Practice Good Theory Blog

Change: Some things are hurt by change, while others withstand it robustly. Nassim Nicholas Taleb challenges this dichotomy and introduces a third category, in his book: "Antifragile: Things that Gain from Disorder". Hormesis: Exposure to some "harm" can help a system. Vaccinations can build resistance. We know that variation is one driver of evolution, but Taleb asks us to peek at a human through a microscope and see millions of cells. Then spot the analogy to evolution when a germ invades this "system". Some cells can handle the change, some can "evolve" to deal with it, others cannot -- the fittest survive, and the organism is healthier for it. "We didn't get where we are thanks to the sissy notion of resilience... but thanks to the appetite for risk and errors of a certain class of people we need to encourage...", says Taleb, extending the analogy to society. (Niall Ferguson also compares Capitalism to evolution, and he echoes Schumpeter's "creative destruction"). Stress is good for you: "The frequency of stressors matters a bit. Humans tend to do better with acute than with chronic stressors, particularly when the former are followed by ample time for recovery, which allows the stressors to do their jobs as messengers." Body-builder Mike Mentzer advocated taking exercise "to failure". Taleb says this holds true for emotional setbacks, and much more. Passing through an episode makes us stronger. It is actually unclear if we can banish sadness without also banishing happiness, since we might have to banish valuing first. Taleb warns: "had Prozac been available last century, Baudelaire's 'spleen', Edgar Allan Poe's moods, the poetry of Slyvia Path, the lamentations of so many other poets, everything with soul would have been silenced." Bureaucracies vs. Individuals: Rigid, bureaucracies do not to gain from variation; instead, they opt for robustness. (I'm reminded of the typical "QA"/"ISO-9000" processes that typically lower product-quality.) Taleb argues that the problem is epistemological: "The Soviet-Harvard delusion" overestimates of the power of knowledge centralized in a few actors. (Reminds me of a quote from investor Charles Gave (paraphrased): if I could predict the economy, then communism would have worked. Also parallel to Ludwig von Mises's argument that calculation is impossible under socialism.) Taleb himself draws a parallel to Smith's "invisible hand", which he interprets as the power of distributed knowledge and decision-making. (Note the parallel to organisms.) Formal Education: Well-funded, formal education can transmit what is known, says Taleb, but new technology mostly comes from individual tinkerers. Society and organizations must allow tinkerers to flourish despite assured, repeated failure. Theory, he says (mostly) comes after observation and practice. Children learn to ride a bike without knowing physics. Option traders were trading options before Black-Scholes. Jet engineers were creating engines ahead of the theory. Carpenters and architects were making intricate geometric shapes before they understood the theorems of geometry. Knowledge and theories come out of practice (proto-induction). Taleb criticises the education establishment for taking more credit than warranted: "bird lecturers" who claim credit for the graceful flight of the chicks they've lectured. However, the real danger is when they try to push rationalistic, or inadequate theory on practitioners. "A writer with argument can harm more people than any serial killer". (Or, a Black-Scholes model can formalize only part of experiential knowledge, short-changing other useful aspects.) Skepticism: In the second half of the book Taleb goes into detail about many specific areas of accepted knowledge where he is skeptical: for instance, the efficacy of mammograms, the safety of fracking, diet-rules, and more. He tries to apply a somewhat paleo-fill-in-the-blank approach to everything. In this view, everything modern is suspect. How can you be sure there is not some hidden harm that will manifest itself down the road? He tells us: "I want to live happily in a world I do not understand". He sums up his attitude succinctly thus: "... if I had to find the anti-me, the person with diametrically opposite ideas ... it would be that Ray Kurzweil fellow." This was tedious in parts, and I almost put the book down two chapters before the end. Still, Taleb does warn us that "by issuing warnings based on vulnerability... we are closer to the original role of the prophet: to warn, not necessarily to predict...." An ambitious book: Though Taleb builds on ideas from his previous books, he makes an extremely ambitious attempt to look at other facets, and also to apply his core idea to a very wide range of topics: finance, automatic-pilot, medicine, politics, child-rearing, epistemology and finally to ethics. The book is rich with anecdotes, wit and thought provoking arguments. It is his magnum-opus, an ambitious book that makes me want to ask him "What will you do with the rest of your life?" A decade ago, I'd have recoiled from every fourth paragraph in the second half of this book: from the hyperbole and the scepticism. Still, if Taleb encourages us to take all "narratives" with a large pinch of salt, we should happily apply the principle to his own book, and take it for what it is. There is much value to be found. Yes, add it on your "to read" list... now. And, finally, two Bonus Taleb witticisms (the book is full of these): "A Stoic is a Buddhist with attitude, one who says 'f**k you' to fate" "A turkey is fed for a thousand days by a butcher; every day confirms to its staff of analysts that butchers love turkeys 'with increasing confidence'. " Link to Original

The first two measures compare prices to rents and to median income. Doing so, factors out the "nominal" aspect of price-change. Price-to-Rent ratio: Over a year ago this measure was almost down to the 1990 average. Since then, it has almost flattened out, falling only slightly. Source: As always the best source for such charts is the Calculated Risk blog. Price-to-Income ratio: A very similar pattern here. (Caveat: Chart only up to 2011) By both these measures, we can see that prices are slightly above their historical average, but only slightly (and way below their boom-time prices). They also seem to be flattening out. Seems a decent enough time to buy a home. Debt Obligation Ratio: Instead of price, this measure looks at the monthly payments. Since interest rates are low (they've risen in the last month though), by this measure people are spending a historically low percentage of their incomes on mortgages. Other consumer debt is not high either, by historical comparison. Again, a decent time to buy. In fact, if one considers interest rates to have bottomed, it's a good time to buy. Home ownership rate: This is the one measure of these four that is not so great. Though it is off its peak, it is not down to historical levels. In other words, there is no huge "pent up demand" for homes. Summary: Home prices could drop a bit it more while bottoming out. However, it seems a reasonable time to buy, base on "U.S. averages", if one plans to keep the house for many years. Buffett and Schiller have been saying so for about a year, and they're pretty savvy on this topic. The numbers above support them. Caveat and Disclaimer: It's said that "all real estate is local". All the graphs above are national averages; local situations can vary quite widely. Link to Original

