D(x) Liar's Dice

One of my best board games purchases was a pound of six sided dice. It means we never are missing dice for our games and it enables us to play Liar's Dice with large groups of people. My group plays the elimination variant, not the drinking one. I recently got another pound of dice from Chessex - but this time I opted for the assorted set. Instead of getting just six sided dice, it comes with d4, d6, d8, d10, d12 and d20. I want to play Liar's Dice with these dice too.

Proposed game: D(x) Liar's Dice (Or Nerdy Liar's Dice).

Each person starts with a full set - (d4, d6, d8, d10, d12, d20). It works like liar's poker, where if someone says "three 4s" they are guessing that between everyone, there are at least three 4s on the table. The next person can either call "three 5s" "three 6s" "four anything" or "bullshit" - in a call of bullshit the dice are revealed and the person who is wrong gives up a dice and it goes until only one player has dice left.

You still only call out a certain number of dice showing numbers between 1 and 6. D4 and D6 work as expected - the number on the dice is the number used. For the other dice it is pretty intuitive. Primes are 1, everything else consists of their factors excluding the number 1:

7 is 1
8 is 4 or 2
9 is 3
10 is 5 or 2
11 is 1
12 is 6, 4, 3 and 2
13 is 1
14 is 2 or 1 (The 7 counts as a 1 in this case unless 1's are wild)
15 is 5 or 3
16 is 4 or 2
17 is 1
18 is 6, 3 or 2
19 is 1
20 is 5, 4 or 2

When playing with wilds, 1's are also wild unless they are called by anyone (if the second person can call 1's then the first person bid too low), so anyone can say "four 1's" if that is a legal bid and then ones are no longer wild. In liar's dice with d6 it doesn't matter which dice you give up, but in this game there is some strategy behind whether you want the potential wilds or you want to keep your d4.

This variation should make the strategy more interesting than traditional liar's dice, because now it is actually less safe to move up from 2 to 3 or from 4 to 5, while in the classical game it was always optimal to make slightly aggressive bids of the number of 4's and 5's so people would bid that there are the same number of 5's or 6's on the table rather than having to call bullshit. Now no number is safe, though bidding a slightly aggressive number of 3's to let the person after you bid the same number of 4's or a higher number of 2's seems like a decent strategy.

This game definitely needs some tweaking and play testing - maybe it should be played with more D20s and less D8s. Maybe dice should be drafted or handed out randomly to allow for asymmetric play. 

I'm probably going to need more dice.

Are Walmart and McDonald's Welfare Queens?

Barry Ritholtz, the man behind the Big Picture trading blog, has a column on Bloomberg View where he chastises Walmart and McDonald's for their large number of workers on welfare.  It's titled, How McDonald's and Wal-Mart Became Welfare Queens. He gets right to the point.

"According to one study, American fast food workers receive more than $7 billion dollars in public assistance. As it turns out, McDonald's has a “McResource” line that helps employees and their families enroll in various state and local assistance programs. It exploded into the public when a recording of the McResource line advocated that full-time employees sign up for food stamps and welfare.

Wal-Mart, the nation’s largest private sector employer, is also the biggest consumer of taxpayer supported aid. According to Florida Congressman Alan Grayson, in many states, Wal-Mart employees are the largest groupof Medicaid recipients. They are also the single biggest group of food stamp recipients. Wal-mart’s "associates" are paid so little, according to Grayson, that they receive $1,000 on average in public assistance. These amount to massive taxpayer subsidies for private companies."

Ritholtz highlights three different possible solutions to the scenario that highlight the extent to which McDonalds and Walmart are abusing the system.

1. Raising the minimum wage.

2. Taxing companies for any public assistance their employees need.

3. Implement a guaranteed basic income for all adults like is currently proposed in Switzerland.  

(It seems appropriate to note that while basic income replacing welfare is an interesting theory, the proposal on Switzerland's ballot is absurdly high, as they are attempting to guarantee income equivalent to $67,000 a year for a married couple.)

