tag:unpleasantfacts.com,2013:/posts Unpleasant Facts and Other Musings 2016-03-25T07:00:50Z Jeff Lonsdale tag:unpleasantfacts.com,2013:Post/1019423 2016-03-25T07:00:50Z 2016-03-25T07:00:50Z The Video Blog Ghetto One of the more disturbing trends on the internet is the ghettoization of extreme cultures. People don't have to interact with each other if they don't want to. Liberals can read the Huffington Post, conservatives check Drudge Report. More extreme people all have their websites, each equipped with specific ideological blinders.

Sometimes there is some cross pollination, but people are usually only exposed to members of other groups through quotes provided by their preferred sources. This happens when there is a debate around a current partisan issue, or more often when an author is trying to make a point that people on the other side sure are stupid/racist/sexist/etc.

Either way, the statements from the other side are at least quoted and links to their original location are generally provided. A reader can browse through the respective articles and come away with a conclusion as to how the evidence seems to stack up. People are still biased and will likely stick with their own ideological champions, but at least it is feasible to get a fuller picture of the debate in a relatively short amount of time.

But a new trend has been emerging. We don't see many new blogs, but there are now a lot of video bloggers on all parts of the spectrum. Though more often than not the political vloggers are on one of the more extreme sides or they would not have started a political video blog. In some sense, arguments in video format should be more persuasive. Videos can more fully utilize sarcasm, humor, body language and can utilize graphics in ways a blogger writing an article cannot. But while they may be very convincing to a subset of people, they are also isolating themselves from the general debate.

Part of this is because watching a video is a bigger commitment than reading an article. A two minute read becomes an eight minute video. Skimming a video is much less effective than skimming a post. Hoping someone takes the time to watch a video is a bigger ask.

Vloggers are also isolated from mainstream debate because citing and responding to inaccurate parts of the video is more difficult. You can't just copy and paste the questionable arguments into a paragraph in order to expose where the vlogger is mistaken. You either have to type out the relevant transcript, describe the vlogger's arguments in your own words (increasing the chance of misstatements), link to the point in time of the most egregious part of the video, or have the people observing the discussion watch the whole video themselves and potentially waste the time of their readers.

Given the most ideological video bloggers have relatively niche audiences, this is a lot of work to have a dispute. And it's already work when a person who disagrees with you has a very different ideological perspective. And since vloggers are generally not yet high status people, there is even less reason to engage. (We will see more critiques of documentaries or of people who appear on television). Most people would reasonably choose not to start or follow up on an argument with someone who communicates primarily through video (or for that matter, a podcast without a transcript). The most likely person to respond would be another vlogger (or podcaster).

This creates a dynamic where vloggers start dialogue with people who are on the other side, but never receive feedback from anyone outside their ecosystem. They end up shouting into the wind. 

But it's not just the wind, they have some followers. And these followers see how their relatively articulate vlogger is rarely countered by people with opposing ideas. These viewers and the vlogger themselves are at high risk of thinking they don't get responses because the videos make incontrovertible arguments, and not because it's too much trouble to call bullshit on long winded videos.

And that's why we can expect video bloggers to be relatively extreme, they are engaging people in a medium where debate is far more inconvenient. This format is far more popular among younger internet users, so it is somewhat scary to think about how political discourse will evolve under these dynamics.

Note: Maybe a simpler hypothesis is that most video blogs are the new long winded disorganized blog or forum posts. Generally, no one with the relevant knowledge would take the time to counter them. Yes, I appreciate the irony. This is post getting a bit long winded. 
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/1007916 2016-03-05T21:59:10Z 2016-03-05T22:18:37Z Ted Cruz's Game of Chicken It looks more and more like Trump is going to run away with enough delegates to become the GOP candidate. There aren't many polls where Trump doesn't have a plurality of GOP voters in upcoming states.

And yet, Trump rarely has the support of a majority of GOP primary voters. If this were a one on one competition Trump's position would be considerably weaker. Fortunately for Trump, GOP candidates have a coordination problem. 

Kasich and Rubio are staying in the race because they hope that between them and Cruz they get enough votes to force a brokered convention in which they might emerge victorious. Recently Cruz came out against the idea of a brokered convention.

"Any time you hear someone talking about a brokered convention, it is the Washington establishment in a fevered frenzy, they are really frustrated because all their chosen candidates, their golden children, the voters keep rejecting," Cruz said Friday at the Conservative Political Action Conference (CPAC).
 
"So they seize on this plan of a brokered convention, and the D.C. power brokers will drop someone in who is exactly to the liking of the Washington establishment. If that would happen, we would have a manifest revolt on our hands all across this country."

This is a message to the establishment and to Rubio and Kasich. He will not play their game. If they want to stop Trump the only way is through him. If they stay in the race, they will all lose. He's shown his intransigence in the Senate. He's hoping that they know that he will not back down.

He's followed up his words with actions. The path to a brokered convention where Cruz might still come out on top is easier if Rubio beats Trump in the winner take all state of Florida. But Cruz has recently started campaigning in Florida, potentially splitting the Trump vote and reducing Rubio's chances of winning.

It will be interesting to see if the establishment and their candidates back down before Trump's victory is ultimately assured. So far it looks like they will refuse to budge and both sides will lose this game of chicken.

Ted Cruz's only hope is that the signal of a few unexpected victories will be enough to convince others of his strength, determination and ability to win. The establishment is not going to blink in a game of chicken if they think giving in to another extremist doesn't even have a chance of working. But when you involve the egos of people who think they should be the president, it's likely that everyone will lose in a game of chicken.
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/1001355 2016-02-25T21:35:20Z 2016-02-25T21:35:20Z Today's Negative Nominal Interest Rates Won't Work A lot of central banks have moved towards negative interest rates. Some people think it is essential that central banks ease below the zero boundary. This includes central bankers at the ECB, in Denmark, Sweden, Switzerland and Japan who have all implemented negative rates.

Some critics believe that negative rates will have all sorts of unintended consequences. Even proponents of negative rates sometimes lobby for a move towards a cashless society where negative rates can be implemented with potentially fewer unintended consequences.

Regardless of whether side is correct, negative nominal rates are a sign that central bankers will fail to accomplish their goals. 

In the case of critics of negative nominal rates being correct, the reasons are relatively straightforward. Something will go wrong. Maybe attempts to avoid negative rates by changing deposits to cash mean negative rates merely incentivize unproductive behavior. Perhaps negative interest income of banks drive deleveraging, or the uncertainty of negative nominal rates negatively impact the markets. There are many possible unintended consequences that could cause negative nominal interest rates to be counterproductive.

What is interesting is that even if negative nominal rates are necessary and proper, things will still turn out badly in our current environment. Central banks are naturally cautious, and negative interest rates a new territory that they will not dive into. When central banks think an interest rate cut is necessary in positive nominal rate regimes, they usually move in increments in 25 or 50 basis points. However, many central banks are being very reticent about moving interest rates negative around or past the zero-bound - the Bank of Japan is a good example. They only moved the rate to negative 0.1%, and only apply it to specific accounts held by financial institutions held at the BOJ. To the extent that negative rates are necessary and proper, central bankers are too scared to move the rates sufficiently negative.

So either they are messing things up by implementing negative rates, or their negative rates won't be sufficient to accomplish their goals. This helps explain why the Japanese yen has actually strengthened since the implementation of negative rates by the Bank of Japan. Either they aren't doing enough, or what they are doing is counterproductive. Even if it is difficult to parse what negative nominal rates will do, it is safe to say that central banks resorting to the implementation negative nominal rates are unlikely to accomplish their goals.
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/993489 2016-02-15T02:13:36Z 2016-02-15T02:13:36Z The GOP Establishment's Primary Problem It's been a long time since I've posted. And I've been following the primaries much more closely than is probably healthy. Following primaries is unhealthy for a few reasons. First, it's paying attention to things that are hard to benefit from or change. Second, believing that the future of our country is changing on a day to day basis with the polls ascribes a bit too much explanatory power to politics when the default is for the major parties to trade nominal control without usually making drastic changes. Finally, no one thinks reality TV is good for you, and this season politics and reality TV are inter-lapping more than ever before. Also, closely following the GOP primary is counter productive when demographics suggest that any moderate Democrat should be able to win in the general election in today's status quo. That said, I have some thoughts that I am going to in-advisably share with the internet.

