Original Cin

If it sounds too good to be true… not that I would necessarily call something that creates unemployment “good”.

Obama sounds populist themes in Virginia bus tour - Yahoo News

By BETH FOUHY, Associated Press Writer 1 hour, 14 minutes ago

MARTINSVILLE, Va. - Democrat Barack Obama is sounding tough populist themes on the campaign trail, pledging to create union jobs to build energy-efficient cars and to end tax breaks for corporations that ship jobs overseas.

Jevons Paradox, anyone?

A simple example: cost and speed pressure means that when you get your car serviced, it’s unlikely you’ll be greeted by the mechanic himself, wiping his hands on a greasy rag, telling you exactly what he did to your car. Instead, you’ll get a difficult to decipher printout.

Why not use the technology to give more?

The mechanic can have a simple digital voice recorder. As he works, he can describe each thing he’s testing and what he finds. You can then email the digital file to Iowa, India or Israel, have it typed up and beautifully formatted and waiting for the customer when he returns. How can that not be worth the $1.50 it would cost?

- Seth Godin, “Old marketing with new tools“

I’ve been doing some research on Flash games, and found someone with a lot of sense on the subject, but he doesn’t know much about capitalism:

Capitalism: Some people pointed their finger at me saying I am doing “capitalism”. Let me explain one thing: monetizing a Flash game is not capitalism. It’s almost an utopy that reminds me the early 80’s when lonely programmers in their rooms/garages made games that we still play today, in some retrogaming sites or with new fancy graphics.

Some people have a generally dim view of capitalism, especially in Europe. But still, this is capitalism. You use capital (human capital in the form of existing libraries and programming tool, and the physical capital of computer systems), you create something useful to other people, you make money off of it. Simply operating at a smaller scale within the market doesn’t magically make you a non-particpant in the market.

My roommate and I were talking about this topic - The Motley Fool on “What’s Wrong With Mutual Funds?“:

Here’s our oft-repeated fact that you should get through your head: The average actively managed stock mutual fund returns approximately 2% less per year to its shareholders than the stock market returns in general. That means that before your dollar even gets to the fund manager to invest, his company has already taken two cents off the top.

I disagree with the Motley Fool on a fair number of things, but they’re spot-on here regarding the average fund.

The Skeptical Optimist takes a humorous look at energy policy:

Q: But to encourage entrepreneurs, scientists, and companies to get moving a lot faster towards that superbattery breakthrough, the government will need to set up some kind of new incentive, won’t it?
A: Of course; I’ve been trying to tell you all along that government energy policy needs to change in a big way.

Q: How about something like an “X-prize” for a new superbattery? Maybe a few hundred million dollar prize for the first entrepreneur, or company, or group of scientists to come through with the new technology?
A: Uhhh… No, no, we couldn’t do that. Uhhh… that’s McCain’s idea… obviously just a “gimmick” (…according to these talking points they sent me…).

Arnold Kling writes on Econlog:

…like Charlie Brown getting ready to kick a football, we seem to have an infinite capacity to believe that it will be different this time. We think that the next top-down design introduced by government will work fine, it will never degrade, and we won’t find ourselves ten or twenty years down the road wondering how such a mess was created.

Obama Turns FDR Upside Down - WSJ.com

….the economic well-being of the country is not measured by how much taxes the government can collect, or even the size of the deficit. Rather, it is measured by the country’s productive capacity. Our theoretical entrepreneur’s 11.2% decline in taxable income reflects both less effort on his part and a less efficient use of his income in order to avoid confiscatory tax rates. Or, to put it directly, Sen. Obama’s plan would reduce an entrepreneur’s after-tax profits by $70,000 – $56,000 in lost profits and $14,000 more in taxes – just to produce a net revenue gain to the government of $14,000.

It is shocking to think that we have a presidential candidate who would make the private sector $5 poorer in order to make the government $1 richer. More likely, given the calculated political design of the proposal, no one in the Obama campaign told the candidate about the economic, ethical or historical consequences of his suggestion.

Via Thinking on the Margin via Greg Mankiw.

McCain calls for building 45 new nuclear reactors

Sen. John McCain called Wednesday for the construction of 45 new nuclear reactors by 2030…

This is a concrete plan that will do more than shuffle the pie around.

