previous post, I discussed the main mechanism laid out by Piketty in his book. Here, I discuss 3 concerns I have with his theoretical model:

1. r > g is a necessary condition for inequality to rise in Piketty's model. The main strength of Piketty's work is his data analysis and here he does a commendable job trying to identify r and g over a millennium:

Piketty argues that r has been approx between 4-5% for most of history and significantly higher than g until the 20th century. He views the 20th century as en exception rather than the new rule: "r fell because of two world wars as the capital stock decreased." However, i find his justification rather uncompelling. If r was 3% during the 1950-2012 period, right after a period of incredible capital destruction, why would r be significantly higher in a long-run equilibrium?

2. The next point is that even if r is high in the long-run, K^ = r only if r is completely re-invested. However, some portion of r is consumed, especially in the form of housing, so it must be that K^ < r; how much less depends on many factors including the rich's marginal propensity to consume, donate to charity, etc. 

3. In Piketty's mechanism, X = r * (K/Y) is the capital share of the economy. As (K/Y) increases and r remains relatively flat at 4-5%, X must rise. But we generally believe that there are diminishing returns to resources.  Hence as (K/Y) rises, the returns to capital (r) should fall. Piketty handles this criticism by arguing that the elasticity of substitution between capital and labor will increase in the future. A high elasticity of substitution will create uses and generate returns for capital even as its relative stick continues to rise.

I am actually quite sympathetic to a high elasticity of substitution between capital and labor (which I describe in the next post) but  in what way is the high elasticity of substitution a feature of capitalism?  The substitution between labor and capital could happen, and in my view, could accelerate, but is not a given and hence not a feature of capitalism, which is what Piketty is aiming to describe

Capital in the 21st Century (part I)

The book of the year in economics is clearly Thomas Piketty's monograph titled, "Capital in the 21st Century." Piketty, through his empirical research, has done much to advance our understanding of inequality, and hence I was quite eager to read this book. 

As expected, the empirical portion of the book did not disappoint. Wage, capital, returns to capital are very difficult to compute going back in time and Piketty performs a Herculian effort in trying to do so. The picture he paints is strong and convincing. Income and wealth inequality has been increasing in the US and other developed countries for the last several decades and is approaching levels unseen since the Belle Epoch (turn of the last century). 

There are potentially many drivers of inequality over the last few decades. Explanations include technological change, globalization, the decreasing power of unions, and the superstar effect. Piketty goes above the fray and instead of looking at particular causes of inequality today, attempts to develop an overarching theory of capitalism and inequality. 

Piketty's argument is as follows (^ below is used to denote annual changes in the variable): 

Until the 20th century, Piketty demonstrates that the after-tax return on capital (r) has been greater than income growth (g) and he takes the 20th century to be an exception rather than a new normal. Then, if r is completely reinvested, K^ = r and K^ > g. Note that by definition, g = Y^. Hence, we get that (K/Y) is increasing over time. If (K/Y) is increasing and r is fairly constant, than it must be that X = r*(K/Y) is increasing over time, where X is the capital share of the economy. Hence, Piketty posits that the capital share of the economy will increase over time. Since, capital is concentrated in a few hands, inequality will therefore inexorably increase over time.

Since r > g is the key catalyst for inequality in his model, Pikkety argues for a global wealth tax to lower r. In my next post, I'll discuss some of my thoughts on this. 

Rand Paul speaks about the injustices of the drug war

The first 2 minutes of this recent speech by Rand Paul are excellent.  I am happy that Rand Paul is running for president if only for the reason that he is raising awareness of the injustices in our criminal justice system.

His main points:
1) Black teens gets jailed at 3-4 times the rate as white teens despite similar drug use rates
2) The jail sentences are way too extreme for youthful, victim-less mistakes and are tearing apart families
3) Felons' voting rights should be restored after they have paid the price for their crimes

I could not agree more. I think Barack Obama probably agrees on all three accounts. But, ironically, Rand Paul has a better chance of moving the needle in terms of public opinion, and even perhaps legislation than Obama on this issue. I hope Paul continues to make these issues front and center of his campaign and fights for this whether he wins or loses his campaign for presidency.  (Disclaimer, I am not supporting of Rand Paul for President. But glad he is running since he is the only person I have seen bring up these issues, which are vitally important). 