Quiet (The Power of Introverts in a World That Can't Stop Talking) - by Susan Cain is interesting and well-researched. Fear not: this is no apologia for everything introverts do, nor a self-help book that promises miracle changes. Instead, Cain surveys the research and examines real-life examples, trying to carve out the meaning and the roots of introversion. She examines her topic from various angles: parenting, work, play; the good, the bad. Cain rejects the idea that introversion is a bundle of negative things that merely stifles the introvert. Instead, she tries to untangle the various aspects of introversion: the positive, the negative and the neutral. If shyness, or anxiety have negative real-world consequences, it makes sense to address those. If risk-averseness or thoughtfulness can be useful real-world traits, but can also lead to paralysis, then one has to address the negatives while treasuring the positives. If introversion works well in some contexts but fails in others, should an introvert seek out the right context: the right career, the right company, the right partner? Cain implicitly adopts a rational, individualistic, purpose-driven ethic while evaluating her subject. Cain makes clear that introversion is not just about shyness, and that extroverts can have stage-fright too. I like the phrase she coins, positively: "Socially poised introverts". The book has numerous examples of introverts who used their introversion positively, and stories of those who learned to overcome its negatives. It also has cautionary tales of introverts who try to be extroverted and fail. [i was reminded of a very introverted manager I once had. He attended Dale Carnegie courses. Suddenly, he was more ready to be assertive and even to scold employees at meetings, but it always felt a bit phony and sounded like he was verging on hysteria. We often felt that he'd gone "post-rational"; so, we had to comply here and now (because it was about being accepting of his assertiveness, not about its subject), but there would have no consequences outside the meeting, because it was essentially an act.] She examines spouses where one is extroverted and the other is introverted. The book is rich with examples. At the end of the day, I'm still not convinced that the concepts of "introvert" and "extrovert" are fundamental, nor that they're the best way to "bundle" certain traits. Indeed, this book is frank about many conclusions still being tentative. This is its strength. The science is still developing. Perhaps the classification is more important than we think. Perhaps it ties back to ancient philosophical debates about thought and action. Perhaps someone will tie this back to the psychology and philosophy of Attila versus the witch doctor: to the mind-body dichotomy. Perhaps, in a decade, psychologists will settle on a different classification. If so, I'll be looking out for a new book by Cain. Link to Original

JC Penny recently fired its CEO -- Ron Johnson -- because his concept of simplicity was not working. With hindsight, we see that they forgot an important fact: for the typical JC Penny customer -- shopping is a game. Exploration: Imagine a computer maze game. It has twists and turns. Imagine that you had to discover gold and treasure hidden along the way, by exploring, discovering, and then learning tell-tale signs -- often coming up empty-handed, but finally hitting pay-dirt. Now imagine the game developer decided to simplify things by removing the maze. Instead, he gives you a straight hallway. And, why hide the gold --- such a waste of time? He simply places it on clearly-visible tables along the way. Perhaps the tables are placed so the gold jumps into your hand as you pass by. You start the game, press the forward key for a while, and you're done. You get through at record speed, and with all the gold. Simple and efficient... great if this was something you really wanted to get through as a means to another end.... but a lousy game. That is the story of JC Penny's new store and pricing concept. The value of junk: You see customers (players?) hunting through a pile of merchandise to find the one thing they really like. There are some things that few people ever buy. Does it make sense to figure out what is junk and stop stocking it? Or, does it make sense always to have some junk, to make the hunt more interesting? A game where all the gold is out in the open is boring. Texture and complexity can be a good thing. You see customers (players?) checking out your store but resisting temptation because they know a coupon will be out next week. Does it make sense to simplify pricing so that even a dullard can always get your best deal? Or, does it make more sense to keep pricing at a level complexity that require customers to be smart and knowledgeable about how the system works? A game without learning and failure and success is boring. Shopping as Entertainment: Perhaps the metaphor of a game is exaggeration. There's obviously a utilitarian aspect to shopping. It varies from person to person and by situation. Nevertheless, shopping for clothes -- particularly women shopping from clothes -- is not strictly utilitarian, but a good part fun... entertainment that JC Penny removed from the mix. Link to Original

Since my last look in November 2012, the various measures of employment have remained along their recent trajectories. A snapshot: Unemployment rate slightly better each quarter (largely because so many people have stopped looking for jobs) Participation rate (how many want jobs) between flat and slightly worse. Employed-to-population ratio, between flat and slightly better The source of all the graphs below is the excellent gallery at "Calculated Risk". The unemployment rate has been dropping slowly but steadily for over two years. This "headline number" that is reported the most widely. It is also the one that gives the most positive picture. A "naive linear" projection gets us back to a pre-recession rate by the second half of 2014. As the graphs below show, the "quality" of this rate will be much lower than what we had in 2006-07. There will be more part-time jobs, and a huge number of people would have just stopped looking. Nevertheless, this is the most-reported number on unemployment, so it's useful to keep an eye on it. The Employment-population ratio shows a more dismal picture. Look at the black line above. It is more or less flat -- so much worse than the headline unemployment rate. If we take the most naively optimistic view, and assume this will suddenly turn upward at a pace as fast as we saw after 1975, it would still be 2017 before we get to pre-recession levels. If we assume it will turn upward and grow at a historically-average rate, we're probably talking about 2019. If we look back at the times when the rate flattened out for a few years (mid-1960's and 2003-04), we'll see that it grew slower than normal. Does that mean it will be the mid 2020's before we can be back to pre-recession levels? My best guess is that we're "never" getting back to those levels. The biggest change we have seen is that many fewer 16-19 years olds are working. This aspect might be here to stay. We are probably talking about a "new normal" where we get back to a little below the pre-recession levels over the next 5 or 6 years, and stay there. a Core age-group, Employment-population ratio: If we leave out those below 25 (yes, I know 25 is pretty old), and leave out those above 54 (yes, I know that's just a few years away for me, and I don't feel old), we get an age group (25-54) which is in its core working years. Mostly, these people cannot delay looking for work while they do still more college, nor can they retire yet. Most optimistically, it will be 2016 for this group to reach its pre-recession level of employment. A more reasonable assumption would put it around 2019 or 2020. Summary of projections: If we do not have a new recession, various measures of unemployment are likely to improve. However, some measures appear to be headed for a "new normal", never returning to pre-recession levels. Except for the "headline rate", they will take well into the next presidential term to return to "good times". The headline unemployment rate should be back in about 2 years, barring a new recession. No new recession? With a booming stock market, a recession appears a distant idea; but that's how it always feels as we head to a "top". Some commentators think we might be seeing early signs of a recession (Europe is already in recession, China is faltering, and India too.) Forget all that, and simply look at the frequency of recessions in the chart above. A "naive-projection" would say that there's a pretty good chance we will have another recession in the next 4 or 5 years. If that happens, the linear projections for unemployment can be thrown away, since we'll start another downturn. Previous, related posts: How're we doing on Unemployment and GDP? (Sept 2012) How're we doing on CPI Levels? (April 2012) How're we doing on home prices? (April 2012) Link to Original

I'm not a grammar nazi, nor a stats nazi, but I'm going to rant anyhow... The Chris Matthews show (on MS-NBC) routinely shows statistics in a form that looks like a horizontal bar-chart. The only problem is that the "bars" are always the same length, regardless of the stats. I've noticed this for many months. Don't those look like horizontal bars? The rounding does it for me. The example below is how it should be fixed. Is this illiteracy from MS-NBC, or do they have some strange intent? Here's another example. Why are all the reds, whites and blues the same size? Link to Original