I was talking with my friend Jeff today, and we were discussing the economy. I mentioned that GMU Professor Bryan Caplan has pointed to the falling dollar at EconLog as a cause of rising gas prices. The article at US News pointed to by Caplan has a more detailed explanation, but, alas, no charts….

Someone out there believes that gas prices are going to fall, or at least not rise very much in the future, and Chrysler seems to believe them. The company is currently offering to pay the difference between $2.99 and whatever the current cost of gasoline is, if you get one of their vehicles.

This is interesting, and there’s been a fair amount of discussion about it online. But I haven’t seen anyone point out that this means that Pricelock/Chrysler are basically shorting gasoline over the next three years. Pricelock’s website focuses mainly on the volatility of gas prices, but this really doesn’t make sense for a three year timeframe. Pricelock could change the guaranteed price every year, or every six months, and still provide a huge buffer against changing gas prices at far less obvious risk to themselves. So, what’s going on here, given that I’ve even heard some people swearing that $10/gal gas is right around the corner?

First of all, an overview of shorting. Let’s say that I’m really sure that Nintendo and Sony are going to drive the XBox line into the ground, mini Linux-run PCs like the Asus EEE are the wave of the future, and Google’s support of the ODF format and its Google Docs platform means that Office will optional software for businesses in the future. Basically, suppose I think Microsoft is doomed. I can short MSFT today at about $29.99 - basically making a promise to buy shares at some point in the future and getting the market price per share today. Let’s say I do this for 1000 shares. Disregarding brokerage fees, if the stock becomes completely worthless, I’ve just made $29,990. If the price falls to $10 (maybe only two of my three predications came true) then I’ve made $19,990 after I spend $10,000 to keep my promise to buy shares.

But, suppose instead that Linux is proven to cause cancer, Nintendo and Sony both bow out of the console market, and Google pulls the plug on Docs, and the price of MSFT increases dramatically, to $200 a share. When I make good on my promise to buy 1000 shares, I’ll be out an uncool $170,010! People often say that shorting has “unlimited risk.” This is not literally true (it’s just plain silly to think that the market capitalization of any stock could exceed the U.S. GDP, and lots of barriers will be encountered well before that point), but shorting anything is risky.

Now, look at the $2.99 “Let’s Refuel America” deal from Pricelock. It’s short-selling, but the target is gasoline instead of the common stock of a company. Even (especially) if you consider the profit from selling the car itself, it’s still shorting, just at a higher effective price than $2.99 per gallon.

Someone is making a huge gamble here. Pricelock, the company, could hardly be more opaque. Their website seems to have been run by a domain-squatter until late last year. Here’s my guess: this company was specifically created just to make this gamble. But regardless of who’s inside Pricelock, Chrysler would not play along if it thought that they weren’t able to make good on their promise. This means either insanely deep pockets to the extent that Chrysler is sure everything will turn out O.K. no matter how high gas prices get, or Chrysler has determined that gas prices are not really going to rise that much, that fast.

Who has the best information on the demand for gas in America for the next three years? Who has “inside information”? You can make good guesses based on trends and demographics and do fairly well, but only automakers can take this and also consider inside information on the availability of super-fuel efficient cars and cars that run on alternative fuels.

So, here’s Chrysler, signaling something about what it thinks fuel prices will be. I wouldn’t necessarily bet with them — the auto industry has made plenty of boneheaded decisions in its time. But, you’d be a fool to bet against them.

The famous David D. Friedman writes on his blog about the decision against homeschooling in California:

The term “fascist” has been overused, and in any case I know nothing about Croskey’s views on economics. But I find it extraordinary that he would be willing to explicitly argue that public schools exist largely to indoctrinate children in views the government approves of, with or without the consent of their parents.

Indeed…

I’ve been running a game of Exalted online for two of my friends, and the last session turned out very, very badly (e.g. boring). I already have lots of ideas on how to make the next one better, but I thought it’d be worthwhile to reflect on some things regarding my writing and storytelling.