Tiered justice system

In December 2012 HSBC admitted to laundering money for Mexican and Colombia drug cartels. The bank was fined $1.9 billion (5 days of revenues) and not a single person went to jail.  On the other side of the drug trade, you have the story of Anthony Smelley: 

Early on a morning in January 2009, Smelley, who is 22, was pulled over while driving along I-70 in Putnam County, Indiana. Months earlier, he'd been in a car accident and won a $50,000 settlement. He states in court documents that he had taken around $17,500 with him that January day en route from his home in Detroit to St. Louis, to buy a new car for his aunt. 
Smelley was pulled over for making an unsafe lane change and driving with an obscured license plate. He was also driving with an expired driver's license. His traffic stop should have ended with citations for those infractions. Instead, the police officer asked Smelley to get out of the car and patted him down, finding the cash. The officer then called in a K-9 unit for a sniff search of Smelley's car for drugs. The dog alerted twice. Smelley and two passengers were arrested, and the police seized Smelley's money. 
A subsequent hand search of Smelley's car turned up no illicit drugs, and no criminal charges were ever filed against Smelley or his passengers. Smelley produced a letter from a Detroit law firm confirming he had been awarded the $50,000 from the accident. That didn't matter. Putnam County has since held Smelley's money for more than a year. The prosecuting attorney said, “We can seize money if we can show that it was intended for use in a drug transaction at a later date…”

So if bankers launder money for drug cartels, shareholders pay a fine but not a single banker is prosecuted for jail time or pays any fees. Meanwhile, Smelley’s money can be confiscated because there is a chance he may buy drugs in the future? For a long time I used to think the inequalities in the American legal system were noise in an otherwise beautiful system. But the more you read, the more you realize that we have three legal systems. The one for the middle of the country operates reasonably well and is the envy of the world. There is a second one for the rich and white collar criminals. And there is a third for the poor and blue-collar criminals. 

Here is another example of how the criminal justice system works if you're poor via stop and frisk in Miami Gardens, FL: 

Earl Sampson has worked for nearly three years at the 207th Street Quickstop, a convenience store that has become the epicenter for police stops. Earl, 28, says he’s been stopped more than 200 times by the Miami Gardens Police Department (MGPD). According to records obtained by Fusion, MGPD stopped him and filed a field contact report 181 times. In addition, Earl was arrested 111 times. Seventy-one of those arrests were for trespassing at his place of work. "They walked through the door, grabbed me and just take me out,” says Sampson. "I told them I work here and they said I don’t care.” Quickstop owner Alex Saleh says he was so appalled that he installed video surveillance cameras in his store - not to record crime but to record police misconduct. In January 2012, Alex says he gave his employee, Earl Sampson, a place to live inside the store to protect him from the police. But even that was no deterrent..police are seen storming into Earl’s bedroom in the back of the store. 

Matt Taibbi contrasts the top and bottom tiers of our judicial/legal system in greater detail in his book American Injustice in the Age of the Wealth Gap and I highly recommend reading his book. Learning about our vastly different tiers of our justice system is heartbreaking and infuriating. And as economic inequality rises, the tiered nature of justice in America could increasingly define us. 

Efficiency vs equality (part II)

In the previous post, I discussed “efficiency” without defining it. Economists have a very strict definition of this important term: if a state of the world can make some better off, without hurting anyone, that state of the world is more “efficient.” On the other hand, a new state of the world, that increases the overall size of the pie but makes some better off and others worse off is not “efficient” by this definition. One reason why economists use the stricter definition of efficiency is that under diminishing marginal utility, overall social welfare may not necessarily increase in the second case. However, in the first case, social welfare is always higher.

Economists have spent considerable time arguing that international trade is efficient. (As a caveat, Stiglitz and others have demonstrated instances where international trade can be inefficient but that is a discussion for another day). So in theory that means international trade makes some people better off and no one worse off. But at the same time, economists acknowledge that international trade leads to “winners” and “losers.” But there are no “losers” in a more efficient state of the world. How to square this circle? Economists argue that there can be a transfer of monies from the “winners” to the “losers” such that the “winners” are still better off and the “losers” are no worse off than before. Hence, as the example of international trade shows, efficiency and redistribution are not mutually exclusive. In fact, redistribution is absolutely necessary for international trade to be efficient!