My intent in this post is to question if the U.S. really has a large amount of debt. Some people think we are just a years away from a breakdown in the credit of the government. Others think we've gone through bad times in the past and will "grow out of" our problems again. To keep this post simple, all debt figures are "gross". "Gross debt" includes the amounts owed by the government to the Fed and to the Social Security "trust funds". Also, all figures are nominal dollars (i.e. no adjustments have been made for price-increases). [Other, better, measures will have to wait till a future post.] Scary chart: This chart of the "gross" U.S. government debt since looks scary in the way the amount of debt seems to be shooting up exponentially. Remember the number $16 Trillion dollars. That is the approximate level of gross federal government debt. The total GDP of the U.S., is also about $16 trillion. Has been scary for decades: In the chart above, you can see the debt start to rise in the 1970's and quicken in the 1980s. This second chart uses the same data as the first, but stops at 1985. Look at the left-hand scale: the gross debt was just 1.6 Trillion ( a tenth of today). Yet, the chart, drawn the same height as the first, looks almost as scary. Just because this has appeared scary for decades, we should not be lulled into complacency. Things often worsen over a long time before they become too hard to undo. Charts with a linear scale on the Y-axis show absolute growth; they obscure growth rates. Going from 1 trillion to 2 trillion shows up as just as big an increase as going from 15 trillion to 16 trillion. (Also notice, at this scale, the jump in debt to fight WW-II is clearly visible. ) Re-drawing the chart, using a log scale on the Y-axis, allows us to see where the growth rates were steepest. The rate is fairly steady: Suddenly, the chart looks far less scary. The steepest jump was in WW-II, and subsequent rises have not come anywhere close to that rate of growth. We see three major periods in this chart: a steep rise in WW-II, followed by 15 years of very slow growth (almost flat by comparison), and, finally, a clear rise in the rate from 1970 to today, with a brief pause during the dot.net boom. A steady rate is not necessarily good news. If someone is digging themselves into a deep hole, it is little consolation that they increased the depth just as much yesterday, and the day before. In fact, a steady rate means that they were digging a larger amount every day. If nothing changes, there will come a point where they're trapped. Debt-to-GDP ratio: A common way to measure the seriousness of government debt is to compare it to GDP. How much is the debt, relative to the total annual production of all the citizens -- who, in their role as taxpayers -- are the underlying debtors shouldering the burden? We can take two very different messages from this chart. The scary message: On the one hand: the debt is clearly getting increasingly burdensome since 1980. The positive message: Or, we can see the glass half-full by noticing that the debt was even more burdensome after WW-II. If the post-WWII generation brought the ratio down to 30% of GDP, then why can't we follow their example and do the same. There may be hope yet: we just have to do what they did! Debt and GDP Compared: This chart expands on the Debt/GDP ratio, by showing the two components (Debt and GDP) separately. Notice how GDP grew faster that gross debt until recently. Also notice, for instance, how the increase in gross-debt slowed slightly in the years before 2000, while GDP kept growing. This explains the dip in the Debt-to-GDP ratio seen on the previous chart during the same years. Notice that the latest recession has seen a significant shift. Since 2008, debt started to climb much more steeply, until it is now almost equal to GDP. 1950's and 1960's: The scale in the chart above makes it appear that debt and GDP were very close during the 1950s. Scaling up and looking just at those years, we see the true picture. Now we see the explanation for the rapid fall in the post WW-II Debt-to-GDP ratio. After WW-II, gross debt increased from about $ 275 billion to $400 billion up to 1969. Meanwhile, GDP went from $200 billion to $1000 billion! The future: If we do nothing about the growth in government debt, and if GDP does not speed up, we face Scenario A in the chart below: the problem gets ever more out of control. If we bring the growth in debt back in line with the growth in GDP, we face scenario B. While better than "A", this is a high-risk scenario that holds the poor status quo. Predictably, a recession will come along, taxes will fall, and stimulus will rise, and we will shift into Scenario A. Today, in summary: Based on historical norms, the gross-debt of the U.S. is too high, matched only during WW-II. In theory, we should be able to do what the post-WW-II generation did: grow the debt very slowly while growing GDP much faster ("Scenario C" above). Unfortunately, considering today's politics, both those seem improbable propositions. So, in summary, we're justified in worrying. Link to Original

The chart below shows the number of seats in the House of Representatives held by the Democratic party and by the GOP, since the early 1900's. For most of this century, the Democratic party has had a majority of seats in the House (out of a total of about 435 seats). The chart starts with a GOP majority, which changes after the stock market crash. During Roosevelt's term the Democrats take a huge lead, and they keep this lead (with two exceptions) all the way to 1994, even through Reagan's presidency. Finally, during Bill Clinton's time -- in 1994 -- the GOP gets the majority back and has held it except for two terms after the recent market crash. [Source: Numbers come from various articles on the Wikipedia.] I also wanted to understand what would happen if the house had something similar to the filibuster rules of the Senate. About 260 seats is 60% of the total -- see the grey shaded area running across the top. A lot of the time, the majority is below 60%. So, if 40% of Representatives could stop passage of a bill, we would have had many House terms where the minority party could have threatened a "veto". This likely would have been a good thing. Link to Original

Every year, Gallup conducts a poll where they ask people across the U.S. whether they would call themselves "Liberal", "Moderate" or "Conservative". For the last 5 years, percentages have been fairly stable. Without reading further, can you guess what percentage would call themselves "moderate", and how conservative/liberal would be split? Here is a link to the latest results. About 37% say they're moderate, about 39% say they're conservative, and about 22% say they're liberal. Since the country's voters divide about 50:50 when it comes to voting for Republicans and for Democrats, it's safe to conclude that moderates lean democrat. If we were to make some rough assumptions and say that voter turnout is equal among the groups and and that "conservatives" vote GOP and "liberals" vote Dem, then a 50:50 vote result would imply that the 37% who call themselves moderate break down into: 10% moderate but leaning GOP and 27% moderate leaning Dem. Even if there is leeway in the assumptions, I think it is a reasonable guess that people who call themselves moderate are at least twice as likely to vote Democrat than Republican. Democrats are more mainstream: I think this fits with anecdotal evidence. Viewpoints propounded by the Democratic party more closely reflect the mainstream views taught in schools and colleges and via movies etc. So, very broadly, the stance of the Democratic party is seen as being more moderate than the stance of the GOP. Under this understanding, people who support some of those mainstream views and think of themselves as moderates, also see the Democratic party as being closer to their position. There are no liberal states! I found it interesting that when one looks at state level data (see page 2 at that link), there is no state of significant size where more people call themselves liberal than conservative. (Mass., Rhode Island and D.C. are the only ones, and there two only D.C. has a clear majority of self-reported "liberals"). Meanwhile, in states like New York and California, self-reported conservatives are more than self-reported liberals (by slim margins). Just some food for thought -- or perhaps a poll confirming what you already knew! Link to Original

