Sunday, September 30, 2012

You might be a libertarian if ...

You can think more clearly than others:
Perhaps more intriguingly, when libertarians reacted to moral dilemmas and in other tests, they displayed less emotion, less empathy and less disgust than either conservatives or liberals. They appeared to use "cold" calculation to reach utilitarian conclusions about whether (for instance) to save lives by sacrificing fewer lives. They reached correct, rather than intuitive, answers to math and logic problems, and they enjoyed "effortful and thoughtful cognitive tasks" more than others do. 
The researchers found that libertarians had the most "masculine" psychological profile, while liberals had the most feminine, and these results held up even when they examined each gender separately, which "may explain why libertarianism appeals to men more than women." 
All Americans value liberty, but libertarians seem to value it more. For social conservatives, liberty is often a means to the end of rolling back the welfare state, with its lax morals and redistributive taxation, so liberty can be infringed in the bedroom. For liberals, liberty is a way to extend rights to groups perceived to be oppressed, so liberty can be infringed in the boardroom. But for libertarians, liberty is an end in itself, trumping all other moral values.

Thursday, September 27, 2012

Repost: avoid bureaucratese

There is a temptation, especially when you have nothing substantive to say, to write in the passive voice, using big words, and ponderous prose.  If you notice these tendencies in yourself, you are probably OK.  But if you don't, you may be speaking in what Alfred Kahn calls "bureaucratese." 
Although Kahn is most remembered for deregulating the airlines industry, Vanderbilt students know him through his essay,My War Against Bureaucratese," the gobbledygook written by government bureaucrats designed to hide what they are really doing.  Here are a few of his most salient points:
  • “Every time you’re tempted to use ‘herein’ or ‘hereinabout’ or ‘hereinunder’ or, similarly, ‘therein,’ thereinabove’ or ‘thereinunder,” and the corresponding variants, try ‘here’ or ‘there’ or ‘above’ or ‘below,’ and see if it doesn’t make just as much sense.”
  • “The passive voice is wildly overused in government writing. Typically its purpose is to conceal information. One is less likely to be jailed if one says, ‘He was hit by a stone,’ than if he says, ‘I hit him with a stone.’ The active voice is far more forthright, direct, humane.”
  • The use of ‘presently’ to mean ‘now’ is another pomposity. If you mean ‘now,’ why don’t you say ‘now’?
  • “Why use ‘regarding’ or ‘concerning’ or ‘with regard to’ when the simple word ‘about’ would do just as well? Unless you’re trying to impress somebody. But are you sure you want to impress anybody who would be impressed by such circumlocutions?
  • “Outreach makes me upchuck.” Sometimes the demands of pomposity and dynamism converge—as in using “input” as a verb, “specifics” for “details” and constantly “implementing” things and “addressing issues.”
Professor Kahn began this war as part of his successful effort to deregulate the airline industry. He is the hero of Thomas McCraw's Pulitzer Prize Winning book Prophets of Regulation. Interestingly, the villain of the book is Louis Brandeis for his role in creating the FTC.

Former colleague Mike Shor's MBA Writer puts phrases from student memos together to generate sentences that sound all too familiar.
To proactively manage profit, our key initiative objective pushes the envelope toward systematized reciprocal capability.

Enabling continuity, enterprise optimization accelerates the movement towards third-generation contingencies.

Monday, September 24, 2012

Incentive Compensation Can Be Too Strong

A recent NY Times article reports that about 1,000 of the elderly in Shaoyang, have been deputized to enforce minor nuisance laws. They have been given the authority to ticket citizens who litter, spit in public or park illegally. Except that they get to pocket 80% of the fines collected from the tickets they issue. What would we expect to happen to enforcement?

That's right, violations have been found where perhaps none occurred:
A convenience store clerk reached by phone described how the newly empowered urban management officials have been pouncing on motorcyclists stopped at red lights, summons books at the ready. “Many of us depend on motorcycles to get around, but they’re now giving us tickets for not wearing a helmet, for not having insurance, or for not carrying our licenses,” complained the clerk, who would give only her surname, Li. “None of us dare drive our motorcycles anymore — it’s just too risky.”

What I expected, but has not been reported yet, is the settling of old grudges by trumping up violations against some neighbor who won't "toe the line." Or worse, extorting payments from the neighbor so as to avoid ticketing - an ersatz senior citizen protection racket.