The GOP primary is a coordinated action problem for the Republican establishment. They really don't want Trump to win. They don't like Cruz. Unfortunately for them, voters do not like them. Between Trump, Cruz and Carson, the anti-establishment Republican candidates are polling at over 50%. To have any hope of beating either, they need to unite behind one candidate. Scott Walker saw this early on, along with his relatively low poll numbers. But what is driving the establishment candidates still in the race?

The establishment money and votes are currently spread between Jeb and Rubio and with a little bit of money and more votes going towards the more moderate Kasich. Given how they are currently polling nationally, the first order solution is to throw support behind Rubio. There are currently a three issues preventing that.

First, Rubio's robotic performance in the pre-New Hampshire debate made him look stupid. He's already relatively inexperienced, so any signals that he'll help Democrats accentuate this weakness in the general election is extra worrisome.

Secondly, there is a perception that Rubio is a disloyal former Jeb Bush lieutenant. George W. Bush's book on his father, 41, made loyalty a central theme. Jonathan Haidt's research tells that loyalty is even more important to conservatives, so a sizable group of Bush loyalists will resist rewarding disloyalty. 

The third issue is immigration. On this issue Rubio is not only out of step with a significant amount of conservatives, but he has demonstrated his ability to at least partially change his position when he comes into power. So the GOP establishment has someone who is disloyal and changes positions. 

Even with all of those problems, Rubio has plenty of money and is polling moderately nationally. With full establishment support he'd have a plurality of voters against Cruz and Trump. Absent a new self inflicted wound, he has no incentive to bow out at this point.

The other establishment hope has been Jeb! Jeb's problems are simpler than Rubio's. Jeb just isn't a good enough candidate to make up for the fact that he is a Bush. Not enough people support him. In a recent poll, 24% of Republicans claim that they would not support him in the general election even if he became the Republican nominee. The only candidate who has more Republicans refusing to support them in the general election is Trump, at 30%. The massive amount of money that he and his super PACs have raised will keep him in the race. My prediction is that he will stay in the race as long as it looks like he has a chance and/or if he believes that staying in the race will harm Rubio.

That leaves Kasich. He's more moderate, which works against him in primary season. He doesn't have the name recognition that McCain had, and without funds he is well behind on setting up his political organization outside of the time he spent in New Hampshire. When his second place finish in New Hampshire coincided with Rubio's debate implosion he seemed like the perfect compromise candidate. But he might not be able to stay in the race long enough to garner the establishment support, he entered the year with a lot less cash on hand than either Bush or Rubio. If he does stick around the establishment might default towards him, if it isn't too late by that point. Being more experienced and less ideologically conservative than Rubio, Kasich has little incentive to step aside for Rubio.

South Carolina and Super Tuesday might encourage establishment GOP members to get their collective houses in order, but the longer this disorder goes on the better it is for both Cruz and Trump. The way things are going, we may even see a brokered convention. That would be fun, at least for those of us who like a certain type of reality TV.
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/948971 2015-12-13T10:17:44Z 2015-12-13T10:17:44Z Good policy held hostage There are a lot of silly laws out there. People on all sides of the aisle would agree on that. And many would agree that some form of the solution is relatively obvious. But even when a most reasonable people on all sides would agree that a policy is bad the work to change it is just beginning. 

That's because fixing broken policy still creates winners and losers. And sometimes those winners are more on one side of the spectrum than others. Unfortunately, giving away a free win to the other side in the name of good policy is bad politics. 

This is a broken part of our system that is under discussed today. The current debate around oil exports in congress is a prime example of how hard it is to fix. Policy implemented in the 1973 oil crisis banned exports in most circumstances. So this is a forty year old nationalistic policy implemented in the midst of a crisis around a good whose supply and demand dynamics have flipped on its head in recent years. It obviously should change, and the White House's primary argument against it is that they would like to keep control of their ability to allow or disallow oil exports.

So unfortunately, if this policy is going to pass it needs to be included as part of a broad deal on spending and taxation. And tax credits to solar and wind companies need to be extended (corporate welfare in action), so each side gets a win. Refineries who have benefited from captive domestic oil producers and earned out sized profits for years may or may not be handed a tax credit as a consolation prize for losing their captive oil suppliers.

It is true that there is some real opposition to changing the inane law preventing oil exports from people who seem to think that our carbon energy based society needs to be made as inefficient as possible if they are going to reduce emissions in the long run. Politicians that count on support from these confused constituents could use a small victory to show them. But holding back a fix on bad policy to implement something for their special interests should be mocked the same way as Republicans who threaten a debt crisis to get their way on minor spending matters.

And outside of the debt ceiling hostage shenanigans, many within the GOP have acknowledged that they will fix the carried interest tax loophole only as part of an overall bargain around reforming the tax code. They are holding back an obvious policy change favored by almost everyone not currently utilizing the loophole as a bargaining chip.

A very similar dynamic is occurring within immigration policy, this time with Democrats holding back some obvious fixes unless the GOP agrees to a comprehensive deal. People on both sides know many of the things that need to be done with high skilled immigration. They don't quite understand that high skilled immigrants should never be placed in the position of indentured servants, but they generally recognize that educating students at world class colleges and then making it difficult to stay and live in the United States is bad policy. 

However, there is no chance of this being fixed unless the more difficult problem of low skilled immigrants is addressed. Each year this policy isn't fixed, too many promising college graduates decide to head back home where they can get jobs or start companies without worrying about legal issues. Even if the preferred solution to the thorny political problem would be good policy, holding acknowledged good policy hostage as a bargaining chip is an action that needs to be understood as a destructive tactic.

Our government is dysfunctional enough. Whenever there is general consensus on what would constitute good policy the politicians holding policy fixes hostage should not be given a free pass.
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/905346 2015-09-15T13:53:30Z 2015-09-15T13:53:30Z Protecting Students with Double Negative Rights One framework that I've found to be useful when thinking about policy is that of positive and negative rights. When thinking about who benefits, it's helpful to determine whether a policy protects an individual from others or if it gives individuals a claim on other members of society. I've used this framework in the past to discuss corruption in developing countries. To avoid both plagiarism and re-paraphrasing common knowledge, I'll quote myself:

"Negative rights are things that are prohibited from being done to a person, and includes areas such as freedom from violent crime, private property (freedom from theft), freedom of speech and freedom from slavery. Positive rights are things that society must provide for a person. These include areas such as the right to police protection, housing, a job, food and health care. Many positive and negative rights conflict either indirectly or directly with each other. While a police force might help enforce the negative right or protection from violent crime, it also weakens the right to private property by requiring that citizens have some of their money taxed in order to pay for that protection."

When thinking about how these categorizations of rights might apply within our modern cultures of victimhood, it becomes a little more complicated. Take the new proposal by the University of California Regents which hopes to label being "free from expressions of intolerance" as a "right," recently highlighted by Eugene Volokh. The proposed policy principles state in part that.

"Everyone in the University community has the right to study, teach, conduct research, and work free from acts and expressions of intolerance...

...Addendum

The following non-exhaustive list contains examples of behaviors that do not reflect the University’s values of inclusion and tolerance, as described in the Regents of the University of California’s Statement of Principles Against Intolerance.

* Vandalism and graffiti reflecting culturally recognized symbols of hate or prejudice. These include depictions of swastikas, nooses, and other symbols intended to intimidate, threaten, mock and/or harass individuals or groups.

* Questioning a student’s fitness for a leadership role or whether the student should be a member of the campus community on the basis of race, religion, ethnicity, national origin, citizenship, sex, or sexual orientation.

* Depicting or articulating a view of ethnic or racial groups as less ambitious, less hardworking or talented, or more threatening than other groups.

* Depicting or articulating a view of people with disabilities (both visible and invisible) as incapable."

Volokh goes on to highlight some of the more inane situations that could result.

"For instance, articulating a view that people with various intellectual disabilities are incapable of various intellectual tasks, or people with various physical disabilities are incapable of various physical tasks, would be condemned by the authority of the University."

It is interesting to fit these policies into the framework of positive and negative rights. Students, staff and administrators will not have to hear anything that might disturb their delicate psyche* and on that basis it looks like the Regents are trying to define a new negative right. But protecting people from offense is a false negative right. If a large subset of people become offended when women refused to cover up their left hand, the policy of protecting the offended by mandating gloves would not be the enforcement of a real negative right. The obligation of the women the cover their safehand for fear of offending crazy people would be best understood as a nonsensical positive right.

