May 17th and Capital Gains

Facebook is expected to go public on May 17th. That means the 6 month lock up for investors and employees would end around November 17th. This gives them the option to sell before the capital gains tax goes up due to the Bush capital gains tax cut expiring and the 3.8% tax on from the healthcare law taking effect in 2013. At least one member of Facebook's board has been telling people that the change in the capital gains tax rate is going to impact the markets, so this probably isn't a coincidence. 

Hopefully the process goes smoothly and they don't have to push back the date much farther. During the holidays liquidity tends to dry up and employees and investors that decide to diversify their holdings closer to year end might move the market and give up in market impact what they are hoping to save in taxes.

Finite Willpower and Fake Investments

In my last post I went over a variety of fake investments. What I didn't get into is why this can be bad outside of the low or negative returns that will accrue to the fake investments.  The reason these fake investments are bad basically boils down to the idea that willpower is finite

Researchers have found that exerting self-control on an initial task impaired self-control on subsequent tasks: Consumers became more susceptible to tempting products; chronic dieters overate; people were more likely to lie for monetary gain; and so on. As Baumeister toldTeaching of Psychology in 2008, “After you exert self-control in any sphere at all, like resisting dessert, you have less self-control at the next task.”

One aspect of self control is delaying consumption and investing. With fake investments the person is using some of their finite self control that might have otherwise gone towards something actually useful. So the student who is fresh out of college who decides to get a master's degree in humanities at a low tier university probably isn't planning for their economic future in other ways because they believe they have already addressed it by continuing their education.  The cost is higher than "This investment will turn out to be useless" because there is the large opportunity cost of the real investments that aren't made after a person makes a fake investment. Economically useless education that a student can't afford is even more pernicious because they will be saddled with debt that doesn't go away in bankruptcy.

What investments are actually consumption?

A lot of times people think that they are planning for the future when they are really just enjoying themselves in the present.  I thought it would be helpful to classify a list of things that are sold as investments that may actually be more about consumption.

Young people's fake investments:

Certain formers of higher education education are definitely consumption rather than investment. Advanced degrees in humanities at less prestigious institutions come to mind. The supply of people with these degrees far outweighs the number of jobs available. Low ranked MBA schools give people an excuse to party for two years, but the cost of the school combined with the opportunity cost of not working for two years means that the marginally higher salary that most students get out of having an MBA does not make up for the time and money cost of the degree. Low ranked law schools might not be fun for students, but they are still paying up for the idea of being a lawyer and the many students suing their schools for misleading jobs statistics show that being a lawyer doesn't really pay.  A four year college degree is probably an investment, but unless the students are actually learning something useful or learning how to learn it is only an investment because of how it helps the student signal.

Fake investments older people make: 

A lot of real estate is actually consumption rather investment. Time shares are the most blatant obvious example. People are sold on them by being given free trips if they listen to a pitch, so someone who thinks about the margin these salesmen are making on the deal to make sales pitches worth it should think twice before buying.  They are told that they will go up in value but generally time shares can be bought for much more cheaply than they were sold on the secondary market.  Buying a home to live in makes more sense, especially with the mortgage deduction and the recent stagnant prices, but in 2005 and 2006 this was one of the biggest consumption decisions masked as an investment out there.  Going forward, investing in housing only makes sense if you expect moderate inflation instead of deflation (But then, not many investments make sense in a deflationary environment).

Certifications such as those for yoga teacher or massage therapists are another expensive investment (more in time than in money) and people who think they are making an investment choice instead of a consumption choice are probably fooling themselves. 

Fake investments for rich people:

Movies, wineries, start ups, second homes. 

In each of these categories, there are people who know what they are doing who can make money. But for outsiders to the movie industry, a lot of their return on investment is the fun of being able to participate in the process in the first place.  Wine country is littered with bankrupt wineries started by those who thought running a winery would be fun but didn't realize that they need scale to get proper distribution. Surprisingly, start ups can also be fake investments. If someone is working on their start up only because it's the cool thing to do or because they can't handle having a boss, that's a decision they are making because it suites their preference unrelated to whether or not they'll be able to capture the value they might be able to create outside of the institutional support of a normal business. Start up investors who are investing in science experiments or in really fun ideas might consistently lose money just for the idea of being able to hang around cool people doing cool things*. A good example of an investment that is really a consumption choice is company that will supposedly mine asteroids, Planetary Resources.  It's a really cool idea, but the investors are most likely happy about the idea that they are working towards a really cool idea and won't mind when it doesn't work quite out.    