Lenders to governments run two types of risks: credit risk (the country won't pay back 100% of the loan), and currency risk (a country borrowing in its own currency can pay back the loan by "printing money"). Developing countries often borrow loans denominated in a currency like the US $, to remove currency-risk. Despite this, they have to pay higher rates of interest because they are not great credit risks. Countries have defaulted throughout history. Yet, consider the chart on the left. After European countries joined the Euro, interest rates on their borrowing became almost equal. And, notice how that finally ended around 2008, with the "great recession". Why were rates nearly equal for about 9 years? Under the Euro, countries agreed not to default (default was not envisaged). They also agreed to stick to certain deficit limits Finally, there was a good possibility that the EU and the ECB would come to the aid of any country in trouble, bailing out their creditors. The main assumption: Merely agreeing not to default is meaningless. As for the limits, countries were exceeding those deficit limits pretty soon. Essentially, lenders were relying on the idea that Euro countries would hang together when push came to shove. Imagine a lender in 2001 thinking: "if Portugal gets into trouble, the Germans will bail them out". It would be a decent guess, but surely there was also a some chance that Germans would shrug? Surely more probability than shown by the near equality of interest rates paid by the two countries. In retrospect, it seems bizarre that creditors were lending money to Portugal and Germany at the same rate. The assumption questioned: Starting around 2007, people began to question the idea that Germany would bail out the poorer countries. Increasingly, lenders figured that Greece or one of the others would default. Finally, in 2012, Greece did default. Subsequently, fear has receded as the ECB has said they will supply as much liquidity as is required to hold things together. Rates that had spread far apart came closer, but there are still spreads between different countries, as can be seen in the chart above. (Today, Europe is debating is Cyprus should be allow to default, or if they should be bailed out.) In the long term: I think the biggest lesson is how long it can take for things like this to play out. Governments like the U.S., Japan, the EU, and even China have a lot of resources. They can bring these resources to bear, to impact market prices. Even if one is right that they cannot keep irrationality at bay forever, they can do so for a long time. Keynes said, "Markets can remain irrational longer than you can remain solvent". Of course, in this case, it is not about markets being irrational. Maybe we should add to that quote: "...and governments can stay irrational far longer than any market can". Japan and the U.S.: Since the housing bust, a few people have feared that huge amounts of money-creation in the U.S. and the huge deficits will cause huge problems, while others have pooh-poohed the idea. The truth is that if the U.S. continues to pile on debt, it will create a serious crisis some time down the road. The U.S. could well change -- countries do. Still, even if it does not, it can be years before one sees the effects. Consider Japan, that has been in a recession for two decades, and has run up debt that is far greater than the U.S. It appears to be getting closer to show time for Japan, but one could have gone bankrupt the last 20 years thinking it was going to break. Link to Original

The Mediterranean Maghreb, along with Egypt and the Levant, has been rocked by the "Arab Spring". Once part of the Roman Empire, North Africa went through a period of Islamic rule, Turkish Imperialism, and European colonialism, followed by independence under mostly dictatorial regimes. The Arab spring marks a new turning point. "A moment comes, which comes but rarely in history, when we step out from the old to the new; when an age ends; and when the soul of a nation long suppressed finds utterance." - Nehru What will "the new" look like in North Africa? Some fear the next phase will be Iranian-style Islamic rule, others are cheering for Democracy. Probably, the next phase will vary across the four countries of the region, ranging between strong authoritarian (possibly Islamic) rule and more liberal democracies that implement a few Islamic rules in family-law and related areas. Later, with a generation or two, that too may pass. I think it is likely that sometime in this century, at least one North African country -- perhaps Tunisia (once Carthage, land of Hannibal), will follow Turkey, and be linked back into Europe via some political form that extends the EU across the Mediterranean. Indeed, considering the North-South divisions in Europe, one might go out on a wing of fancy and wonder if perhaps the more enduring political union may be a Mediterranean one: the Roman Empire rising again? A Union that circles the Mediterranean, using a common currency (the Denarii) might work better than the EU. But, enough of fiction. Here's a map of the four countries, followed by very brief summaries: Morocco: [You've heard of its largest city: Casablanca.] This constitutional monarchy was fairly dictatorial, but began small moves to liberalism under the current king (since 1999). The Arab Spring protests resulted in a new constitution and more democratic control, but the king still retains primacy. The largest parliamentary party is moderately Islamic, but it has nowhere near a majority. There are quite a few other parties that are nationalist, monarchist or even liberal. Algeria: Post-French-colonial governments were socialist, secular and authoritarian. In 1991 an election was held and an Islamic party won, based on their Islamic ideology and their anti-socialist agenda that appealed to traders and businessmen. The military overturned the results; the leaders of the Islamic party were jailed; and, a bloody civil war ensued, with the military and the secular establishment retaining power. Since then, Algeria has seen a slight opening up of the economy, but is still very authoritarian, and reliant on extraction of oil. The Arab Spring saw uprisings in Algeria, but the government has maintained control. It mostly remains a country run by secular authoritarian government, with a not-so-moderate Islamic party likely if free-elections are ever held. Tunisia: Like Algeria, the post-colonial government was secular and autocratic. (Veils were banned in government jobs.) Then, a Tunisian street-vendor set himself on fire, sparking the Arab spring. Unlike Algeria, the the President fled and a new party is in charge. While the historical roots of this party are very Islamic (pro-Iran etc.) the current leadership appears to be moderate. Unlike in Algeria, where the main Islamic party wants Sharia, the Tunisian party rejects Sharia as a basis for law, while saying that the law should be informed by religious/Islamic values. The leader says he sees an Islamic party in the tradition of the various "Christian Democratic" and "Christian Socialist" parties of Europe. Libya: And Italian colony before WW-II, post-colonial Libya was a monarchy that was fairly secular. After twenty years, the king was overthrown by socialist, nationalist Gaddafi. He declared that Sharia would be the law. He also was the most repressive and brutal of the North African dictators. The Arab Spring brought civil war to Libya, and Gaddafi's death. The interim constitution says that Sharia is the basis for law. However, despite this, and despite the attack on the U.S. consulate in Benghazi, the majority in Libya is not particularly Islamic. The largest political alliance favors democracy and a move toward liberalism. The future: Morocco is on a path where power continues to move away from the king, to a parliament, and where religion does not play an overwhelming role. Tunisia does not have a monarch, and appears to be further down the path of modernism. With a per capita GDP ($9,300) greater than China, Tunisia has the best prognosis of the four. Algeria is brittle, with its dictatorship likely to crumble some day, with an Islamic party waiting in the wings, and with a history of civil war. Finally, Libya is a mess of rival tribes right now, but the parties are not overwhelmingly religious. It's reliance on oil might entice a new dictatorship; we have to wait for the dust to settle. Link to Original

In the middle of the "fiscal cliff" stand-off, there are stories about a "milk cliff". If Congress does not act, milk prices might rise substantially -- potentially doubling. Price support programs have been around for decades. Herbert Hoover desperately tried to keep prices from falling, and was fairly successful at doing so (prolonging the great depression). The intellectual root comes from monetarist economists who want the government to ensure the stability of prices, in order to fight deflation. [Today, some of these are cheering Japan's new Prime Minister Abe who says he wants prices to rise at least by 2% per year.] Roosevelt doubled down on the madness. In 1933, millions of pigs were slaughtered. They were not handed out to the hungry poor struggling to get by. Instead, they were buried in mass graves. Posterity will not believe this. The Dairy Product Price Support Program makes the government buy milk. The current program dates from 1949. Under the rules of the program, the government would be buying milk at very high rates. So, along the way, in various farm bills, the amount of the subsidy has been lowered. Instead of removing the subsidy entirely, only the calculation has been modified, and only temporarily. Farm bill: If we do not get another Farm Bill, we will go back to 1949 subsidies and the government would have to pay so much for milk that the price might double. The government is not allowed to resell the milk at a lower price. It is not allowed to give it to charitable organizations. The whole idea behind the program is to keep milk-prices up. Farmers don't want the price to rise that high, because they know voters will wake up and might cancel the program altogether. Don't patch it, Kill it: We do not need a new farm bill full of subsidies. We do not need a farm bill that will reduce the milk subsidy once again. We need a bill that will kill these farm subsidies forever. Link to Original