The required self censorship by many who would in the normal course of events cause offense is a duty imposed on them. The new policy of the Regents is the creation of a double negative right, or a nonsensical positive right. 

My grammar school teacher always made sure to point out when I was using a double negative because that meant I was being incoherent and if the Regent's principles are adopted the forthcoming policies are likely to be similarly incoherent**. The implementation of a speech and conduct code that discourages students from even thinking of discussing protected groups in a negative manner will not change hearts and minds. Students won't lose their prejudiced views, it will just prevent their views from facing scrutiny in the light of day.

If the approved answer to "What is your physically disabled classmate capable of?" has to always be "Everything!" then the ignorant students will never learn when the true answer is "Actually, a lot more than you thought possible." because there is less likely to be any discussion in the first place. It's better to let the prejudiced or misguided air their beliefs openly where they can be confronted with reasoned debate and facts.

Universities should make sure students are safe. Preventing vandalism, unwanted graffiti and actual threats to students are causes that everyone can stand behind. But academic institutions should encouraging discourse, and enshrining principles that will make people scared to state what they think is true for fear of punishment does the opposite. If I told you ten years ago that an institution's leaders decided that a large subset of contentious topics are not open for debate and anyone bringing up forbidden ideas will likely be condemned, you would have assumed I was talking about a religious institution or an authoritarian government. Today, more of you would have filled in the details correctly. And that might be the saddest part about this story.


*The neuroticism of Americans has been consistently increasing from the 50's through at least the 90's, so they may be right about the vulnerability of today's college students and staff. But it's likely that the implementation of policies such as the above exacerbate the situation.

**Often the application of negative and positive rights framework can also be incoherent, because outside of the simple cases it depends on how the rights are framed. If this post seems to go off the rails a bit, it's because I really wanted to use the phrase "double negative right" to describe anti-free speech rules and nonsensical positive rights in general. Unfortunately, I can't easily tell if the phrase "double negative right" has been used in a similar context due to the popularity of the phrase "that's a double negative, right?".
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/903837 2015-09-11T11:44:08Z 2015-09-11T23:17:14Z Honor vs Dignity vs Victimhood Cultures Jonathan Haidt posted a really interesting article that puts the recent increased focus on microaggressions into a larger context. He posted the paper Microaggressions and Moral Culture by Bradley Campell and Jason Manning. The basic thesis is that the increased policing of microaggressions could herald another major cultural transition akin to the transition that occurred in Western societies in the 18th and 19th centuries. 

The cultures displaced in the 18th and 19th century West were cultures of honor. Honor was something that had to be earned and protected. The classic example of defending honor would be the duels that were fought to defend honor. These duels were fought even if the slight that caused the duel was unintentional. Members of honor cultures would be less likely to appeal to the law for help and are more likely to settle disputes themselves.

This culture of honor was displaced by a culture of dignity, where it is assumed that all humans have dignity that does not have to be earned or personally defended. People socialized into cultures of dignity rely more on centralized authority to settle major disputes, and will be more likely to shrug off minor slights that would need to be addressed in honor cultures. Campell and Manning point out that "Sticks and stones may break my bones but words will never hurt me" is a concept that is foreign to honor cultures.

In settings where censuring those who engage in microaggressions is becoming common, this culture of dignity is being supplanted by a culture that Campell and Manning label a culture of victimhood. In their words:

"A culture of victimhood is one characterized by concern with status and sensitivity to slight combined with a heavy reliance on third parties. People are intolerant of insults, even if unintentional, and react by bringing them to the attention of authorities or to the public at large. Domination is the main form of deviance, and victimization a way of attracting sympathy, so rather than emphasize either their strength or inner worth, the aggrieved emphasize their oppression and social marginalization."

The last transition from a culture of honor to a culture of dignity occurred during a step function upwards in economic growth. Cause and effect are messy, but the culture of dignity reinforced things that are beneficial to economic growth. The rule of law and the ability to trust strangers enough to work with them are both more difficult to implement in cultures of honor. 

This current potential transition from a culture of dignity to one celebrating victimhood is occurring during a time period of potentially slowing long run economic growth. Again, cause and effect are messy but there are obvious ways that a more enshrined culture of victimhood could retard economic growth. To take one example, the process of documenting and aggregating small offenses to punish people will eventually incentivize people to interact with out-group strangers to a far smaller degree than they have in the past. The act of sending a stranger a message will become a very risky. Transaction costs are increased when every little action is potentially going to be monitored and might lead to severe punishment.

It's important to note that this is not an inevitable transition. Even in our current society, there are many pockets where cultures of honor dominate. The culture of victimhood that is prevalent on college campuses today is not yet the dominant culture. 
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/879896 2015-07-11T23:45:11Z 2015-07-11T23:45:11Z Restaurant advice - ditch the middle Tyler Cowen linked to some very good restaurant advice from Todd Kilman.

The basic thesis is that avoiding mid priced restaurants in favor of high end and low end restaurants will help avoid bad meals.

Anyone living in an area with good ethnic food can see the strengths of this strategy already - a good burrito or broken rice dish is going to beat most meals at casual sit down diners. Middle end sushi places will be getting their fish from the same places that low end sushi places do - they all will be serving the same mass frozen salmon/tuna/yellowtail/albacore that you can find in local Japanese supermarkets - the middle end places will just charge more for the decor and service. The places serving better sushi will be the ones at a high enough price point (or at a mid-high price point but in an area where their overhead costs are significantly cheaper) that take the trouble and expense to source better fish from their wholesalers.

There is a problem with this advice for those who live in or near San Francisco, which arguably has the best middle end food in the country. But even at the high-middle end restaurants in SF I often find myself disappointed as common tropes such as pork belly dishes at froufrou places won't be as good (but will be three times as costly!) as at much cheaper ethnic restaurant.

Kilman ends with a discussion of when middle end restaurants are unavoidable:

"Granted, there are going to be times when you can’t avoid the middle. You’re out with a group of co-workers, say, and need to find a place that satisfies a multitude of tastes and needs. Or you’ve got family coming in, and need to keep the costs down for a big group, while also making sure that a not-so-gently aging aunt is going to feel “comfortable.” These are obligation meals. And there’s nothing much to be done about them, except to go along with the wishes of the group, which, by the way, is what a good chunk of the middle exists to serve—the needs of the many."

One of the best ways to avoid middle end obligation meals is educating potential dining partners. Alternatively, now you know why your foodie friends are avoiding you.
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/816256 2015-02-27T05:02:10Z 2015-02-27T05:02:11Z Loyalty and Patronage Politics Loyalty is often an underrated attribute. It's important for large networks to be oiled by trust and having everyone work from the same page will mean that things actually get done. The Bush family values loyalty highly - it's a theme prevalent in 41, George W's book about his father. A recent NYT article covering Jeb Bush's campaign and their insistence that policy advisers only advise his team highlights how he has similar views on loyalty.

One of the major problems in politics today is a modern elite patronage system in which the government enables the continuation of rent seeking opportunities to large political donors. In this environment, an overvaluation towards the concept of loyalty can backfire. Loyalty to people will mean loyalty to insiders who have been benefiting from policies at the expense of the public.

Jeb Bush comes across as one of the more outwardly sensible GOP figures when it comes to policy, but libertarian leaning supporters need to remember that someone who values loyalty highly will have little interest in dismantling the system that has served their supporters well for decades. 

The principle applies to more than just one family, but it's helpful to remember that seemingly good qualities can have significant drawbacks in the wrong scenario. It's also an important reminder that it is important to identify the long time supporters of politicians, since those are the ones who might be able to call on loyalty for favors that help them at the expense of the public.
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/795671 2015-01-14T02:56:11Z 2015-01-14T19:41:43Z The More Fungible Worker A lot of people have been worrying the technology is taking away jobs and suppressing wages. To a large extent these worries are compared to the Luddites and are dismissed as silly and misguided.

The economist reaction to these worries is basically "That's silly, this is how economic growth works. No one thinks it is bad that the horse driver and telegraph operator jobs have disappeared." Economists are right that old inefficient jobs need to be replaced in order for human society to grow richer over time. When technology satisfies one need, workers are free to take a job that satisfies another of the almost infinite desires that humans have. And when workers are more productive, the marginal productivity of a good worker often goes up proportionally and their wages increase. 