Things are valuable when they’re scarce. I think this gives me a clue for why my own prose tends to sound overwrought and verbose when I read it. I have a confession to make: My name is Nic, and I am an adjective addict. I have difficulty disregarding irrelevant details, eschewing oddball colors, scents, and sounds, and eliminating background noise. Oops. Somewhere along the way, I forgot that “show, don’t tell” means to use verbs.

Moving on, what’s scarce in an RPG? Experience points are scarce, but they don’t have value outside of their fictional world. Character to beat up are a bit scarce, but the PCs could become marauding pirates and beat up lots of NPCs every session and I don’t feel that it would inherently make the campaign more or less interesting (it would give it a radically different flavor and plot).

I was told it needed some challenge, and I agree. But here’s where I really think I failed — the situation I created in the last session was very pedestrian - students talked to some people on campus, met a someone new at a nearby event. <sarscasm>Well, it’s not like people do that all the time!</sarcasm> Novel situations are scarce, perhaps not in RPGs, but definitely in real life. Throwing exotic characters in mundane situations sometimes creates an exotic situation, but you can’t depend on that to happen.

So, from now on, I’m going to try to create a new, unusual situation as the foundation for each session. I don’t know if I’ll succeed, but that’s my goal.

Have you ever had an opportunity to bet your life on something you believe in? I’m doing exactly that, although the situation is complex, and requires a fair amount of explanation of my beliefs and my financial situation.

To begin, when I very young, my parents took out (multiple!) life insurance policies for me, with a benefit of roundabout $100,000 and premiums of about $631/yr. The idea was that I would grow up, start a family, and have cheap insurance.

Problem - I have no interest in having children of my own, and thus no reasonable beneficiary to name for these policies. I don’t see any good reason for me to have children, and I don’t exactly think I’d be passing on awesome genes. After reading a bit about the age-genius curve for men, I’m not all too sure a spouse is really all that great an idea. What were they doing before I died that they don’t have any passive income streams or career to rely on?

So with no beneficiaries (assuming I don’t die before my parents) and policies that pay only in the event of my death (as opposed to something useful, like policies that would give me money in the event of a sever maiming), these life insurance policies are utterly worthless to me. $100,000 will buy a lot of something, but nothing I can actually enjoy when I’m dead. Except, of course, that I just so happen to have an interest in cryonics, and the cost to be vitrified is (very roughly) $100,000. It’s also common to pay for vitrification by naming a company as the beneficiary of a life insurance policy.

On the other hand, I want to use the money I can receive from surrendering the policies to help me move to a better location and take classes. I figure that the present value of this lifestyle change, just from the expected improvement in income over my entire life, is $499,310 given an 8% discount rate. It’s actually probably worth a lot more.

So now, to crunch some numbers. If I lived to age 80, the cost of these policies would be $34,705. This may seem like I’m assuming I’ll live longer than I really will, but the people who publish life expectancy figures get around the problem of increasing life span by ignoring it, and you should expect to live beyond what typical online statistics would say your life expectancy is (how bizarre is that?). We honestly have no idea where medical technology is going — maybe the government will regulate improvements out of existence, and average life expectancy won’t improve a day. Maybe it will decline. Maybe they’ll be a huge leap in our understanding of longevity, and all of these calculations will be moot and I’ll live a very long time no matter what I do. The foresight exchange says there’s a 22% chance of physical immortality of some sort becoming a reality, but it doesn’t say how. 80 years is “good enough”

Now then, against this expected cost of $35K, I have to try to figure out the expected benefit from cryonics. First of all, no one knows if cryonics will ever work as intended. My gut instinct is to say that the probability that cryonics will work is P(0.02), but a more informed person hints at P(0.05). I’ll use P(0.03). An expected value is the probability of an event multiplied by its payoff (or, probabilities by payoffs, as it is). But how do you quantify “Holy crap! It’s fifty years after my death, and I’m alive again?! Yippee!”? I presume that the technology required to get someone who’s been vitrified up and running again ought to also be good enough to keep them running for a fair amount of time, at least enough for a second lifespan. The question then becomes the still difficult but at least well studied “What is the value of life?” Estimates are all over the place, but it turns out that $4.7M is a conservative value. Multiply by 3%, and the expected return on cryonics is $141K. This exceeds the $35K the insurance would cost, so it wouldn’t be a bad bet per se, but the difference is far less than the $499K that I believe the value of surrendering the policies would give me.