Economists who believe in the efficiency of international trade (including myself) should also believe in increasing re-distribution from the “winners” to the “losers”. However, the tax code in the US has become increasingly regressive at the same time that globalization has increased dramatically. This is not efficient by economists own definition of efficiency. (Side note: are there situations under the theory of second best where increasingly regressive taxes contemporaneous with international trade can be efficient?).

In order to make international trade efficient, we need to better understand the “winners” and “losers.” The recent trade literature has luckily ignored Lucas’s advice and spent considerable effort trying to understand who is hurt from international trade. Hopefully this research will move us towards making international trade more efficient, but in the meantime, I am curious why economists have been silent as the US tax code has become more regressive over the years while loudly touting more free trade.

Efficiency vs equality (part I)

Inequality is the topic du jour in the United States and surprisingly even in economics. Surprising, because in my time in academia, it was definitely rarely a topic of research in the field. For example, out of the 100 or so PhD job market papers (which is a good proxy for where economic research is heading) I was aware of between 2008-2011, I dont think a single one was about inequality. Further, only a few academics were publishing papers in top journals on the subject of inequality. Robert Lucas, a nobel prize winner, and undoubtedly speaking for many economists, said in 2004, “one of the tendencies of sound economics, the most seductive, and in my opinion the most poisonous is to focus on questions of distribution.” 

Implicit in this statement, Lucas is assuming that there is always a trade-off between efficiency and equality and that thinking about increasing equality (or lowering inequality) must necessarily lead to less efficiency and is therefore “poisonous.” However, this is wrong for a few reasons. First, the second fundamental welfare theorem in economics posits that there is a very important instance where there is no trade-off between equality and efficiency. There are numerous other economic policy instances where there is no trade-off between efficiency and equality. Second, I would contend that even Lucas would agree that there is likely a certain level of inequality that would lead to sub-optimal economic efficiency. Where that point is, is very hard to say but without scholarship, how would Lucas imagine we could eventually have insights on this. I think that Lucas, and others like him, are perpetually stuck in the Cold War era, where thinking about issues of inequality meant “communism.” While there is no doubt that “communism” was a failure, economists and other scholars do a dis-service by not better understanding inequality. Forever drudging up the specter of communism as if that were the only alternative to an “efficient” model is intellectually dishonest. So with that opening salvo, more of my opinions on efficiency vs equality, inequality to come. 

Here's looking at you kid

Beautiful image in the Sky over Sweden a few weeks ago

H/t Phil Plait Click here

College - an investment or consumption good, and why the difference could matter

People go to college to learn, form networks, build credentials, and thereby invest in themselves. But, a series of studies by Stacy Dale and Alan Krueger found that going to highly selective colleges (versus a low ranked college) does not matter for most students in terms of their job/wage outcomes. On the other hand, it does matter for minority students and students who come from less educated families. How could this be possible and what is the difference between the two groups? One potential explanation could be social capital. The former group has significant existing social capital via their family and so does fine no matter which college they attend. Their college decisions appear to be more like the purchase of a high brand consumption good. Meanwhile, better colleges provide the latter group an opportunity to build their credentials and social capital necessary to succeed. For them, college is more of an investment.

Does it make sense to have only one model of higher education to deliver these vastly different purposes?

One potential cost of this one-size-fits-all model is demonstrated in this recent study. The authors spend 1 year immersed in a large, public flagship school in the Midwest. They find that some students come to college to essentially party and have a good time (college as consumption), secure in their existing social capital. Another group of students, who do not possess the same social capital, sometimes get caught up in the consumption side of the college experience and under-invest in themselves?

Another implication of college as consumption can perhaps be seen in the rapidly rising cost of a college education. There are surely numerous drivers of college tuition inflation (see Baumol's cost disease), but here is what I have in mind: if a significant portion of students value college as a branded consumption good, it is likely that the price elasticity of demand is quite low, contributing to the rapidly rising cost of college. On the margins, this is changing the cost-benefit analysis for students for whom college is predominantly an investment good. For example, if I simply need a credential to signal to the job market, should I have to spend 4 years and upwards of $200K?

Just as students sit along the investment/consumption demand spectrum for college, it makes sense to think we should have post-secondary options that sit along the spectrum: cheaper options for course content and credentialing; expensive options similar to higher ed options today; and hybrid models in between.