From the policy perspective, the choice seems to be between imperfect under-enforcement of the laws and imperfect over-enforcement.
Zhang Yue, a downtown shop owner, acknowledged that city streets have become increasingly chaotic but suggested that the government reconsider its experiment. “People in this city have no respect for the law, making the traffic situation really terrifying,” he said, “but this crackdown is going very far, perhaps too far, in the other direction.” 

Hat tip: Angus

Saturday, September 22, 2012

10 college majors most likely to end up in retail

The majors are ranked according to how likely their graduates end up working in retail, measured against the national average.
1. Anthropology Likelihood of working retail: 2.1 times average
2. Fine Arts Likelihood of working retail: 1.8 times average
3. Film and Photography Likelihood of working retail: 2.6 times average
4. Philosophy and Religious Studies Likelihood of working retail: 2.0 times average
5. Graphic Design Likelihood of working retail: 0.6 times average
6. Studio Arts Likelihood of working retail: 2.3 times average
7. Liberal Arts Likelihood of working retail: 1.8 times average
8. Drama and Theater Arts Likelihood of working retail: 2.1 times average
9. Sociology Likelihood of working retail: 1.4 times average
10. English Likelihood of working retail: 1.4 times average
The list illustrates the idea of selection bias. If we randomly assigned students to majors, then we could conclude that the difference in outcomes was due to the major that they chose. However, students select majors, so it is difficult to infer causality from this correlation.  It could be that students who are likely to end up in retail are choosing these majors.

If causality is running the other way (from choice of retail to the major), then forcing your sons and daughters out of these majors would not necessarily improve their employment outcomes.

The truth is likely somewhere in between (both selection bias and causality explain the data), but that is only my opinion.  To prove this, you have to do a lot more work. 

Thursday, September 20, 2012

Why are so many donated kidneys discarded?

In the past, we have blogged about our inefficient kidney matching system:  almost 100,000 people are waiting for kidneys, only about 20,000 receive kidneys. 

Now we learn that physicians throw away about 2000 usable kidneys.  One of the reasons is the government's performance evaluation metric:  If the number of failures exceeds expected levels by 50 percent, transplant programs are put on watch list, and then decertified if they dont improve.  This incentive encourages physicians to reject all but the best organs for transplant:
“When you’re looking at organs on the margins, if you’ve had a couple of bad outcomes recently you say, ‘Well, why should I do this?’ ” said Dr. Lloyd E. Ratner, direct of renal and pancreatic transplantation at NewYork-Presbyterian/Columbia hospital. “You can always find a reason to turn organs down. It’s this whole cascade that winds up with people being denied care or with reduced access to care.” 
After the University of Toledo was cited, a transplant surgeon cut back to about 60 transplants a year from 100, becoming far choosier about the organs and recipients he accepted. 
The one-year transplant survival rate rose to 96 percent from 88 percent, but Dr. Rees still bristles at the trade-off. “Which serves America better?” he asked. “A program doing 100 kidneys and 88 percent of them are working, or a program that does 60 kidneys and 59 of them are working? It’s rationing health care under the guise of quality, and it’s a tragedy that we are throwing away perfectly good organs.”
Someone, please, let these people use a market. 

Monday, September 17, 2012

Why are there so few tenured professors?

Virginia Postrel remarks on the decline in tenured professors in academia:

About 30 percent of faculty members are either tenured or on the tenure track, compared with about 57 percent in 1975. The rest are “contingent faculty”: About 19 percent work full time, usually on contracts lasting one to three years, and more than half work part time. (These figures omit graduate students who also teach classes.) Along with a lack of job security, contingent faculty members receive lower pay and fewer, or no, benefits. They frequently don’t have offices and may not even get library cards. 

Why the change?  Tenure makes it very difficult for academia to respond, and adapt to a changing external environment.  And there are few industries changing as rapidly as academia (see past posts:  Failing to Educate,  How should universities respond to rising costs, declining demand, and the emergence of cheap alternatives?, Making Research more Relevant, Irony: do business schools practice what they preach?, Incentive pay for professors, Agents vs. principals: the strange case of Dartmouth, Dartmouth governance, again).

Competition favors lower cost organizational forms, so it is not surprising that we see a decline in its use. 