The first solution references a long running debate among economists. If wages are forced significantly higher, it's likely that some current employees will be better off and a lot of potential future employees will be never be hired. Automated cashiers are basically a solved problem, and it's no coincidence that McDonalds are rolling them out in Europe where labor costs are higher before we see them here in the United States. Walmart also has cashiers that could be replaced if costs were higher.  It's a little ironic that people complain more about Walmart and McDonalds hiring cheap workers than they do about Amazon, which bought the robotic company Kiva Systems in order to reduce their need for human workers. If labor costs get high enough, Walmart might start to look at this type of automation more seriously.

The second solution jumps out as being immediately farcical. Before jumping to tax companies that employ anyone needing assistance we should stop and think about what that would mean for the hiring prospects of anyone that looks like they require this assistance. This is an example of the type of regulation that actively hurts those who it is designed to protect.

The third solution, which Ritholtz acknowledge as extreme, is interesting in theory. A guaranteed basic income, properly designed, is not very different from a negative income tax or our current Earned Income Tax Credit.  Negative income taxes theoretically work quite well, their main downside being that they lead to high marginal tax rates and reduce the ability of a society to be open to poor immigrants. The main problem with guaranteed income plans comes with the exceptions - the income is designed to replace welfare but there are always some groups that are seen as slightly more deserving and the process will inevitably allocate them a little more than others. This turns what was supposed to be a simple catch all program into one that merely magnifies the current problems of the welfare state. 

Thinking about whether or not Walmart and McDonald's are abusing the current system is an interesting question. But when we look at proposals to fix the problems it becomes apparent that the alternative to paying a lot of workers a bit of money could lead to these companies investing more in capital and paying fewer workers. 

Without employment opportunities at Walmart and McDonald's and other similar work places, many of these workers would have no jobs at all. The government would then have to pay out even more benefits to support people with no other incomes. It's not like they are perfect corporate citizens, McDonald's and Walmart have lobbied federal, state and local government for various rules that help them and hurt their competitors while they take advantage of every tax break they can. 

It's reasonable to think that many of the tax loopholes used by these companies should be closed and the various laws their lobbyists helped tweak before passage should be repealed. But the fact that McDonald's and Walmart employ low skill labor and pay them at the levels dictated by supply and demand is not something that should be held against them. 

Useful and Wasteful Signaling

One of the goals of this blog is to make sure that I never run for office in the future.  That said, a recent Talking Points Memo by McMillan Cottom, Why Do Poor People 'Waste' Money On Luxury Goods?, looks at an interesting topic. (Hat tip: Gene Z)

"I learned, watching my mother, that there was a price we had to pay to signal to gatekeepers that we were worthy of engaging. It meant dressing well and speaking well. It might not work. It likely wouldn't work but on the off chance that it would, you had to try."

Owning a nice outfit for job interviews or general interaction with the outside world can vastly improve the results. That's why the phrase "dress for success" is generally accepted as common knowledge. And it is a particularly useful strategy for groups that are likely to be discriminated against in everyday interactions. 

However, the point doesn't actually counter the normal critiques of wasteful signaling spending by the poor.  When people discuss the wasteful spending, it isn't about buying a nice suit. They are usually geared towards behavior such as spending more money on large jewelry or flashy footwear.

For those looking for some hard data on this, the 2012 Federal Reserve's Consumer Expenditure Survey found that African Americans had after tax incomes almost 30% lower than Whites and Asians yet spent almost 25% more per year on footwear. On an absolute basis, the only category of people to spend more on footwear were Asians, yet they still spent a significantly lower amount of their total after tax income.

The spending on footwear and jewelry and other such items is still signaling, but unlike buying a nice suit this is signaling at the in-group. The people who respond positively to these signals are generally in similar cultural and social circles. Buying suits or outfits to fit in at a common work environment is signaling an outside group and potentially changing their view in an important way.  Signaling outside groups can be a productive behavior, and if enough people do it then it can change people's perspectives and reduce the need to signal in the long run.  