If I use the policies I have for cryonics, I lose ($499K + $35K - $141K = ) $390K! So, keeping the policies is a no-go, big time.

An argument given to me by the agency that originally sold the insurance (and wants me to keep it) was that fewer than 1% of term policies ever have a payout. I’ll take this as true. This leads to the second half of my thinking on the subject. The majority of term life policies are for people older than I am, and for a term of at least ten years. This means that my chance of dying in the near future is small. Very, very small. It could happen — I could suffer a heart attack, get hit by a bus, or be assassinated at random by terrorists. But the probability of that happening within, say, the next five years is negligible, much, much smaller than 1%. I’d be a fool to wager any sum of money on a random 25 year old dieing before they’re 31. This opens the door for me to have my cake and eat it too — I can, essentially, bet that I not die before I turn 31, and then begin establishing finances and other arrangements for vitrification.

Say that a 10-year policy would have a $5K cost. While I’m covered by the policy, I save away $10K a year (challenging but doable even if things don’t go as planned). Even with no interest on the money I save (absurd given the 8% discount rate from much earlier), I’d be able to afford cryonics outright when my insurance ran out. The total cost of this “manual” route is $105K. The benefit is the $499K I believe I can get from moving, the $35K I no longer need to spend on the current policies, plus the expected value of cryonics, $141K for $675K, minus the cost of this alternative plan, $105K, for $570K. Even better, when I’m 41, although I can’t do anything about the $5K I’ve spent over the previous decade, the remaining $100K is entirely within my control. If cryonics looks at that point like it’s a pipe dream, and some other life-extension technique looks much more promising, I can redirect the money however I like. Maybe I’ll have kids after all — $100K is a decent college fund, and if they don’t want to go to college, it’s cash, and can be used for anything else. Maybe I’ll use the interest I’m earning on it to take a vacation to an exotic location every year. Maybe I’ll just let the money sit around and compound in case I ever need it.

So, I bet my life, since I’m hoping I won’t die in the short-term, as “inevitable” as it may be in the very long-run.

Pirate ships had checks and balances on power.

Serial entrepreneur Micheal Robertson takes the college board to task on the return to investment of college:

I am writing in regards to the “Education Pays” report that you co-authored for the College Board. I appreciate the College Board attempting to get information distributed about the financial value of a college education. I think this is necessary and valuable that young people and their parents have accurate and objective information so they can make informed choices about their future. Your report concludes that “[Higher education] yields a high rate of return for students from all racial/ethnic groups, for men and for women, and for those from all family backgrounds.” My belief after analyzing your report is that several critical errors were made in the data used to arrive at that conclusion. These errors and assumptions mean that the report does not represent the true financial picture for the average student.

….

According to your chart, the net difference in income after 40 years between a high school and college graduate is under $250,000. If one is to adjust the numbers using the changes listed above (-$421,441) then the financial benefit of a college education goes negative. Thus it would make more financial sense for the average young person to bypass college and simply graduate from high school and enter the workforce.

This tentative guideline to life is actually based on the title of one of the first blogs I encountered, The Skeptical Optimist. People think that there’s a contradiction between being skeptical and being an optimist, but it’s not true. I don’t think this actually goes far enough — I think it’s a good idea to be both cynical and optimistic.

Quite a long time ago, I was an avowed pessimist, and proud of it, thank you very much. I believed things were always getting worse, and virtually everyone who didn’t agree with me had an agenda of some sort.

I now believe that most people mean what they say. This isn’t because people are especially virtuous; it’s simply easier than lying. As economist Bryan Caplan puts it: “The legions of people who imagine that their opponents secretly agree with them are utterly deluded…. Sincerity is greatly overrated.” Also, on the subject of legions, there’s a legion of cognitive biases available to prop up your beliefs no matter what they are. So, people aren’t usually intentionally villainous, they’re just mostly self-interested and terribly biased.

But, none of that should get in the way of optimism. Often enough, people do the right thing, just because. Even if they didn’t, the result of the actions of greedy, myopic people can be something better than a dog-eat-dog train wreck, just because that’s the way society works.