But there is more to the "technology reduces wages" story than economists like to admit. The Luddites tried futilely to stop progress that benefited society, but the artisans themselves really did see their wages fall due to competition from technology. 

The obvious way that technology reduces the wages of workers in the developed world is how it enables and facilitates competition from workers in the developing world. Arnold Kling has called this the Great Factor Price Normalization.  In this scenario the average worker is significantly better off and society gains from trade, but workers in the developed world may see wage stagnation to pair with lower prices.

Arnold explains. "I want to suggest that there is a connection between this trend and the stagnation of median incomes in the United States, and even to the decade-long drop-off in employment here. New patterns of trade are developing that are reducing the advantage that a person enjoys merely for being located in the United States."

But there is a second way by which technology can suppress wages - when technology can guide and track workers the output of different workers becomes more uniform and thus more fungible. Before the era of ubiquitous cheap information technology, training and tracking the performance of mid and low skill workers was more expensive. Workers varied significantly in quality and ability and it made sense to pay workers with experience more so they would not have to be replaced by new workers who would be expensive to train. The extreme example of the fungible worker is the Amazon warehouse worker.

"The programs for our scanners are designed with the assumption that we disposable employees don't know what we're doing."

Amazon can quickly train employees as well as track them to make sure they are not underperforming. There is a smaller difference between one employee and their potential replacement. If an employee decides to leave their replacement is guided by technology that makes the new worker's productivity very close to that of a good worker.

Before these technological advancements, workers enjoyed mini-monopolies. The warehouse worker couldn't be easily replaced because their replacement might be way less efficient as they learned the layout of their workplace. As technology more directly guides low and mid skill workers in their jobs the workers are losing their mini-monopolies. Workers don't need job specific experience to be hired so the supply of workers available to every technology guided job has increased. A higher supply leads to a lower price (the price of a worker is their wage). After full employment is reached the general wage level may increase for low skilled workers, but for now the impact of the Great Factor Price Equalization and the More Fungible Worker are suppressing the wages of middle and lower class developed world workers.
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/787239 2014-12-24T00:30:19Z 2014-12-24T00:30:19Z Vocational Training vs College in the US
Critics of the higher education system in the United States have a lot to complain about, but one of their clarion calls is that there needs to be a shift towards more vocational training. In principle this seems reasonable, the problem is that vocational training in the US doesn't work very well. A study of How College Affects Students found that evidence from the 1990's suggested that the impact of sub baccalaureate vocational training has approximately 1/2 the impact of an associates degree. And associates degrees are less than one half as effective as a bachelor's degree. In recent years, the advantage of a bachelor's degree has increased even more - this causes those who are familiar with the data to be very skeptical of those who call for increased vocational training.

Meanwhile, vocational education does seem to work quite well in Europe. Switzerland and Germany appear to be running many successful vocational training programs.

What's keeping the US vocational programs from looking like the successful European ones?

1. A lot of vocational education in the United States is provided by for-profit colleges that are dependent on federal student aid. For-profit colleges in the United States have until recently only had to convince students to attend and the federal government to continue to provide loans - they have not been held accountable for their failure to provide a valuable education. When the education company with the political connections and the best marketing win, the bad education companies prevent good education companies from taking root and growing.

2. In Europe, the important of a four year college degree is not stressed nearly as much. Especially if students were in a top high school, there is some measure of shame in going directly to vocational education.

3. If only low quality students are going to opt for vocational training right out of high-school, businesses will not want to create apprenticeship programs for workers they would not want to hire.

4. Vocational training in Switzerland starts at the age of 16. Instead of being at school for five days a week, students are in school fir one or two days a week and working at their apprenticeship on the other days. This preemptive sorting does not sit well with the American notion that anything is possible for high school students.

Current critics of the United States higher education system need to understand why vocational programs in the US generally have not worked. The best solution to a poor education system is the creation of a parallel system that works better. Peter Thiel is trying to demonstrate a parallel system operating with top students via his 20 under 20 program. But significant change will not occur without a solution that can be applied to a sizable percentage of average students. These solutions need to provide proof of intelligence and consciousness while imparting useful skills. And perhaps most importantly, any successful large scale education system has to show that their students have a willingness to conform

Defenders of the higher education status quo need to realize that emphasizing the importance of a four year college education for everyone creates a self reinforcing belief that makes it difficult to create workable alternatives. But many of those arguing in favor of our current education system are professors with a lifetime tenure, so some of them might understand the self reinforcing cycle they are perpetuating. 
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/784643 2014-12-17T17:01:15Z 2014-12-22T20:40:19Z Assorted Links: The Environment 1. Death to beavers! The next time you hear someone discussing the environmental benefits of vegetarianism for cutting methane production, see if they are equally as enthusiastic with regards to hunting down beavers in order to cut into some of the 800 million kg of methane they cause. [Edit: Not 800 million kg of methane, but methane to be 800 million kg CO2 equivalent]

Warning: Pointing out the various ways in which politics is not actually about policy is not the best way to make friends at parties. [Edit: And the search for counter-intuitive insights can often lead to inaccuracies]

2. India is attempting to stimulate growth by parring back environmental rules. Considering their current environmental rules are organized, they would need to be replaced anyway. The question is whether this cuts back on the need of bribery or if it just centralizes the bribes into the hands of centralized officials.

3.  The Economist on geoengineering.

"And the mere fact of experiments going ahead might lead people to assume that geoengineering could easily be made feasible, and thus to give up on reducing carbon emissions."

This sounds a lot like the people who in 2009 wanted to pretend that monetary policy was impotent because the fed funds rate were at the zero bound. They made these claims this in order to maximize the size of the fiscal stimulus. Once it was realized that more stimulus was needed, monetary policy became the only game in town and the Federal Reserve implemented QE2 and other programs.

At some point, geoengineering will be the only game in town and the people fighting it today are just ensuring that we will have less data on the long term impact of many potential solutions.
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/775467 2014-11-26T18:42:59Z 2014-11-26T18:42:59Z Leftwing Vegan Problems
I'm neither leftwing nor a vegan. I just found the following line of thought to be an interesting logical problem.

There are many animals killed in mechanical crop harvesting. Clearing native vegetation, or even just utilizing mechanical harvesters, kills many sentient beings. There seems to be an active debate over whether or not enough animals are killed to justify the argument that eating cattle harms fewer sentient beings than eating vegetarian, but there is no question that many animals are killed in the cultivation of plants.

One way to avoid this is to utilize more human labor. Humans are less likely to indiscriminantly kill animals. Farming processes that require significant amounts of human labor, such as having humans pick fruit and vegetables, means that fewer animals are going to be killed by mechanical harvesters.

Vegans (and ethical vegetarians) are more likely than the average population to have political beliefs that see low wage occupations performed by immigrants as a form of exploitation. 

Until they succeed in getting at least some agricultural companies to raise wages to levels that they deem acceptable, leftwing vegans are forced to choose between exploiting immigrant labor or buying products whose production required the deaths of numerous small mammals.

One way to get around this is to not think about or discuss the problem of small animal deaths caused by food production methods. To the extent that the problem of animals killed in plant cultivation is ignored, it is evidence that being a vegan isn't actually about not harming animals.

Happy Thanksgiving!
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/773106 2014-11-21T02:26:37Z 2014-11-21T02:26:37Z Years to Train Physicians: An International Comparison
One aspect that is under weighted in the discussion on US Health Care is the focus on how our doctors are trained. When reform in the healthcare system is discussed, the main question is how the existing healthcare services should be allocated. We look to other countries for models on how health care is produced. Liberals cite the single payer systems in Europe that seem to work with relatively low expenses while conservatives often point to the public/private system in Singapore that are able to provide suitable services at a fraction of the cost of their gross national product.

But the question of allocation is only half the problem. The education of healthcare workers, and more specifically physicians, is a variable that is basically ignored by almost everyone in the health care debate. A 2009 paper by the Global Knowledge Exchange Network provides an overview of differing physician training requirements.
The table above contains data from the paper, supplemented with data from the World Bank, the OECD, the Congressional Research Service, the German Medical Association, and Singapore's Ministry of Health.