Wednesday, September 12, 2012

Market for Online Class Takers

Like many universities, mine is gearing up for online courses in a big way. Our administrators see this as an untapped revenue stream. The faculty worry about diluting the value of the degree. How do you know that the one enrolled in the course is the one doing the work and taking the exam? With "WeTakeYourClass," it just got harder. From their website:

We know why you came here

 You are struggling with your online classes or homework and you want someone to do it for you. We can handle almost any subject and customer service is a priority. Our company culture revolves around making sure you feel safe and satisfied knowing that your work is being done by an expert within your specified deadline. We are here to serve you around the clock by email, live chat, and phone. For all of your academic needs, WeTakeYourClass wants to be the one you turn to time and time again.

Signing up is simple:

1) Fill out the Get a Quote Form or speak to a representative about your assignment

2) Receive a price to complete the class or assignment and come to an agreement

3) If its an online assignment, we will complete it for you and send an invoice when its done. If its an offline assignment we will send an invoice and once its paid, we will complete your work and send it to you within the deadline.
HT: Mark Perry at Carpe Diem

On Uncertain Ground

Insightful, well written summary of the economic forces that will shape business strategy in the coming years, by Howard Marks, chairman of Oaktree.

The essay touches on a number of themes in our textbook.  The first is that firms seem to be waiting until the political and economic uncertainty (Chapter 17) is resolved before they invest:
...In contrast to the preceding 28 years of pro-business and pro-free market administrations under Presidents Reagan, Bush, Clinton and Bush, today many business people detect antipathy – or, at minimum, indifference – on the part of the Obama administration, in which the private sector is little represented.  In addition, there is uncertainty and anxiety regarding the outlook for the economy, regulation and taxes.  All of these things have deterred expansion.
The second theme is the role of compensating risk differentials (chapter 9).  Given that a lot of the uncertainty is political in nature, investors have adopted so-called "macro" strategies, to buy risky securities when they perceive the political risk is about to be resolved:
This has given rise to so-called “risk-on, risk-off” investing, consisting of investors’ attempts to profit by increasing their risk exposure when they expect favorable macro developments, and decreasing it when they foresee unfavorable developments.  Since macro events determine most of the results, it’s on the macro that investors believe they should spend their time.
Finally, there is a really good description of the formation of the financial asset bubble:
In the 1980s and ’90s, everything went right.  Economic growth was strong.  Companies thrived.  There were great gains in productivity and technology.  Profits rose dramatically.  Interest rates declined.  Inflation was quiescent.  Equities soared.  Houses and 401k accounts appreciated, producing a positive “wealth effect.”  The world was largely at peace.  All of this contributed to positive psychology, feeding back to further spur economic strength in a classic virtuous circle.  Was this a period in which favorable outcomes were entirely dependable, or just one in which the underlying processes met up with good luck, producing favorable outcomes?  And if the latter, were the results better than people should have expected to continue? 

Regardless, people did extrapolate them.  When stocks returned 20% a year in the 1990s, rather than the normal 10%, investors ratcheted up their return expectations for the subsequent years, and with them their allocations to equities.  Everyone knows that if you reach into a bag containing both black and white balls and pull out ten white ones in a row, the probability has increased that the next one will be black [PROFESSOR NOTE:  The author is using the statistical metaphor, sampling without replacement, that you cannot keep drawing white balls out of a hat, to explain his belief that the downside risk is bigger.  This is not the only one he could have used.  Regression towards the mean suggests that high returns in one period are "outliers" and we should not expect them to continue].  But in the investment world, events like that serve to convince people that there are only white balls – favorable outcomes – in the bag.  That’s part of the illogical, emotional thinking that makes for bull markets and bubbles.  So by the time the late 1990s rolled around, many investors had concluded that the world was a benign place in which profits were inevitable.  That is, that there was little risk or uncertainty.
And its aftermath, deleveraging:
Few debtors can tap the capital markets today to the same extent they could five or ten years ago.  In a radical turn of events, lenders now appear to care about borrowers’ ability to repay, and they find some of their customers less than creditworthy.  Since almost no borrowers actually have the ability to pay off their debts, this has led to credit difficulties ranging from home foreclosures, to municipal bankruptcies in the U.S., to debt crises in peripheral Europe. 

American consumers seem to have concluded that they should owe less (or have found that they can’t borrow as much).  For whatever reason, the savings rate has risen, suggesting a decline in the propensity to spend all one makes and more.  All around the world, there’s movement on the part of borrowers – sometimes voluntary and sometimes involuntary – toward austerity (reducing the excess of spending over incomes) or even delevering (spending less than you make and using the surplus to pay down debt). 

Do teachers deserve to make 31% less than everyone else?