Additionally, although you can’t change your personal circumstances, there is flexibility to your own choices which allows you to make the best of your own environment — if things are bad, make them better.

…it’s so important to observe how users actually behave versus the way they tell you they behave. People who do this professionally are called “economists” - Jeff Atwood, “Every User Lies“, Coding Horror

“Homo economicus never regrets ordering dessert–he has infallibly weighed the fleeting gustatory pleasure against the likely effects on his girth.” - Tim Harford, The Logic of Life

I was thinking about recent posts on various blogs about the aging population in the American work force, and what it means for our economy. The very short version: things will be slightly difficult because the number of workers relative to the number of retirees will decline.

Way back when I was 15, I wanted a job. Alas, labor laws make it extremely difficult for a 15 year old to get a real job, even for the summer. The DOL of labor notes “During the school months of 1996-98, the CPS found that only 9 percent of 15-year olds were employed in an average month” and backs me up on the cause.

Let’s not pretend that teens benefit from being kept out of the labor force. Such restricts are the thinly-veiled economics of a bygone era, an attempt to increase wages by decreasing the size of the labor force, without any regard to the real activity taking placing under the surface.

There are roughly 20 million people in the United States between 5 and 9 years old. In five years, they’ll be between 10 and 14. If even 10% of them were involved in the labor force, with real jobs, we’d have another 2 million workers, easily. If they worked only for 5 hours a week at the 2009 minimum wage - slightly more than an hour after school during the school week and less than a single day a week during the summer - they’d still generate 3.7 billion dollars of additional gross wages (5 X 52 X 2000000 X 7.25). No, it’s not nearly enough — a mere drop in the bucket compared to the 18 trillion dollar projected medicare shortfall. But it’s no a small amount either.

Unfortunately, I’m not willing to make a prediction that it’ll be easier for teens in this country to get jobs. We do not have a history of well-thought-out labor law — it’s even possible that any coming crisis may actually lead to an outright ban on all teen labor.

A long time ago, I saw an ad for a website on Fark. The site was in a blog format, well before Wordpress and Blogger were hits, and offered daily stock picks. I was intrigued, but skeptical (no, the site was not Fool.com, which has never advertised on Fark to the best of my knowledge). After a week or so, the previous entries were updated to show the change in price. The performance of the past picks seemed impressive, but I easily smelled a scam, so I kept on eye on the site.

Were the picks actually chosen after the fact? Nope, a few days of watching the site confirmed that picks were made in advance.

Was this a pump-and-dump? It seemed unlikely to me that a few hundred Fark readers had enough money to significantly change the prices of the stocks being highlighted, even if all of them had decided to bet their retirement funds on it — these stocks were cheap, but didn’t have market caps that were that small.

After about a week of watching and wondering just what was going on (and independently checking things on Yahoo and in a spreadsheet), I got my answer, as one or two entries that didn’t perform so well were silently dropped from the site. The picks were simply stocks that had a great deal of volatility in a generally bull market — and only the winners (or at least not-so-bad losers) were reported. I’m fairly sure the entire site was a poorly thought-out setup for a pump-and-dump to come, which probably failed miserably due to a poor choice of target (Fark readers? Come on…) The entire site went dead some time later.

Which brings me to the Motley Fool. My father loves the Motley Fool. I’m not so sure. It hasn’t really been that long since they were pushing their Foolish Four agenda. Basically, I can’t help but wonder if perhaps the Fool is a more sophisticated scam, and if they’re basically a portfolio of portfolios for publication and sale. The losing portfolios and strategies are killed, much like the Foolish Four. There are currently 7 products, all with positive performance, listed on Fool.com, along with four others with no performance given. Call me suspicious, I know of at least one loser not listed. Who knows what else has been tried and never seen the light of day. With the massive number of recommendations made on the site, who knows what the real performance of the investment brains behind the Motley Fool really is?

Here’s one thing that’s certain: money that you spend on investment advice cannot actually be invested itself. Yes, for a large amount of money to invest, it’s a relatively minor cost. But is the benefit received really worth it? How can you tell?