A 2013 OECD study found that the United States has the third lowest proportion of general practitioners to specialists among developed economies, with only Hungary and Greece having fewer general practitioners. Looking at the above table it's easy to see why - with education already lasting over ten years, the addition of a few more years for a significant bump up in salary is a strong incentive to avoid general practice. The return on those last few years of training is quite high.

It is interesting to note that a recent study found that foreign trained primary care physicians trained abroad outperformed American born physicians. Whether that says more about industrious foreign born immigrants or burnt out Americans is an exercise left to the reader.

Longer training times restrict the supply of physicians available to treat patients. A restricted supply means that demand must be rationed. In capitalist systems, that rationing occurs with the wages of doctors and costs to the patient going up. In socialist systems, that rationing occurs via longer wait times for patients with less serious conditions. But if restrictions on doctor training were loosened then in mixed systems there would be downward pressure on both prices and on wait times.

Unfortunately, no political reform of the medical system is going to occur without the public support of physicians. And the American Medical Association, the modern guild of physicians, is not going to support policies which have any chance of creating downward pressure on the wages of its members.

While analyzing which countries are most efficient in training physicians is a fun exercise, actual reform in the medical system needs to come more from other places. Ideas to reduce the incentives of hospital physicians to practice defensive medicine, price disclosure by medical service providers and the proper implementation of technology and standardization to reduce administration costs need to be given more weight. The political question surrounding the allocation of resources gets much easier if the amount of those resources can be significantly increased.
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/760022 2014-10-24T22:35:48Z 2014-12-16T15:43:15Z Remember - It's Tesla vs Dealerships
Another state has effectively banned Tesla sales - Michigan. From a public choice perspective it's not surprising that the homebase of the old auto manufacturers is moving against their upstart electric competitor. Creative destruction is always opposed by those who are hurt by changes in the status quo. But people looking at the newest twist in the story from the angle of "Big Three vs Tesla" are missing a key point:

Old school auto manufacturers have been held hostage to dealerships for decades. Laws originally designed to protect large capital investments of dealerships have been extended indefinitely. None of the auto manufacturers are allowed to sell directly into states themselves - politically influential dealerships have locked automanufacturers into a disadventagous long term relationships via dealer franchise laws.

When Tesla was let into New York, it wasn't a compromise with the Big Three that got them a spot at the table - the deal that let Tesla keep their retail outlets also helped the dealerships in their relationships with out-of-state manufacturers. 

This doesn't make the strategy of the Big Three in Michigan and elsewhere right. But from their perspective they are just trying to ensure that their new competitor has to deal with the same parasites that they are forced to do business with. This may entitle them to sympathy, but it does not mean they deserve any support in their misguided quest to expand the reach of their rent seeking dealership partners.

Tesla's real enemy has always been the car dealerships and their lobbyists. And in the battle of corporations vs. rent seekers, consumers win when rent seekers lose. 

Side note: Dealerships are often portrayed as small businesses that help drive economic growth. This is because small businesses are seen as engines of job growth. This is wrong - the actual causation is that young firms are drivers of job growth and the correlation between size and job growth exists because many young firms just happen to be small.  Dealerships are generally old businesses.
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/759014 2014-10-22T21:53:02Z 2014-10-28T05:54:30Z Attempting to Align Incentives: Banking Employees Edition William Dudley, President of the New York Federal Reserve Bank, has an interesting idea on how to align the incentives of banking employees with the desires of bank regulators: Defer their bonus payments for 10 years and take regulatory fines out of the bonus pool. From his speech:

However, in contrast to the issue of trading risk, unethical and illegal behavior may take a much longer period of time—measured in many years—to surface and to be fully resolved.  For this reason, I believe that it is also important to have a component of deferred compensation that does not begin to vest for several years.  For example, the deferral period might be five years, with uniform vesting over an additional five years.  Given recent experience, a decade would seem to be a reasonable timeframe to provide sufficient time and space for any illegal actions or violations of the firm’s culture to materialize and fines and legal penalties realized.  As I will argue below, I also believe that this longer vesting portion of the deferred compensation should be debt as opposed to equity.

There is no question that banking incentives are broken. In the run up to the 2008 financial crisis employees were generating what looked like revenue in the short term, but ended up actually destroying many companies. Other companies were found to be systematically violating regulations designed to protect consumers, often because a simple cost benefit analysis can find that breaking the rules now and paying the fines later is more profitable than other approaches. Employees involved might accurately estimate that the chance of significant bonus clawbacks are generally close to zero percent. It's the shareholders who are stuck with the bill years after the bank's employees have walked away with between 40% to 50% of the revenue they generated.

What challenges will a Dudley style system encounter?

If the bonus pool is too lumped together the responsibility will be too diffuse to matter. Bear Stearns and Lehman both had significant employee stock ownership, and yet both firms went belly up in the 2008 crisis. Work will have to be done to ensure that the people causing the trouble are hit first and hardest by the problems they cause.

The deferal unilaterally changes the deal between shareholders and employees, and employees who do not want to wait for their bonus payments will leave the regulated sector. This may actually be a good thing, as FDIC insured institutions shouldn't be in the business of creating free call options for employees looking for a quick payout.

Base salaries will go up as a portion of total compensation to make up for slower payouts. Higher base salaries and smaller bonuses can cause employees to act in a more risk averse manner.

If this system isn't implemented unilaterally through all FDIC insured banks at once the employees with the most earnings potential will leave banks implementing this policy for greener pastures. Like reform to the modern college education system, reform has to come from the high status players or all at once.  

If a mandatory deferred compensation system was imposed from the top down as one of the requirements for deposit insurance or for institutions with access to the Federal Reserve discount window or for primary dealers then it has the potential to help more than harm. Shareholders win because they are more protected from the bad behavior of their employees. Citizens who are better protected against renegade employees and less likely to fund bank bailouts win, while certain employees who have been enjoying a "heads I win, tails you lose" dynamic are inconvenienced.

One caveat: Top down regulations on compensation are generally undesirable. Right now it is arguably too difficult to comply with all of the regulations that banks are supposed to follow - it's crazy that Citi needs 30,000 people working in compliance. This part of the system is also broken. And a congress plus a regulatory body trying to implement Dudley's reforms in some form may end up doing much more harm than good. But the financial industry, with both government subsidies and significant moral hazard, needs better ways to reign in broken incentives. Dudley's proposal gets a lot of things right.
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/754884 2014-10-13T22:09:09Z 2014-10-13T22:12:09Z Note to Silicon Valley: Jean Tirole is Relevant Most Nobel Prize winning economic work is ignored by people trying to understand Silicon Valley, and for good reason. Subjects like macroeconomics and trade theory are rarely relevant for what people are doing on a day to day basis. Even the issue of efficient markets is a non-question. The venture capitalists don't believe and the people trying to automate wealth management accept it is true as a matter of faith.

But the work of Jean Tirole, who was awarded The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2014, is far more applicable to understanding the ecosystem of the technology sector. His work spanned many areas, but it is primarily on how to understand and regulate industries with few powerful firms. The Swedish Royal Academy of Sciences released a short summary of Jean Tirole's work here and their in-depth look is here - or just read Tyler Cowen's summary.

But why is this relevant for understanding the technology ecosystem? As Peter Thiel makes clear in Zero to One, one of the goals of a startup is to create an area where they are a monopoly. Google has an effective monopoly in online search. Facebook is the internet's most complete personal directory and the world's largest photo sharing company, LinkedIn owns everyone's online rolodex. Airbnb, Uber and many other successful new companies are successful because they essentially own their respective domains. Understanding the dynamics of market power is essential to understanding the most successful technology companies.

Once a firm is first to market, the question of what extent they should go to in order to deter competitors is a complicated question. In 1984, Jean Tirole and Drew Fudenberg plublished a paper on whether firms in various scenarios should over invest to protect their monopolies or if they should accept that they are going to face competition and stay lean and agile. The paper also highlights scenarios where the large initial investment to claim market share reduces a company's incentive to innovate, leaving them ripe for disruption after they have enjoyed the benefits of monopoly profits for a decade or two.