I should probably add "writing blog posts" to this list, but I'm not sure which category it would fit under. 

While investment that is actually consumption is bad, there is an additional category, consumption that's also an investment, that is good in exactly the way investments that are actually consumption is bad. If people can identify wich activities they enjoy are also good for their long term success and happiness they will be better off in the long run.

*If one of those cool things works well enough, then they'll make most of their money back, but this isn't the case outside of a small group of connected VCs and angel investors.

Economists missing the point

Professor Mark Perry discusses the underpriced Garth Brooks tickets in order to make a basic economic point. When the price is below the clearing price of demand at that specified quantity the tickets will sell out quickly. Increasing the price or quantity will alleviate the supposed shortage. But that isn't the whole story.

The problem is actually more about resellers than most economists would like to think. The preference of the artist isn't to price the tickets where markets clear and they can maximize their profits. The idea is to give their fans a large consumer surplus and to create buzz around the show to help them sell out future shows. This could be because the artists are trying to appear altruistic to their fans or merely because the artists want to make sure their fans keep coming back. If a concert was just barely worth the combined price of the ticket and inconvenience of attending for a majority of their fans the artist wouldn't have long term staying power. A popular restaurant that raises their prices by too much can go from having lines out the door each night to being empty, there is no easily identifiable middle ground.

The problem is that current institutions allow resellers to capture a large percentage of this consumer surplus by buying up most of the tickets and selling them on ticket reselling sites.  So the challenge is for the artists to set up institutions that reduce the resale value of the tickets. There are various ways that the promoters can make it more likely that the difference in value between the price that the tickets are sold at and the market price goes to consumer surplus of fans rather than ticket resellers.

One method that is starting to be used is to only allow for small ticket purchases and to require that the person with the credit card shows up to pick up the ticket and goes directly into the show with their guest. At the very least, it reduces the premium to the reseller who actually has to drive and show up to the show in order to get their customers inside.

Another option would be to have a lottery for their fans, making each fan give a valid non-PO box address. The random winners would be given the option to buy tickets at the lower price. The tickets would be tied to the ID of the winner and that person would have to be the one to enter the concert.  The ticket could only be resold back to the promoter to give the buyer some optionality but to prevent the secondary market.

Eventually the technology to track purchases should be available and the large ticket resellers will have the potential to be stopped. The issue here is whether or not artists and promoters actually want to give their fans a high consumer surplus or just want to look like that's what they are trying to do while capturing most of it. A significant portion of the extra charge by Ticket-master goes directly to the promoters and artists who want to look like they are offering a lower ticket price and that Ticket-master is the greedy corporation. 

More generally, the relationship between an artist and their fans isn't always a market relationship where the artist is attempting to maximize profits. At the very least, there are social norms that most artists are trying to follow where they want to appear to be trying to give their fans large consumer surpluses and this approach should maximize profits in the long run by increasing the artist's popularity. It's from these social norms that the market inefficiencies exploited by resellers are created. But if the promoters and artists change the nature of what a ticket is, there are ways that artists can supply tickets to their shows that at the very least significantly reduce the problem and profits of resellers. 

Assorted Links

1. A 2010 internal Spanish study found that green jobs cost jobs. Each green job destroyed 2.2 other jobs. Those hoping for an employment recovery might want to focus on more than just green jobs.

2. The transcript of my favorite polymath interviewing a popular utilitarian philosopher. If people could win interviews then it's fair to say that the polymath won. Be sure to read the part about the fish.

3. Unfortunately, a regime shift towards deflation doesn't seem very likely. (Hat tip: Jonathan)

Take the S out of STEM

Science, technology, engineering and math jobs are seen as being important for the modern economy.Collectively, these are known as STEM majors. Many people have talked about how important it is to have more STEM majors.  The problem is, not all STEM majors are created equal. And this isn't a new phenomena. 