On the other hand, signaling to inside groups is very wasteful. Everyone is wasting resources in an attempt to establish relative status positions. This type of behavior should not be encouraged unless there are other significant benefits from signaling behavior. An example of a signal that could be useful is parents bragging about their children's educational achievements* or people exercising and eating healthy to be in the best shape.  In the long run, this is much more productive than trying to wear nicer clothes or drive nicer cars. 

Cottom ends their piece with a plea for people to be more understanding of signaling by poor people.

"You have no idea what you would do if you were poor until you are poor. And not intermittently poor or formerly not-poor, but born poor, expected to be poor and treated by bureaucracies, gatekeepers and well-meaning respectability authorities as inherently poor. Then, and only then, will you understand the relative value of a ridiculous status symbol to someone who intuits that they cannot afford to not have it."

It is true that most of us (I'm making demographic assumptions about my 15 known readers here) aren't in a position to understand what poor people go through. But overall the piece lacks an understanding that there are important differences between useful and wasteful signaling. The useful signal helps correct an incorrect view held by others. The wasteful signal is spending limited resources on playing in-group status games with no long term benefits.

*To an extent. Our current obsession with college degrees regardless of the cost or usefulness of the major is actually one of society's current problems.

Anecdotes about Russian Drinking

1. Beer has only recently been labeled as an alcoholic beverage.

2. The etymology of vodka is very closely related to slavic the word for water.

3. "Russia’s official addiction expert, who in the past, according to Heidi Brown, has advised Russians who like to drink a lot with dinner to open their windows a bit in order to get less drunk..." (Hat tip: MR) The rest of the article discusses why Alcoholic Anonymous is not popular in Russia. One of the major reasons is that excessive drinking is not seen as problematic unless/until it causes a person to end up homeless in a ditch.

Less funny is this chart of male and female life expectancy, which shows some of the impact the drinking culture has on life expectancy:
The difference between male and female life expectancy was over 11 years in 2011, the largest difference in the world.

An example of pride and falling

“I’ve been painted as a megalomaniac, as someone who is vain, proud. My response to these ‘accusations’ is that none of these things is a defect or anything reproachable.” - Eike Batista

This was a quote that the Financial Times highlighted from Eike Batista's autobiography. Just two years ago, around when the autobiography was released, his assets were valued at $34.5 billion. More recently they've been valued at $200 million. This is related to his oil company, OGX, which recently initiated the largest ever bankruptcy filing in Latin America. The oil company wasn't Batista's only asset, far from it. But he loaded the company with debt that he personally guaranteed. He was so confident he even sold put options on the stock to his company (It's unclear if the $200 million net worth estimate from Bloomberg assumes that Batista will have to buy $1 billion dollars of almost worthless stock or not).

A former associate of Eike highlighted another of his flaws in this Businessweek piece. It is one that many powerful individuals seem to have.

“Management was structured in a way that there was incentive to take only good news to Eike because he had a tendency to shoot the messenger,”

So it probably wasn't just pride that caused this disaster. Pride in and of itself is not necessarily dangerous. It comes before both success and failure. It is dangerous when it causes the actor to become overconfident in their own projections and reject conventional wisdom that is actually correct in their specific situation. "Don't shoot the messenger." "Don't drill with debt." "Don't put all of your eggs in one basket*."

*This isn't always rational if you want to make a very large sum of money. You need all of your eggs in one basket to make a fortune in the first place, as founders of companies who sell too early don't become as rich as the ones who retain ownership as the company grows. But once a significant fortune is acquired, it is irrational to expose the whole fortune exposed to single risk factors.

Bitcoin Price Action after the Silk Road Closure

Bitcoin is an online crypto currency that has grown significantly from its introduction in January 2009. While tech enthusiasts like using it for its own sake, it is mainly used in black and grey market transactions. If you want to get money out of Cyprus or if you want to switch your money into Argentinian pesos without going through official channels then bitcoin is the right tool.