Another interesting question often faced today is that there is a company with a monopoly over one area, but how can they take that advantage to profit in other sectors? Tirole wrote many papers on vertical integration and monopoly power, and he did a literature survey of the field with Patrick Rey. Even if the goal of the literature is to figure out when to regulate these monopolies, companies can also use these strategies to find ways to expand their profit and market share. A mild version of this tactic is utilized by Microsoft when they release subpar versions of Microsoft Office to Mac so that power Excel users will be pushed to remain on the Windows platform.

Many startups are looking to build platform companies, where one company owns a two sided market and sells to both consumers and producers. Others may just want to better understand the incentives of the stores they are using to get their product to consumers. Jean was one of the first people to understand that maybe newspapers should be giving away their paper for free if that means they can charge businesses more for ads. This type of competition by the newspapers can drive their competitors out of business, but this seemingly monopolistic practice is benign - in many scenarios platform companies make is so everybody (except the platform competitors) wins. Here is a paper on Platform Competition that Tirole wrote with Jean-Charles Rochet - or better yet, a literature survey published three years later.  Alex Tabarrok and Vox have short posts addressing some of his work on platform markets.

This is only scratching the surface of his work, but it shows that many of the ideas driving value creation in Silicon Valley today have been analyzed in academia to a significant degree. These are complicated problems and sometimes returning to look at what the theory says can keep practitioners from making avoidable mistakes.  

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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/753968 2014-10-11T05:56:27Z 2014-10-11T05:56:27Z Snapshots of our world: Assorted Links
1. Tim Harford uses the analogy of picking the fastest grocery store checkout line to explain the efficient market hypothesis. Ironically, the advent of self service aisles has created an option that lets customers get out of the grocery store

2. The internet of murder things.

3. Welcome to the US, where everyone is guilty of something

4. And some things (literally things, not people) are guilty until proven innocent. (HT: MR)

5. Consumers in the US are spending more money on luxuries. All of them, not just the one percent.

6. A chart that highlights one of the impacts of the expansion of democracy to the masses. Presidents have to speak more simply in modern times. 
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/752218 2014-10-07T20:27:52Z 2014-10-07T20:27:52Z DFW: No such thing as atheism I recently came across a collection of audio recordings by David Foster Wallace. Some of the short stories from Brief Interviews with Hideous Men are far more disturbing when I am forced to listen to every word and cannot just skim quickly past some of the more gruesome scenes. 

His commencement speech "This is Water" (transcript) is one of the more striking parts of the collection. This passage is towards the end of the piece:

Because here's something else that's weird but true: in the day-to day trenches of adult life, there is actually no such thing as atheism. There is no such thing as not worshipping. Everybody worships. The only choice we get is what to worship. And the compelling reason for maybe choosing some sort of god or spiritual-type thing to worship -- be it JC or Allah, be it YHWH or the Wiccan Mother Goddess, or the Four Noble Truths, or some inviolable set of ethical principles -- is that pretty much anything else you worship will eat you alive. If you worship money and things, if they are where you tap real meaning in life, then you will never have enough, never feel you have enough. It's the truth. Worship your body and beauty and sexual allure and you will always feel ugly. And when time and age start showing, you will die a million deaths before they finally grieve you. On one level, we all know this stuff already. It's been codified as myths, proverbs, clichés, epigrams, parables; the skeleton of every great story. The whole trick is keeping the truth up front in daily consciousness.

Worship power, you will end up feeling weak and afraid, and you will need ever more power over others to numb you to your own fear. Worship your intellect, being seen as smart, you will end up feeling stupid, a fraud, always on the verge of being found out. But the insidious thing about these forms of worship is not that they're evil or sinful, it's that they're unconscious. They are default settings.

It's worth noting that a trite message can still be important, true and undervalued.
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/747950 2014-09-29T00:17:57Z 2014-09-29T00:17:58Z Assorted Links 1. Bill Gross left Pimco. When some CEOs leave their companies the shareholders celebrate. In the case of Bill Gross leaving the shareholders of Pimco's parent company, Allianz, decided that the company was worth about 3.8 billion dollars less than the day before. Part of this 3.8 billion dollars is related to new information about the severity of the problems that caused Gross to leave in the first place. But because Bill Gross chose to join Janus Capital the same day, we are left with an estimate of about how much the market values the human capital of Bill Gross - slightly under $900 million dollars.

2. Clay Shirky tries to help his students stop multitasking. Apparently there are many drawbacks to multitasking and I should stop making assorted link posts. (fortunately for me these posts are generally a symptom of my multitasking and not one of its causes)

3. Regulatory capture in the financial sector: Goldman Sachs vs the Fed. We should expect these problems to persist for as long as regulators are hoping to find work for the companies they are regulating (or companies doing a significant amount of business with the regulated companies).

It's interesting to see the PR machine of Goldman go to work on damage control. First the response is "This person tried to get a job from us many times" implying that the employee was merely bitter. They also highlighted the fact that Goldman did have a conflict of interest policy and thus the whistle-blower was wrong (without any emphasis as to whether or not it was effective). Shortly thereafter, there is a massive change in Goldman's conflict of interest policy. 
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/745841 2014-09-23T23:37:16Z 2014-09-23T23:37:16Z The Best People on the Internet Are those who don't comment. So those who accidentally browse the comment section of popular websites should take solace in the fact that comments are not a reflection of the general population.

Via slate and the original paper.

While the study focuses on the behavior of trolls, it's interesting to note that people who are interested in debating issues also have more traits associated with Machiavellianism and sadism than others.
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/744103 2014-09-19T20:48:52Z 2014-09-19T20:48:52Z An implication of the BABA IPO After the Alibaba IPO, the market is on average expecting that Yahoo's CEO Marissa Mayer is going to destroy $11 billion dollars in shareholder value. That's how much the operating company of Yahoo is valued at when stripped of its cash, Alibaba and Yahoo Japan holdings.  

This is actually a little harsh. There are some tax issues which would lower the $11 billion number slightly. On top of this - Alibaba is currently very hard for an arbitrager to short. Once it becomes easier to borrow Alibaba stock it is likely that the implicit negative valuation of the core Yahoo business will shrink.

Investors are guessing that a significant portion of proceeds from Yahoo's Alibaba stake are going to go towards value destroying acquisitions that boost the importance of the CEO at the expense of shareholders. When Facebook bought Instagram, they made a good decision to buy a nascent competitor who understood the mobile space. When Yahoo bought Tumblr for $1.1 billion, Mayer spent $750 million of that cost on intangible assets in an attempt to try make Yahoo relevant/cool, with the side effect that the person running Yahoo would also be more relevant*. 

Mayer can prove the doubters wrong in one of two ways. The easiest way is to find a tax advantageous way to return money and shares to the shareholders. The harder way is to make acquisitions like the market expects, but to buy companies that will actually generate earnings for the core operating company.

Mayer taking the hard approach is the most likely, but she has committed to returning at least 50% of the proceeds of the Alibaba IPO to Yahoo shareholders. Given that this payback, it is really hard to destroy as much value as the market is currently pricing in . They are probably paying too much attention to Yahoo's past acquisitions of GeoCities and Broadcast.com. 

And given how cheaply Yahoo is currently trading, this entire discussion could be moot. Yahoo itself could be bought before we have a chance to find out what Mayer would have done with its influx of money.


*It's important to note that Tumblr's value has gone up if value is measured on a basis of how many users the service has, but it has disappointed the market in that it has been harder than expected to generate revenue from these users.
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/742266 2014-09-16T07:23:16Z 2014-09-16T07:23:18Z Assorted Links 1. One of the scariest things for a start up in the valley today is the prospect of a down round. Interestingly enough, Facebook had one in 2009. Their value was over $10 billion and it was in the midst of a financial crisis, but it's still interesting to note that it happened.

2. Peter Thiel did an AMA. I for one have always thought that capitalism was the private ownership of the means of production. But the insight that the best investments are outside of commodified industries almost sounds like the best businesses are those with a moat or long lasting competitive advantage. This theme has helped other investors compound significant amounts of capital for a long time.

3. Positive news on the US patent front. But there is a long way to go.

4. The concept of time optimization, engaging in activities at unusual time to get better use out of underutilized resources, is severely undervalued in most people's everyday life. This advice from Tyler Cowen about eating early in the evening before restaurants get sloppy is interesting. It's best for those who either do not need to eat with others or who have enough status to convince others to eat with them at an unconventional time.
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/735810 2014-09-03T07:04:50Z 2014-09-03T19:43:05Z Revolving Door Politics Needs a Systemic Solution Eric Cantor, the former House Majority Leader who recently lost his primary, demonstrates a major hole in the current campaign finance reform agenda via his recent actions.