From this 2005 report by the BLS, we see that natural science technicians make less than most other STEM researchers. They have an average salary of almost 40 thousand dollars a year while STEM majors overall average 64 thousand dollars a year. Life Scientists don't do quite as badly on the salary front, but their jobs have been slowly disappearing even over the past year of job expansions. 
This isn't to say that science isn't important. It's just that supply and demand matter. Students aren't being told to think about their job prospects at all when they go to college. Many of them will end up in majors that seem comfortable and familiar because they've already taken similar classes in high school and they have potential career paths.  The problem is that not all biology majors are going to be doctors (if our country was more efficient, maybe we'd be graduating primary care physicians directly from college in the first place) and not all chemistry majors are going to be pharmacists or go on for their PhD's and Master's degrees. And then even those with advanced degrees in chemistry aren't having a great time. So instead these students end up with specialized skills that aren't in high demand relative to the supply of lab workers. And many of workers see lab work as a way to beef up their resume while they apply to schools and therefore are willing to take a lower salary, making it harder for those who just want to earn a living without having to go back for even more years of school after college.

And yet still everywhere people are promoting STEM education and talking about STEM jobs like they are all the same. It's too simple to just take out the S, both because smart students who are interested in basic research should be encouraged and because in fact some of the more niche scientific professions are seeing tighter markets, such as the market for geologists which is being bid up by oil companies.

Alex Tabarrok has a post discussing how important it is to have more STEM graduates. He uses the acronym STEM, but he's generally referring to CS, Chemical Engineering and Math and Statistics majors. There should be a better more widely recognized acronym to highlight the importance of the (non-life science S)TEM majors. What these majors have in common is they generally leave their students feeling comfortable with quantitative analysis. In this modern economy where everything is getting quantified and there is a greater opportunity for businesses to study these numbers and optimize more of their processes, being comfortable with mathematics and statistics is going to be more important. When people talk about training STEM majors, they should instead talk about TEQ majors and TEQ jobs. TEQ stands for Technology, Engineering and Quants. The term "quant" needs to be stolen back from finance, rehabilitated and then applied to everyone who is working with statistics and data analysis. 

Science is important because it forms the backbone of long term technological progress. But we don't need to be telling every impressionable high school student that they should major in something that's familiar but difficult when their job prospects would be much better if they picked something that was less immediately familiar but more scarce in the market place relative to its demand.

Random related items:

Some jobs will have higher average salaries because they involve living in unpleasant places far away from civilized society. Many oil jobs fall into these categories.  This should be adjusted for when students are looking at the average salaries of various majors.

It is possible that there is a negative selection effect to explain the difference in starting salary between engineering and natural science majors. It is more likely that a good engineer will work in industry after school (or a good CS major will drop out while still in school) while someone who excelled in natural sciences isn't likely to stop their education with just a Bachelor's degree.

The better schools provide superior networks and credentials, students at these schools can afford to think less about the average returns to their specific majors. The problem is that every school wants to pretend that they are one of the better schools so the myth of "What you study doesn't matter" is perpetuated even when it really shouldn't be.

Is there a difference?

According to, the FBI thinks that there have been quit a few cases of foreign spies getting access to American universities and trying to steal sensitive information. Not only that, but they are taught techniques that will help them get around problems faced by their military engineers back home. The FBI is trying to prevent these spies from stealing potentially valuable information*. 

Then there are the unaffiliated foreign graduate students who have a year after they graduate to either get an H1-B visa, stay in school or get are kicked out of the country. If they get kicked out of the country, they forced to take their training and skills back to their home country. 

So do we want the people learning valuable skills to stay and help create jobs in this country? Because it doesn't seem like it.

*Protecting our intellectual capital is important, but it's a growing world not a stagnant world. The best way for us to stay ahead is to optimize the environment for creating new ideas and new technology in our country. Right now we have a system where foreign PhD's who could join start ups or potentially start their own company are kicked out of the country, and then we have the patent issue where very recently one of the larger tech companies spends $1 billion dollars on patents instead of returning money to their shareholders or investing in developing new products. 

Who resists totalitarians and why?

Via MR, I found this link of an article by Robert Higgs about who is the most likely to resist totalitarianism.  It turns out that historically people of faith were the most likely resistors. Some individual atheists did resist, but atheism was also a key part of some of the more brutal totalitarian regimes ranging from the USSR to China and North Korea.