It was also the currency of choice for people in the developed world looking to buy drugs online. This marketplace, known as SilkRoad, was closed down recently. Rather than falling, bitcoin prices have doubled since the closure.
Source. The day Silk Road was closed is easy to see in this chart.

Why? There has been some good news for bitcoin. Baidu, one of China's larger internet companies, has a security and firewall division accepting payments in bitcoin.  This seems like a really positive trend for bitcoin, but speculators should not count on China to promote official acceptance of a currency designed to get around capital controls. Once party leaders understand that situation it is unlikely that this trend will continue in China.

Still, there is another reason for the price of bitcoin to go up.  With the closure of Silk Road, many users who were active users of bitcoin became hoarders as they had no where to spend the money. Inertia means many of them remained holders of bitcoin, and in the face of rising price action they will likely remain holders and opt to instead spend currencies that face inflationary pressure. In addition to users who are no longer spending their money, the government seized the bitcoins of many Silk Road users. This means the supply of active bitcoin in the market shrank significantly in the aftermath of the closure.  This reduction in supply more than countered the reduced demand for bitcoin by consumers who might have been enticed by Silk Road to enter the bitcoin ecosystem.

Bitcoin is a fiat currency whose main value is its effective design and current network effects.  As long as it is accepted in the black and grey markets around the world it should flourish. However, speculators should always keep the idea in the back of their mind that despite it's increasing value, bitcoin could still be the Friendster of the crypto-currencies. 

Fighting Foreign Corruption

Thanks in large part to the internet connecting the world like never before, the first decade of the third millennium saw unconditional convergence. The poorer countries didn't have to become significantly less corrupt in order to approach the technological frontier, they just had to let their citizens get online and connect with the world.  This naturally resulted in an increase in outsourcing and trade as global coordination was made possible. 

With all of the growth coming from emerging markets, multinational corporations based on developed countries are very eager to do business there.  The problem they have is that they have to follow the Foreign Corrupt Practices Act while their competition does not. Not only do corporations have to contend with connected local businessmen, they also have to worry about emerging market companies who have fewer scruples and no significant consequences for their actions. If they are caught red handed in corruption, their businesses in the developed world might be at risk of civil penalties but it is very simple to avoid those issues - they just stay under the radar and avoid doing business in jurisdictions where they are liable.

One tool that can be used is to go after the corrupt officials themselves. The Magnitsky Act was designed to go after corrupt Russian officials who were involved in the torture and death of Sergei Magnitsky after he uncovered hundreds of millions of dollars being stolen by Russian tax officials. They are not allowed to enter the United States or use the banking system.

One of the police officers tried to challenge the law in UK libel court and had his case thrown out. This takes away one of the key tools that targets of these sanctions can use to fight back.

This act by itself and others in the future won't solve the problem of corruption, but it should help on the margin. If individuals think that acting in corrupt manner will close off their access to safe havens in the developed world, they might think twice.

Government Shutdown Links

1. Nate Silver on the political impact of the shutdown. Absent a crisis, it doesn't look like it will be significant for midterm elections.

2. Larry Summers insults Peter's 20 under 20 fellowship. Larry Summers isn't thinking hard enough about what the program is designed to do. If he did, he wouldn't be so quick to criticize it.

3. A transcript of Tyler Cowen's talk about thinking in stories. I've linked the talk in the past, but the following lines need to be re-emphasized often:

"As a simple rule of thumb, just imagine every time you're telling a good vs. evil story, you're basically lowering your IQ by ten points or more...

...what kind of stories should we be suspicious of? Again, I'm telling you it's the stories that you like the most, that you find the most rewarding, the most inspiring."

While thinking in stories on the margin is probably a mistake, the interesting implication is also about how telling stories can make those around the storyteller turn off their brains temporarily. It's probably why almost every highly regarded academic or executive has a few go to stories that they refine and tell over and over again - it's very effective.

4. Robin Hanson is praising profanity. The theory is that profanity helps vent aggression, gauge emotional toughness and helps groups figure out when they are pushing people up to or beyond their limits. 