In this 2-minute video, CNBC's, Maria Caruso Cabrera demonstrates the abysmal quality of mainstream business reporting: " /> " type="application/x-shockwave-flash" allowfullscreen="true"> First, Cabrera implies that Democrats are wrong in a wanting to raise tax-rates on the rich. Then, with no sense of irony, she suggests means testing for Medicare. She ought to know that means testing is as much a progressive tax as the Dems push to raise the marginal rates. The GOP want to tax the rich just as the Dems do...they just want to pretend they don't. Payroll tax are taxes: Today's social-security system is very progressive. Richer folk are paid out more than the poor; but, proportionally the rich are paid out far less. We have Alan Greenspan to thank for this. Medicare is even worse. The rich pay in far more and get nothing extra -- not even a better walking-stick -- in return. The Simpson-Bowles plan would shore up social security. In part, it would do so by raising payroll taxes on the rich, but only paying them a tiny bit more when they retire. Medicare tax hike for 2013: In 2013, a 3.8% Medicare surtax will hit people earning around $250K per year. At 3.8%, the increase is significant. In the recent "fiscal-cliff" farce, the GOP has been portrayed as fighting to stop taxes being raised on millionaires. Yet, even after hours of TV programming on the topic, few people know about the Medicare surtax. Tax the middle-class: Economist Tyler Cowen has suggested that we should raise taxes for everyone. Taken in context, I agree with him. There has been too much focus on "the rich", when those taxes would only make a small dent in our deficit. It is the spending, stupid! However, politicians are scared to touch entitlements. Focus on deficits: The GOP cling to a "no tax" mantra like cargo-cultists. As the CNBC video shows, they're fine with progressive taxes if they're called something else, like "means testing". Instead the GOP should focus on the deficit. They should insist on a plan that eliminates the annual budget deficit within 5 years, and has a surplus for the next 10, paying off a portion of the debt. That should be primary. They should not compromise on this. To get there, they should insist on spending cuts. They should only compromise on this if the Dems agree to raise taxes to cover spending, and only if the taxes are across the board: where all voters feel some pinch from the extra spending. Someone else's money: If that sounds like a dream, the root cause is the American voter who wants to pursue his American values like iPods and iPad, ignoring the fact that we will eventually run out of other people's children. It does not take a rocket scientist to understand that the deficit will fall on our kids and someone else's kids. It does not take a saint to know this is immoral. Voters ought to have their taxes raised, thus bearing the burden of their desires. Link to Original

Some tidbits of news from around the world: Protests in India: As these photos from CNN show, last week New Delhi looked like Tahir square, as thousands of middle-class youth protested against traditional police attitudes toward rape. This followed an exceptionally brutal rape of a middle-class girl in India's capital. Police responded with batons and water-cannons, and one cop died. It appears that this will be watershed incident, which will bring some real change to public (and police) attitudes toward rape. Britain's Royal Mail has started to explore privatization. Margaret Thatcher sold state-owned industries except for the railways and the post office. Her successor privatized British Rail in 1993 (inspired by Sweden). The U.S.Post Office and Amtrak have no plans to privatize, though the former is selling some of its pricey real-estate. The 1997 Kyoto Protocol is losing steam. In 2011, Canada withdrew. Now, in the latest round, Russia and a few other ex-soviet republics are threatening withdrawal. Good riddance! Japan has been in recession since the crash in 1989/90 (Nikkei in black). The dark blue line in the graph shows the Yen. Notice the strength between 1985 and 1990, during the boom. Notice the flattening out since then. Japan has more public debt than any other developed nation. They've engaged in a flood of monetary and fiscal stimulus. Yet, to the disappointment of both Keynesians and Monetarists, Japan has been going nowhere for 20 years. (Take heed, all those who would short US debt and the dollar.) No country can put off the day of reckoning forever, but a strong country can delay it long enough to wipe out even the patient shorts. Still, with every few years, the Japanese crisis worsens. It's like any bubble: hope and expectations underlie credit-creation until one day hope changes to fear. [Full disclosure: I'm short JGB and yen] Link to Original

(Updated: Dec 2012) Lots of numbers: Trying to get a clear picture of U.S. government debt can be frustrating. The government owes: 60% of GDP: bonds owed to private entities, both foreign and domestic 100% of GDP: if we add bonds owed to the government-itself (e.g. Social Security "trust fund", Federal Reserve) 400%+: if all Fed promises to social security and medicare recipients are met (they won't be) [Note: the GAO claims that adding another 2% (of payroll) to the current 13% payroll tax would keep social security funded for more than 70 years!] A snapshot: The U.S. government (officially) owes about US $16 trillion to the public, plus to the Fed, plus to the "trust funds". The GDP of the U.S. is approximately $16 trillion. (Both these were about $15 Tr. last year.) To put this in perspective: adding up the assets of everyone in the U.S. and subtracting liabilities, we get a "net worth" that adds up to about $ 64 trillion ($58 tr. last year), shown by the blue bar at the top of this chart. The bar in the middle is the government debt. (Aside: The portion marked "gone" is wealth that disappeared in the recent bust. All figures here are nominal and many assets (like homes and stocks) are valued at market prices. In the recent bust, home values and stock-prices dropped, bringing nominal net worth down by about $10 trillion, of which $5 trillion is back.) Annual budget: The bar at the bottom shows the annual GDP. The purple is taken as taxes and spent by the government (importantly, this excludes payroll taxes!) The red portion, is borrowed and spent, viz. the annual federal deficit of over $ 0.6 trillion. Visualize adding more such red portions each year, going to the right. One can see that in a few decades, all the wealth in the U.S. won't be enough to pay off the government debt. (We would never get there, because we'd have a financial collapse well before we're actually bankrupt). Breaking down Federal Debt: Of the $16T in federal debt, approximately $5.5 is owed to foreigners, $4.2 trillion domestically, $1.7 trillion to the Federal Reserve, and $4.8 Tr. to the "trust funds". [All figures are purposely approximate -- i.e. give or take half a trillion. It is the order of magnitude that matters more, so I chose rounding that helps memory.] Foreign holders of U.S. government debt: The biggest jump since last year was in bonds held by foreign entities, up from $4.5 Tr. to $5.5 trillion.The government makes estimates of which countries (and their citizens) hold the government debt owed to foreigners. This pie-chart (one year old -- 2011) shows the break-down, with China holding about $1.2 Tr and Japan holding about $1 Trillion. International Comparison: This next chart (from 2010) compares the government debt of various countries, expressed as a percent of their GDP. (Source: IMF via Wikipedia). The scary part is that the U.S. is pretty bad by this measure. At the same time, consider that Japan is more than twice as bad by this measure, and there is still a large appetite to buy Japanese bonds at extremely low interest rates. Finally, notice that even though China is reputed to be a creditor to the world, these statistics show that their government has borrowed about 33% of its GDP (the Chinese central bank might be excluded from this calculation). A caveat on Incompleteness: "Off balance sheet" liabilities, like commitments for Medicare and Social-security (not addressed in this post) can make a huge difference to these numbers. As mentioned earlier, some estimates are as high as $62 trillion, dwarfing all else. Also not addressed: the private saving and investment which can help wealth grow. Those two deserve separate posts. Also see Part 2: Unfunded Liabilities for "entitlement programs" Link to Original