The graph from NY Times Economix blog shows that middle school teachers in the US earn about 69 percent of the salary of a average college-educated worker in the United States. The comparable figure is 82 percent in the rest of the developed world:

So tell me: Given the opportunity costs of becoming a teacher instead of using your college degree to enter another, more remunerative field, are the psychic rewards of teaching great enough to convince America’s best and brightest to become educators?

Monday, September 10, 2012

Perverse incentives in TN state funded investment

The state is auditing the its venture capital fund, which awards $20 Million ($25 M in future tax credits are worth about $20 M today), and then asks fund managers to invest  in early stage ventures.  After the investment pays out, the state and the managers split whatever remains. 

Proponents of the program say it was an innovative attempt to steer venture capital toward economic development priorities like health care, bioscience, music and other sectors. As the Business Journal reports today, some Republicans are questioning the program’s job creation so far and want to evaluate other aspects of its financial performance.

Any audit should first understand the incentives.  To do this, lets run through some scenarios.  This is what is called a "sensitivity analysis."

 Compare the (very approximate) terms of a typical Venture Capitalist (VC) to those of TNInvestco under the following scenarios:
  • Scenario A:  Good Scenario (Invest $20 million, sell investments for $50 million)
      • TNinvestco gets $25 million, State gets $25 million
      • Typical VC gets $6 million, investor gets $44 million

  • Scenario B:  Break-even Scenario (Invest $20 million, sell investments for $20 million)
      • TNInvestco gets $10 million, State gets $10 million
      • Typical VC gets zilch, investor gets $20 million

  • Scenario C:  Worse-case Scenario (Invest $20 million, sell investments for $10 million)
      •  TNInvestco gets $5 million, State gets $5 million
      • Typical VC gets zilch, investor gets $10 million
The key thing to note is that the typical VC is makes nothing (other than management fees) unless a fund makes money for investors.  This serves to align the fund manager's incentives with the profitability goals of the fund investors.

In contrast, a TNInvestco fund manager makes a substantial amount unless the fund is a total failure.  

Bottom line, TNInvestco creates incentives for the managers to not lose money, as opposed to the high level of risk taking that is typical to venture capital.  One would expect safer investments. 

Stay tuned for what the audit uncovers. 

Will the Chevy Volt break even?

The $39,995 price and its complex technology have kept sales low.

Lets do some simple break-even analysis. With a $1B investment and a 10% cost of capital, fixed costs are $100 million/year. Lets assume a 5% margin, which would give a $2,000 margin on each car, so the company would have to sell 50,000 cars to break even.

Year to date sales have been a measly 13,500.

The above analysis is probably way too optimistic.

Price is lower: many of these sales are made at discounted 2-year leases as low as $199/month, which translates to $5000 over the two year lease.  And development costs may be as high as $2B. 

Which gives us the unfortunate answer: 
It currently costs GM "at least" $75,000 to build the Volt, including development costs, Munro said. That's nearly twice the base price of the Volt before a $7,500 federal tax credit provided as part of President Barack Obama's green energy policy.

So why are we (does the Government still own GM?) making this investment?

Thursday, September 6, 2012

Tilting at the winds of creative descruction

A venture capitalist criticizes public polices that try to temper their effects:
Capitalism only works if companies are allowed to succeed and fail – on their own merits, in their own time, with their fate dependent on pleasing customers, not politicians. Yet the progressive economic policy-making coming out of Washington today rests on the futile attempt to escape the corporate cycle of life that lies at the heart of capitalism. The current administration actually brags about its interventionist approach, pledging to expand it, despite its manifest failures.

Tuesday, September 4, 2012

Mapple syrup stockpiles raided, how will prices react?

Canadian Maple syrup producers have a problem:  supply is dependent on the weather (you need warm days and cold nights), which varies quite a bit.  Fluctuating supply leads to fluctuating prices which deter producers from developing new products:

Quaker can't pour a bunch of time and money into developing a maple-and-brown-sugar-flavored version of Life, only to find out it won't be able to get enough of its ingredients, or that they'll have to pay through the nose for each liter of syrup.

The solution?  A strategic reserve of maple syrup.

The reserve makes sure there's always enough syrup for the market. As Farrell explained, each producer sells its harvest in bulk to the federation -- a government-sanctioned cooperative -- which turns around and deals it to bulk buyers. When production is high, the federation siphons a portion off to store in steel drums for future use.
But now someone has stolen 25% of the reserve, worth about $30 million.  I expect prices to come down soon.