Long accused of being too friendly to Wall Street, Cantor is now being paid very well to work for a boutique investment bank. His contract includes a relatively common provision in which leaving to go back to work in politics is essentially encouraged:

Unvested initial RSUs and unvested incentive RSUs will be forfeited if Group LP terminates Mr. Cantor for cause or if Mr. Cantor terminates his employment other than (i) for good reason or (ii) after the second anniversary of the grant date, to take a full-time elected or appointed position in federal government, state government, or a national political party.

So not only are they monetizing his connections now, but they are paying him millions of dollars and assuming that he will go back into politics after two years. This is a very common practice. Rahm Emanuel also decided to monetize his political connections after his time with the Clinton White House. Then in late 2008 he was part of an incoming Obama team, part of whose job was to determine whether or not the bail out of the financial system should retain the status quo in which too big to fail banks could make the equivalent of "Heads I win, tails you lose" bets. It's hard to imagine that a group of people who know that multimillion dollar jobs are easily available from the companies whose fates are in their hands will be able to remain unbiased. 

More egregiously, Raj Date worked as deputy director of the Consumer Financial Protection Bureau where he helped create regulations that drove banks out of an area of the mortgage business and then started a financial company to take advantage of the hole in the market he helped create. Less ambitious regulators might not create business opportunities for themselves quite so directly, but the incentives and opportunities for them to do this are there.

Ideas like the PAC to end all PACs would reform the financing of elections, letting congressmen study legislation more closely if they didn't have to spend as much time fundraising. But this does nothing about where their big pay days come from after leaving office. Even under a revised system, any officials and elected representatives can still choose to spend a significant portion of their time thinking about how they can help the very same people they are soliciting political donations from today. The practice doesn't have to be obvious, they don't even need to get jobs directly from the influentials they help. If the officials/politicians are owed favors they can call in favors while working for their new employer and everything will look above board.

It's difficult to quantify the potential positive impact of campaign finance reform compared to closing the revolving door between business and government, but on a relative basis solutions for the revolving door problem deserves much more attention.

Right now the revolving door is only brought up during partisan high profile nominations (when the partisans will bring up anything that makes a nominee look bad) or when those appointed officials are perceived to be misbehaving (like with Tom Wheeler and the FCC's and net neutrality rules).  And so the US still lacks broad systemic rules to stop those who create or enforce legislation and regulation from immediately getting high profile jobs in the private sector where they can monetize their owed favors and connections. Unless the officials are making decisions directly related to government contracts it doesn't matter where they work. And activists don't seem to be putting actionable solutions on the table - outing the people involved in revolving door politics or trying to block a few nominations seems to be as far as most groups will go.

Partially this is because there is less incentive for people in power on either side of the aisle to bring further attention to a practice that helps themselves or at least helps their friends and colleagues. Finance reform has a natural constuency among legislators - those who aren't as good at raising money and those who dislike the process of raising money can support it or at least be lukewarm about the idea. On top of this, those on the left don't favor revolving door storylines that paint government officials in a negative light when the problem of attracting good people to government work and getting voters to back additional progressive policies is a higher priority. 

And the op-ed writers pushing for campaign finance reform have an extra selfish incentive to do so - if generic rich people have a harder time making their voice heard then the ones in control of the media, such as the writers who have a column every Sunday, will have more impact.  They don't have the same incentive to talk about system wide solutions to revolving door politics. Pushing for policies that would hurt the economic wellbeing of legislators and officials could cause them to lose the access that makes their job significantly easier. 

Like campaign finance reform, the solution to the revolving door issue can get messy and complicated once implementation is considered.  France imposes a three year waiting period between working for the government and working in the private sector. This seems biased towards keeping poor people out of politics, but some version of this rule with exceptions carved out for unrelated jobs such as medical practice or teaching would be an improvement on the status quo. Singapore's solution of paying officials very well, just not quite as well as their private sector counterparts, works well in the context of their political system. Mandatory transparency from former officials in their business dealings after leaving office would also improve the situation.

When it comes to getting money out of politics, it's time to admit that the revolving door is a significant problem that requires a systemic solution.
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/729079 2014-08-18T21:41:38Z 2014-08-18T21:41:38Z Unassociated Links 1. The Flynn effect has yet to have a significant impact in Liberia.

Exhibit A: The looting of an Ebola quarantine center and the stealing of, among other things, bloody sheets.

Incidentally, the next time we see an article on how average white political science major can't possible do much good over there - remember how irrational and uneducated members of these developing countries can be.

2. Brad DeLong on long run market returns and the cyclically adjusted PE. There are a lot of reasons to be skeptical of the Shiller's CAPE as it applies to predicting future long run equity market returns - it's a relatively unhelpful metric that gets far too much airtime.

3. An example of how not to run a police officer camera program - the SDPD refuses to release camera footage when it matters.

"San Diego police effectively lock any relevant videos in a vault and throw away the public's key. The footage their officers record will never show up on YouTube and go viral. Nor will it help fill in the gaps when a major crime leaves lots of unanswered questions. Crime victims or their families may never get to see and hear what the devices recorded."

It's not just a question of getting police to wear cameras, the policy also has to promote transparency.
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/727494 2014-08-14T20:26:47Z 2014-08-16T00:14:43Z Some Thoughts on Ferguson and Police Transparency We don't know what happened when Michael Brown was killed, but the way the Ferguson police department is acting makes them hard to trust. Washingtonpost reporters have been arrested in two cities this year: Tehran, Iran and Ferguson, MO.  It is likely that the non-police witness's version of the story is true. an unarmed black teen was killed with his hands up by a white police officer. The way the Ferguson police department is refusing to even name the officer is reminiscent of the way police departments around the country often respond to investigations - by protecting their own. And the records indicate that Ferguson police are racially biased - the percent of whites found with contraband that are arrested is just 15% compared to the almost 50% for blacks (Presumably not all of these arrests are related to the contraband found, but it's a way to control for how police treat members of the groups who have committed some type of crime).

Rand Paul's op ed on the excessive militarization of police is dead on. It's interesting that he is walking the fine line and taking what can be construed as an anti-law and order stance because he is one of the front runners for the GOP nomination. 

It's probably because he is aiming to win the nomination that he didn't go farther: Active duty police officers need to be automatically recording everything they do. With recordings, incidents such as those happening in Ferguson can be quickly resolved one way or another. When tested in Rialto, California, recording reduced both complaints filed against police officers and the incidents where use of force was required. There will still be cases where police officers use excessive force in murky situations but by and large transparancy via recorded police and citizen interactions should protect the innocent parties, see more guilty parties punished and cause better behavior all around.

The main obstacle for making officers record everything is the political reaction to how such policies impact the status of police officers. The word of a police officer is generally trusted more than the word of a suspect. Telling officers "We are going to make you record every interaction" sounds less like "We are protecting you from false allegations" and more like "Officers, we know you often risk you life as you protect citizens but we don't quite trust you." The way many police officers currently respond to citizens legally filming on duty police is telling - many officers would prefer to remain in control of situations without anyone looking over their shoulder. And the options on the table aren't just "Recording or no recording" - there is also the option of letting police officers record when it protects the officer and not record when it might incriminate themselves. 

Even if recording was always on there is still the issue of structuring the system so the police are unable to delete incriminating evidence. There is also the problem of whether or not pervassive recording might have unintended negative side effects when recording technology is combined with facial recognition and prosecutorial discretion. 

Despite its potential flaws, the upside of preventing police misconduct (murder/manslaughter, for instance) and the potential riots that follow are likely bigger than the downsides. The idea that interactions between police and citizens needs to be recorded as a matter of course needs to be a bigger part of the discussion after these types of events.
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/726576 2014-08-13T01:19:22Z 2014-08-13T01:19:22Z Assorted Links 1. Advice to Hillary for 2016 from an anti-interventionist: Please just lie to us? Apologies for the pseudo partisan snark, but if anti-war candidates from Woodrow Wilson to Barack Obama can't seem to keep our country out of war it seems odd to think that pressuring a known element to modify their rhetoric will have any real impact.