"So it makes sense that today profanity is more common in work groups that depend closely on one another, and who have high levels of physical and emotional stress....

...I take recent increases in campus speech codes that basically ban any talk that anyone might offend anyone as further evidence that schools are more about signaling status than about gaining productivity."

Game Theory of the Government Standoff

We are a couple of days into the government shutdown. The GOP doesn't want to pass a continuing resolution without a concession from the Democrats, while the Democrats don't want to grant any concessions to the GOP after they gave away what they felt to be too much in previous negotiations over the federal budget and debt ceiling.

During this standoff, Obama apparently attempted to scare the markets.

Obama dismissed talk on Wall Street that Washington will solve its problems, warning that the fight this time is putting not only government operations at risk, but the debt ceiling as well.

“I think this time it’s different,” Obama said in the interview. “I think they should be concerned.”

Tyler Cowen's analysis of the situation is broadly accurate - a market panic which would result in a solution won't occur because there would be no reason for the market to panic in the first place if a solution would result from that panic. Assuming he understands the nature of markets, Obama is probably more concerned with getting Wall Street donors talking to congressmen than he is with helping cause a market panic in order to force everyone to act.  When thinking about what would cause markets to panic, a conclusion we should draw from this is that the markets won't panic about the situation until and unless even a market panic has some chance of not resolving the situation. The market crash after the first TARP vote failed falls into this category. In our current situation, it means that if the political institutions require a market panic in order to act then things will probably occur on a very last minute basis, perhaps just as the Treasury is running out of ways to borrow money despite almost hitting the debt ceiling. 

Right now the political situation looks like a zero sum game. Either the GOP lose by not even getting a small concession to show for their trouble or the Democrats lose by going back on their word about not negotiating until a continuing resolution is passed. Unless both sides figure out a solution they can rhetorically pass off as a victory there isn't an obvious compromise on the table.

So Warren Buffett is probably right when he says that the US will approach but not cross the point of extreme idiocy. 

The Direction of Global Inequality

Which way is global inequality going? 

This should be a question with a simple answer. First, the question must be clarified. Usually answers to this question refer to the Gini coefficient, where a number close to 1 implies all of the wealth is owned by a few and a number close to 0 indicates that income is distributed more evenly.  If the question is asking about the direction of income inequality in various countries around the world, the answer is obvious: It is going up.

The above chart from a 2011 OECD report on income inequality highlights that income inequality has been rising in most countries around the world. It may be that national inequality is more important than global inequality, as electoral (or revolutionary) politics have a history of working more on a national basis than a global basis.

Still, the direction of global income inequality is still interesting for its own sake. A World Bank working paper, Global Income Inequality by the Numbers: In History and Now by Branko Milanovic looks at three different ways of measuring global inequality.

Concept 1. Inequality between countries.

Concept 2. Inequality between countries weighted by population.

Concept 3. Inequality between individuals of the world.

The first two are easy to measure while the third metric is much harder to get data for until the 1980's. Concept 2 is clearly superior to concept 1, as smaller countries should not be weighted the same as significantly larger countries. By the same measure, concept 3 is superior to concept 2, as wealth in developing countries is less significant if it is wholly in the hands of a few. The only downside to concept 3 is the inherent data problems as surveys of the very poor and the very rich will often be skewed.

Looking at concept 2 and concept 3, it appears that worldwide inequality has actually been falling during the 2000's. It may be a little unintuitive that inequality can go up everywhere but down in total. But those in the bottom third of the income distribution have seen their real incomes rise between 40% and 70% over the past 20 years. This has created a new middle class and the income distribution has become somewhat more equal overall even if countries where people are coming out of poverty are also creating many new US dollar billionaires.

Whether or not this trend will hold is another question entirely. The internet gave a boost to the economic institutions of almost every country in the world, so from the mid 2000's up until the financial crisis we had unconditional convergence between developing and developed countries. Going forward, institutional quality might again begin to cap the growth of developed countries around the world. And if that happens, world inequality may start to increase yet again.