Last time I looked at unemployment, in Feb 2012, the number of people employed was flat; but, with people dropping out of the workforce, the unemployment rate had started to fall. The rate has continued to drop (upward in the graph from Calculated Risk, shown below). To the right, I've added a "naive linear projection" which would see pre-recession unemployment rates return by 2015. Instead of the commonly-reported rate, we could simply look at the number of people employed as a percentage of the population. This chart shows the core working-age range (25yrs -54yrs). Notice the slight uptick near the end of the chart. After a flat 2010 and 2011, we've seen a slight rise during 2012. What if we do a naive extrapolation of this chart? When will we reach the pre-recession 80% for this age-range? We get the orange arrow drawn at the end... ... not getting back to pre-recession levels for at least 5 years (that's 2017). Unfortunately, if we look at data for all ages (16 - 65yrs) the uptick is barely discernible, with youth unemployment being the major issue. Unemployment claims are flat too, stubbornly refusing to come down to levels seen in 2005 through 2007. New normal: PIMCO's Bill Gross has popularized the phrase "new normal". This is the idea that the U.S. has moved to a phase where we are not going back to 5% unemployment and 3.5% GDP growth. A new recession: Go back to the first chart in this post. Imagine that the "new normal" for unemployment is somewhere near 6%. If a recession does not hit in 2013, we could see a rate like that in 2014. Meanwhile, in Europe, Japan, China and India, all signs point to slower growth -- with Europe and Japan in recession. There is a strong likelihood that the U.S. will see at least a mild recession (as defined by the NBER) during the current presidential term. (Some economists think we're in one already.) The summary: Flat, but not clear that were poised to improve; we could just as well be flattening out before a second dip. Link to Original

Only once since the 1900's has a U.S. president lost the popular vote, while winning the election: G.W.Bush's first term. Other than that, which president got the lowest margin of victory? The answer -- JFK -- shows how history was kinder to him, compared to contemporary opinion. It is also interesting to look at presidential second terms. After 4 years to check a president out, who enthused voters the most (relative to his second-time opponent)? The winner -- FDR -- is no surprise, but the close second is Richard Nixon. Nixon got a higher margin in his second term than Ronald Reagan! Third party caveat: Some of these years cannot be compared, because a third party took more than a marginally share of the vote. For instance, ironically, the Green party might be the reason Gore lost since they got about 3% of the vote in the election where Bush lost the popular vote. Perot took 19% in Clinton's first election and over 8% the second time around. Anderson took over 6% in Reagan's first election. George Wallace took over 13% in Nixon's first. The Progressives took 16% when Coolidge won. Link to Original

The monthly U.S. unemployment report is not much use as a real-time statistic. The data is meaningful only after it has been revisited, revised and is no longer current. Two factors make it difficult to compare the report with the "normal": seasonality and the birth of new businesses. Adjustments are required. Total Non-Farm Employment (No Seasonal Adjustment) Seasonality: Statisticians adjust monthly data for seasonality in order to make better comparisons. For example, every year total employment drops sharply from June to July (see chart). If it drops this year, it is not necessarily bad news -- it could be an expected seasonal pattern. Instead of reporting the actual ebb and flow, statisticians often report a seasonally-adjusted number. A drop that is much less than normal, may be reported as an increase in employment! Birth-death Adjustments: A second adjustment by the BLS is an attempt to estimate how many new businesses have been formed, but are not yet part of the list used by the survey team. The BLS makes assumptions about how many businesses are created in different industries, in different months. Bureaucracy rather than conspiracy: Seasonal adjustments are not "fudging". They can also make the numbers look worse. Private business do this all the time. Birth/Death adjustments can make numbers look good (or bad) for months or years, if we're in a secular "new normal". A private investor gathering data, seeing every month being revised down by 2000, may come up with an adjustment: something has changed, we don't know what it is... but, lets start subtracting 2,000 right off the bat until this does not happen any more. Bureaucracies don't work that way, least of all government ones. Married to models: It is not just bureaucrats. People can be wedded to their "models". Paul Samuelson's famous textbook showed the Soviet Union would surpass the U.S. When his past forecast for commie success was too high, he did not change his model. Instead, he assumed the growth revolution had simply been delayed. So, his revised text books continued to predict Soviet economic growth shooting up in the future. A literal lie: Taken literally, the BLS does lie when is says (e.g. July 2012) "Total non-farm payroll employment rose by 163,000 in July". It ought to say "Seasonally-adjusted total...". For instance, an accurate description of that July report would have said: "Total non-farm payroll fell by 1.2 million, but adjusted for seasonality, it rose by 163,000". (That is not a typo.) This time is different: The two adjustments above work reasonably well when times are close to "normal". However, adjustments fail when there are significant one-off influences. Particularly warm or cold weather that moves shopping patterns by a few weeks this way or that; or, a government cash-for-clunkers program that induces purchase that would otherwise have delayed for a few months; or, historically low new-business formation. Terrible at turning points: At turning points (when you would need them most), the BLS's adjustments turn out to be very wrong in retrospect. From one of John Hussman's superb weekly commentaries: For example, if you look at the originally reported data for May through August 1990, you’ll see 480,000 total jobs created (see the October 1990 vintage in Archival Federal Reserve Economic Data). But if you look at the revised data as it stands today, you’ll see a loss of 81,000 jobs for the same period. Look at January through April 2001, at the start of that recession. The vintage data shows a total gain of 105,000 jobs during those months, while the revised data now shows a loss of 262,000 jobs. Fast forward to February through May 2008, and though you’ll actually see an originally-reported job loss during that period of 248,000 jobs, the revised figures are still dismal in comparison, now reported at a loss of 577,000 jobs for the same period. As other good economic analysts have recognized, economic time series tend to be revised after-the-fact, with upward revisions in periods just before the recession begins, and downward revisions in periods just after the recession begins. I continue to believe that the U.S. joined an unfolding global recession, most probably in June of this year. [emphasis added] Summary: BLS data is fine when one is studying history; but, any one or two months data does not tell us much if anything. Nietzsche warns: "Danger, disquiet, anxiety attend the unknown –the first instinct is to eliminate these distressing states. First principle: any explanation is better than none… The cause-creating drive is thus conditioned and excited by the feeling of fear!…” Don't grasp at the data merely because you want to grasp at something. Acknowledged ignorance is sometimes closer to reality. Link to Original