2. College admissions and sports - 20% of admissions at Ivy's and small liberal arts colleges are recruited atheletes. And it isn't just the big sports, Harvard has 39 intercollegiate teams. Are esoteric sports that are rare outside of wealthy school districts the easiest ways for colleges to discriminate in favor of wealthy and/or legacy admissions?  This is probably why preferential admission for college athletics lacks many of the critics that are directed at affirmative action. While the plight of the college football players who aren't ready for college might get some notice, the rich, relatively athletic but otherwise average student who gets into their Ivy of choice because of lacrosse or crew isn't given a second thought.

3. This defense of large US braodband companies by the Mercatus Institute is interesting because it challenges the current zeitgeist, but it misses the point on quite a few marks. First, they add in media taxes that EU citizens are paying anyway for owning television and radio and use this to erroneously suggest that this makes US broadband costs equivalent to rates of other developed countries. More generally, arguing for an institutional structure that encourages and rewards investment is correct, but most of these companies are also holding local monopolies which need to be addressed.

4.  Sometimes, low investor confidence is an opportunity that needs to be taken advantage of rather than a problem that needs to be solved. Kinder Morgan's gigantic M&A transaction shows how connected businessmen can capitalize on control of their companies when faced with doubters. The Kinder Morgan Energy Partners LP was trading at a discount to peers after it looked like the bulk of its future gains would go to the general partner and not the limited partners of the MLP.  This made the economics of the general partner KMI buying out the LPs favorable to everyone relative to the status quo. 
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/724981 2014-08-09T00:00:09Z 2014-08-09T00:00:09Z Correlation and Causation and Inequality In a takedown of the recent S&P study on inequality and growth (HT: MR), John Cochrane gives us the following quip that I wanted to share/save:

Well, that's what forecasting is about. "The weather forecaster causes rain" is a model that forecasts well. Until you try to kidnap the forecaster and make a sunny day.

It sounds like the plot of a very fun movie.

With regards to the S&P report on inequality, worries about inequality impacting aggregate demand shouldn't be too worrisome. Aggregate demand is a cyclical issue that can be managed by monetary policy when needed. 

However, the hypothesis that relatively bad education outcomes are driving both low growth and higher inequality than in the past is more worrisome. The modern education system is ill suited to the needs of many people and those at the bottom of the ladder are increasingly forced to compete on a global basis when they enter the workforce (Or rather, they are forced into local service jobs because of potential global competition). Combined with assortive mating, the children of those with poor education may continue to have poor education and low productivity themselves - thus lowering future economic growth.

It should be pointed out that inequality is not the causal drver of growth in this analysis, education and globalization are the main driving factors. And while this is related to inequality, worrying about the education gap is different from worrying about whether or not the growing wealth of the 1% will impact future economic growth.

Here is a thesis of how inequality of the 1% and growth might be related (particuarly in more corrupt developing countries): High levels of inequality are sometimes a symptom of excessive rent seeking. This rent seeking is damaging to long term economic growth. In these cases redistribution may not improve growth outcomes unless the rent seeking behavior is itself taxed. Since the most successful rent seekers are generally people with significant political influence, it's very unlikely that they'd lose the battle. But it could still be one worth having. 
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/720419 2014-07-29T21:15:59Z 2014-07-29T21:15:59Z Piketty and Expected Return One of my favorite blogs came out of hibernation to comment on Piketty (Warning, it's pretty overtly political), and it reminded me that I still haven't contributed.

A lot of ink has been spilled the question of whether or not the return on capital after will be above the growth rate for significant periods of time.  The merits of the arguments generally fall on the side of r > g in perpetuity being nonsense. Either labor prices have to eventually rise (on a global basis they are doing just that) or the return on capital needs to fall.

How can the return on capital fall? Two ways come to mind.

1. Earnings stop growing. This can happen when effective taxes go up more than prices rise to compensate for the increase. This would also occur if unit labor costs started increasing more quickly than the prices of goods sold and profit margins fall. Already, the sales growth of the S&P 500 has been below the economic growth rate of the economy for the past few years - and this is noteable because the S&P also has exposure to faster growing emerging market economies. 

2. The expected return of assets fall. 

#2 has been interesting - because it is what has been happening over the past few years and yet analysts have if anything gotten more worried about wealth inequality. That's because in order for the expected future returns to capital to fall, prices today need to go up. A company with an earnings to enterprise value of 10% has a much higher expected future return than a very similar company with the ratio at 2.5%. But if the company is earning one million dollars a year in cash, it would have to move from a $10 million dollar valuation to a $40 million dollar valuation in order to reduce the expected return on capital. 

Analysts looking at the 16.0% total return to the S&P 500 in 2012 and 32.4% returns in 2013 will plug those numbers into models which uses past returns to predict future returns for various asset classes. After the recent bull market, they might assume that the future return on capital will be even higher than it was in the past. But over this time period, the price to earnings ratio rose from 14.87 to 18.15. In other words, the average earnings yield of all of the companies fell from 6.7% to 5.5%. Instead of concluding that the expected rate of return on capital is higher, analysts should be assuming that future returns will be lower.

The same principles apply to other asset classes, but in many cases interest rates are already below the nominal growth rate of the economy. Equities are one of the few places where the earnings yield is above the growth rate. So if we find ourselves watching the stock market go up over the next few years, it actually means Piketty is more likely to be empircally wrong than right in his r > g prediction on a forward looking basis..
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Jeff Lonsdale
tag:unpleasantfacts.com,2013:Post/715287 2014-07-17T19:38:40Z 2014-07-17T19:45:32Z Market Commentary from the Fed

In 1996, Alan Greenspan didn’t mean to say the markets were suffering from irrational exuberance, he just implied it when discussing whether or not central bankers should worry about the stability of asset prices:

Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?

Source: Bloomberg

After mentioning how concerned the Federal Reserve must be with asset price stability, Greenspan presided over one of the largest asset bubbles in modern history over the next three years.  Almost 18 years later when the S&P 500 is again making new highs, Janet Yellen has waded into the market commentary space with the Federal Reserve’s recent Monetary Policy Report. The valuation of a smaller class of equities is questioned:

Some broad equity price indexes have increased to all-time highs in nominal terms since the end of 2013. However, valuation measures for the overall market in early July were generally at levels not far above their historical averages, suggesting that, in aggregate, investors are not excessively optimistic regarding equities. Nevertheless, valuation metrics in some sectors do appear substantially stretched—particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year. Moreover, implied volatility for the overall S&P 500 index, as calculated from option prices, has declined in recent months to low levels last recorded in the mid-1990s and mid-2000s, reflecting improved market sentiment and, perhaps, the influence of “reach for yield” behavior by some investors.

(Emphasis added)

On a price to book basis, it does look like valuations are stretched in biotech companies.

Source: Bloomberg

The value of biotech companies, and social media companies for that matter, come from intangibles that aren’t measured in book value and are yet to be captured in earnings.  What the high valuation tells us is that investors think the expected value of these companies is higher relative to its tangible book value than it has been in the past. That may be because the drugs the new companies are working are particularly promising, or because investors have decided to value the lottery-like payout of biotech stocks at higher prices. But either way, investors can’t be said to be “reaching for yield” in these sectors because it’s exactly the wrong place to look for yield – yield only comes after sales and earnings exist.

The beta of the Nasdaq Biotech index to the market is 1.2, which implies that biotech stock valuations are being moved by factors other than whether or not their drug trials are going well. Part of the explanation may be that in a high liquidity environment the market will value lottery tickets more highly.  A higher proportion of companies with no earnings have been going IPO since the 1999 tech bubble.  And the companies with no earnings will on average have bigger IPO day pops than companies with earnings. It’s almost as if there is something about real earnings that makes investors look more skeptically at a company.

Source: Initial Public Offerings: Updated Statistics, Jay R. Ritter

The Federal Reserve report also mentions low interest rates, and compares them to the mid 90’s and mid 2000’s. Data for implied volatility doesn’t go back much farther than the 90’s, but we can look at the historic volatility as a proxy.

Source: Bloomberg, Author's Calculations

The other time periods that volatility was low were good economic times, the early 50’s and mid 60’s. So while regulators might be worried about the formation of eventual imbalances, it’s much more likely for low volatility time periods to lead to future periods of low volatility and high growth. The next Minsky moment in the US economy is a long way off.

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Jeff Lonsdale