Higgs is worried that as society becomes more secular, the faith based groups who resisted state expansion in the past are going to be weaker going forward. He attributed this resistance to these groups having a strong belief in something other than the state. It's actually much simpler than that, these religious groups historically have been one of the few groups that are powerful in civil society and separate from the state. Today, there are many more groups, but they may be less tightly knit because they are easier to leave or less likely to share a similar belief system and therefore would presumably be less able or willing to counter a totalitarian state. A group of people today such as a gaming clan (I did not score highly on Charle Murray's quiz) might spend a lot of time together working on the same goals, but their goal is to play a video game not build a society. 

On the other hand, the pessimism of Higgs isn't completely warranted. The internet means that these groups aren't as necessary for coordinating resistance to the state. Religious institutions weren't the only drivers of the Arab Spring. They were just the only ones organized enough to really take advantage of the political void in the aftermath. If what matters is the ability to coordinate and people knowing that they are part of a broader movement, the internet would facilitate a lot of that resistance. The internet's usefulness to those resisting a potential totalitarian threat is why attempts like the UK's government's proposal to increase their monitoring efforts of the interent are so scary.

A quick note on the lottery

The jackpot is going to be over $500 million dollars. Even though there is a 1 in 171 million chance of winning, factoring in taxes and the increased chances of splitting the jackpot means that the ticket is only mildly positive expected value, at best.  Factoring in the time cost of checking the numbers probably makes it negative EV. Any strategy that involves picking numbers that are marginally less likely to be shared (sticking to numbers that aren't part of birthdays) also incurs a time cost versus getting random numbers, and the advantage is not likely to be worth it.  So it's entirely rational not to play even now unless a person enjoys the lottery process itself.

Three thoughts:

1. This is a great advertisement for the lottery.

2. It would be interesting to see how often these types of jack pots occurred in private lotteries if competition with the state was legal. Given that  this is great advertising and a private market lotteries would have to give a higher percentage in payouts due to competition and that this is a great form of advertising it might be a more common occurrence.

3. Some companies will probably do large company pools and buy a lot of tickets. If any of them win the big jackpot, it would destroy that company. This is especially true for start ups.

Full disclosure: I have never bought lottery tickets before, but now I am long a few tickets. 

A surprising prediction?

Tyler Cowen mentions that they are now asking people what their most surprising prediction is instead of their most absurd belief. In many ways these are the same thing, except now the belief has to a prediction of the future.

His prediction is something that I thought wasn't that surprising, a lot of people think that real wages are going to stagnate in the non-resource rich developed world over the next ten years due to the failure of innovation to keep up with factor price equalization with the developing world. It's mostly interesting because right leaning economists usually like talking about how important it is to understand the consequences of long run compounding economic growth (This is a TED talk by his coblogger/coauthor Alex Taborrok).  

Tyler Cowen did write a book about how there isn't enough innovation. My takeaway from it was that the economy as a percent of GDP is consisting more of in health care, government spending and education and these are areas where innovation is stalled for reasons relating to either government regulation, signaling constraints on new competitors (I may have gotten this part more from the GMU related economist blog posts than the book) or some combination of the two. It's nice to see him giving some weight to factor price equalization in his latest prediction, because in his book he pretended that real median wage was measuring technological progress uninfluenced by the relative advancements of the developing world.

So what would my surprising prediction be?

The internet is going to become more closed and regulated over the next 10 years.

The problem is I'm not sure that this is very surprising either. It's just a combination of a few facts:

1. The US government as it is currently run is not very good at saying "no" to copyright holders. The failure their lobbyists to pass SOPA shows how much needs to be done just to halt the expansion of their control.

2. People are spending more of their time on controlled networks like Facebook already so they are slowly becoming more comfortable with the idea of a controlled internet.

3. As shown by California finally taking steps towards collecting sales tax from Amazon, people aren't as worried about the government regulating activity on the internet.

4. In the past few years there have been an increasing amount of high profile cases of foreign hackers. Steps will be taken to stop them, these steps might not work, but they will be used to justify more controls.

I hope that I'm wrong.