Unemployment: Yesterday's jobs report (Sep 7th) was reported as negative, after last month's positive. The monthly fluctuations have become standard since 2010 (see graph). Basically, the growth in jobs has been flat -- around 125K jobs per month since 2010. It takes about 150K jobs just to keep up with population growth, but people have been dropping out of the job-market. Consequently, the official unemployment rate has dropped slightly, and ever more slowly. GDP: Huge amounts of "fiscal stimulus" have brought GDP back over its pre-recession level. The piper will have to be paid some day... but not yet. However, if one subtracts "transfer payments" from GDP, or if we look at industrial production, or the total number of people employed, we are still about 97% of the pre-recession levels. (See this August 5th post from the excellent Calculated Risk blog for details.) Retail Sales: Though retail sales rebounded from its recessionary lows, they have flattened in 2012. Stock market boom: Amidst this flat and stagnant real economy, we're seeing a stock market boom. We probably have Ben Bernanke to thank. By lowering interest rates (the exact opposite of what he ought to do) he has encouraged investors to take a chance on stocks. Summary: After rebounding off the lows of the recession, the economy has not yet reached its pre-recession point. Using a "level concept" of recession (as opposed to the standard "change-concept") we're still in a recession. The bad news is that things have started to slow in the last year. Bill Gross of PIMCO talks of a "new normal", economist Tyler Cowen speaks of a "Great Stagnation". The immediate future seems to promise a slow crawl upward rather than any type of crash. Link to Original

Unless Congress acts, at the end of 2012, the federal deficit grow more slowly. Oddly enough most commentators say this is a bad thing. It's being called "the fiscal cliff". Taxes will rise if: the "Bush tax cuts" and "AMT exception" expire, the Payroll tax goes back, up to its normal rate Some government spending will falls if: unemployment benefits go back down to their normal rate "sequestration" agreed to when extending the debt-ceiling kicks in Deficit spending is a bankrupt idea: It has a temporary effect that is soon gone. The last few years have seen record levels of deficit spending. Despite this, the economy has not recovered to previous levels. Deficit spending does prop up GDP levels temporarily, but it does so artificially, mostly subsidizing uneconomic activities that ought to be ended, and by with the use of borrowing...pushing the cost into the future. Over a business cycle, deficit spending reduces the level of real GDP and results in less economically-sensible employment. Too much too soon: The recent recession was the most serious since the Great Depression. Unprecedented deficit financing has meant that the weaknesses in the economy have not worked themselves ought. Fiscal tightening can add another shock to what ought to have been seen 4 years ago. So, if we jump over the fiscal cliff, it will be a good thing. The lesson has not sunk in: People realize that the economy is pretty stagnant. What has not yet sunk in is that this is a "new normal". People have stepped back, and have changed their behavior, but they need to do more. Consider the Personal Savings Rate. After the current bust, it rose from a low of 2% to about 4%. That shows people changing behavior, but not enough. It has started to waver. If people really thought we were facing a new normal in the economy, and that entitlements were going to be less than expected, this rate ought to go up further, despite the fact that more people are retiring and drawing down their savings. Will probably be avoided: GOP senators are already trying to avoid spending cuts in defense, and both parties want to extend tax-cuts but are arguing if people earning over $250 K should see their taxes go up. With an election around the corner, there's a good chance that Congress will do something temporary to extend the status quo for a few more months. Link to Original

Cities in trouble: Many U.S. cities are hard hit because they promised retirement-benefits they could not deliver. With property taxes down, cities are being squeezed. Camden, NJ wants to shut its entire police force and outsource to the County. Miami declared a state of "financial urgency" for the fourth year. In Stockton, CA, a police chief who lasted for 8 months is drawing a pension of over $200,000 a year; the city recently filed for bankruptcy protection. While tax-payers were not paying attention, mayors made some exorbitant promises to public unions.We're now in a phase where it is clear that many local governments cannot keep these promises. Bankruptcy can be good: Bankruptcy is a legal way to recognize an untenable situation. It allows people to recognize some losses, and then allows both debtor and creditor to move on. Before bankruptcy, a debtor often tries in vain to meet commitments he cannot meet, instead spiraling into a worse hole. Cities that have made promises they cannot keep, ought to go bankrupt; but, they must learn from their past mistakes. End city-pensions: It is time to phase out pensions for retired municipal employees. Many of these are lavish compared to private-sector plans which previously bankrupted some large private businesses. Now, most businesses have moved away from "defined benefit" retirement plans, offering "defined contribution" plans instead. There the employer contributes a certain amount toward retirement, but does not make any promises about future benefits. Cities must do the same. End open-ended promises on behalf of future tax-payers: If a private investment or insurance business wishes to guarantee a pension, for a fee, that's fine; but, cities must stay out of this business. Long-term promises made today have to be fulfilled by tax-payers of tomorrow: by our children. We have no right to bind them in this way. This principle should be extended to any long-term promise. End long-term municipal bonds: Taking out a loan that will be paid by future tax-payers is dubious. There ought to be a legal limit on how long-term of a promise a city may make. I suggest a 10 year cap. If a city wishes to build a new police station, they will argue that they don't want to taking money from current tax-payers for (say) 10 years, and only have the building after that. However, by the same token, taking out a loan where one does not have to pay anything back, means current residents get a benefit that a future resident must pay for. Consider the egregious plan of Poway School district in California. they took out a 40 year loan, on which payments start after the first 20 years. Limit the size of municipal commitments: Even 10-year bonds ought to be an exception, not a rule. There should be a cap to all the promises and commitments that a city may make. It should be limited by the total size of their current tax receipts. In any year, the debt servicing cost -- interest and repayment of principal -- should not be more than 20%-30% of their budgets. All financial commitments should be included in these limits: so, if a city leases its court-house on a long-term lease, it should mean they can make less commitments elsewhere. Summary: Cities have too much leeway in making irresponsible promises. The law should stop this, and force cities into sticking with very conservative financing. Original: http://feedproxy.google.com/~r/PracticeGoodTheory/~3/zon-_JIsolE/end-city-government-pensions.html

An article in the LA Times criticizes charter schools saying that parents think they're better than other tax-funded schools. Consequently, the author writes: "Charter schools are pulling in so many onetime private school students that they are placing an ever-greater burden on taxpayers, who must fund an already strained public education system." Moronic criticism: Believe it or not, this is supposed to be a criticism! Consider this: charter schools are simply one concrete. They're one way in which some cities have tried to improve their tax-funded school systems. The author's argument can be applied to any improvement. Basically, the author is saying: the government has taken some action to improve schools, and more parents are thus using government-funded schools. His criticism amounts to saying: do not improve government-funded schools, because people might actually want to use them! Improving Public schools hurts private schools: Charter schools do hurt private schools. Parents think they're better than other tax-funded schools. Anything the government does to convince parents that a tax-funded school is good, will draw some kids away from private schools. This is a problem for owners of private schools; but, for a tax-payer the idea that he can recoup some value for his tax-dollars is a good thing. The quality of Charter schools: Critics claim that charter schools are not as good as private school, and that their reputation is undeserved. They claim that charters do better mostly because they get a different mix of kids: kids whose parents are motivated enough to choose a charter over another public or private school also tend to be parents who are helping their kids' do well in school in other ways. When this criticism comes from statists: the answer is simple -- if charters are just as good, they do no harm while giving parents a choice. Owners of private schools: When this criticism comes from owners of private schools, I'm sympathetic. An owner of a private school told me how he had to struggle through some years of lower enrollment when a charter school opened nearby. Over the years, parents realized the charter was not that great and his enrollments started to rise again. Possibly some private schools may not be able to last out, and may have to shut down. This is sad. The solution, of course, is to privatize the entire system. Short of that, one has to decide who should be sacrificed: the owner of the private school, or the kid who is forced to attend a school that's so bad that parents would rather have him in a private school. Schools should be privately-funded. I think the criticism from private school owners is valid. Nevertheless, if schools are going to remain largely tax-funded, charter schools are one way of getting better quality. Invalid criticism: Statists should not complain about charter-schools. It is ridiculous for someone to start with the statist assumption that schools should be tax-funded, and then complain about when parents like something done in a tax-funded school! Original: http://feedproxy.google.com/~r/PracticeGoodTheory/~3/mH6ogf4_7PY/charter-schools.html

Guest Post by Florentine signory from 1340: In the early 1300's the Duke of Athens wanted to become prince of Florence. The "signory" of the city wrote to him about the nature of freedom and warned him that even a benevolent dictatorship was incompatible with freedom. They would not confront him by force, but they were warning him that he would have to hold power primarily by force. (Source: " HISTORY OF FLORENCE AND OF THE AFFAIRS OF ITALY..." by Niccolo Machiavelli) Blog cross-posted with permission. See link at top of post for original.

How're we doing on Home prices (April 2012 edition): Businessman Warren Buffet recently suggested that U.S. "single family homes" were a good buy. Prices have fallen and mortgage interest rates are low. Here's the Case-Schiller index of home-prices. (For original versions of the graphs shown below, see the excellent Calculated Risk graph gallery.) Nominal prices: This graph shows the 10-city average and the 20-city average. The index dropped from its peak and has remained steady over the last 3 years. However, if we look to the left portion of the graph, we'd ask: could prices fall further, closer to the flat level of the 1990's? Real Prices: To get a better historical comparison, we should look at a "real" version. One way is to use the CPI to normalize the index. This gives us the next graph. Since the CPI is significantly up since the 1990's we see that prices are very close to 1990 levels. A 10% drop would take us back to those levels. [Note: Increasing house sizes are already accounted for by the Case-Schiller index, because it compares like sales across years.] Price-to-Rent ratio: Another way to adjust nominal prices is to compare them to rents. This way too, we see that we're very near 1990 levels. Another 10% drop in prices would brings us to historically safe levels. Also note: since the CPI is running at 2%-3% a year, a "real" drop of 10% over the next two years implies a much smaller nominal drop. Units sold: Finally, this graph shows the number of units sold: existing homes and new ones. The drop-off is new homes has been far more drastic than the drop-off in existing homes. One can see that both have flattened out and the sale of existing homes is showing a signs of rising slightly. Summary: After falling considerably, house prices are very close to 1990 levels in real and "price-to-rent" terms. In nominal terms, they appear to be flattening out. While they may easily drop a bit more before bottoming out, it seems a reasonable time to buy, in most places, if one plans to keep the house for many years. History of the last 4 decades would suggest that prices are not going to turn around and shoot up. So, there's no urgency to "buy at the bottom" even if it is too early for you. Rather, if you want to move into a home, and have been holding back thinking prices might drop further, there's little reason to think we have much further to go. Caveat & Disclaimer: It's said that "all real estate is local". All the graphs above are national averages; local situations can vary quite widely. The above may not apply to specific situations, always do your own research. Previous posts: How're we doing (GDP Oct 2011), and How're we doing (Employment Feb 2012) Blog cross-posted with permission. See link at top of post for original.

Is the "individual mandate" really that bad?: The "individual mandate" (buy health-coverage or pay a fine) is the political focus for the week. I hope the SCOTUS decides the "mandate" is unconstitutional and also rejects all of Obamacare. The problem with health-care: The problem with the U.S. healthcare system is that it is already heavily statist. Medicare and Medicaid control a big part of healthcare spending. Just as important, the government has imposed huge costs on private insurance via mandates, making it impossible for the poor to afford legal health-care. Existing mandates: While the SCOTUS was debating the "individual mandate", the GOP in Michigan was mandating that anyone who buys private insurance must also buy coverage for autism. To someone with private health-insurance a mandate that says "you must also buy cover for disease XYZ, whether you want to or not", costs money. Compared to this, a mandate that says "you must buy health insurance" has no immediate impact, since they already buy it. Both Republican and Democratic state governments across the country have enacted all sorts of health-insurance mandates. Clearly, the GOP's focus on the individual mandate is hypocritical. If GOP leaders were to be honest they would admit that by their own premises the individual mandate is not that big a deal. Mandate-like regulations: The government already mandates what you must buy if you buy insurance. In addition the government mandates who may or may not provide health-services, and mandates the ways in which health-services may be delivered. Virginia Postrel recently argued that birth-control pills should be over-the-counter. It is often a good idea to consult a doctor before taking medication, but that does not justify a government mandate, forcing one to do so. People should be allowed to decide this for themselves. The argument against all these government mandates is the same as the one against Obamacare's mandate. "Free-riders": The government also mandates that hospitals working with Medicare or Medicaid cannot turn people away from their emergency rooms (ERs). People without insurance have been priced-out of health-care by government mandates. So, they bring their kids to ERs with coughs and colds. The ER is mandated to treat them, so it passes on the cost to the people who do have insurance. The existing mandate means people who have private insurance subsidize those who do not. The latest (Obamacare) mandate basically charges some of these people (assuming they earn a certain amount) something toward the existing forced subsidy. As Ari Armstrong explains, force begets force. Forcing people to buy insurance is the "logical" next step of having forced people to behave in all sorts of other state-directed ways on health-care. GOP approaches to free-riders: The "individual mandate" is a GOP idea just as much as it is a Democratic one. Among its advocates: The Heritage Foundation, Newt Gingrich and Mitt Romney. In the face of Obamacare, the GOP is disavowing their previous support for the individual mandate. However, just this week GOP Senator Tom Coburn MD, was on CNBC saying he would support something very much like a mandate. Instead of fining people who did not have insurance, he would give a tax-credit to those who did have cover. In the end, the person without insurance would pay more tax. So, the exact same fine would apply. As for those who do not pay tax, even the GOP plans have government subsidies for them. So, in essence, the GOP ideas on an individual mandate are almost identical to the Democrats. Go Scalia! though you're a fraud: I hate Obamacare. It is another big step in a long list of things that have made health-care so statist in the U.S. There are third-world countries with health-care industries far freer than the U.S. At times like this, I cheer for judges like Scalia who will use the individual mandate as an excuse to vote against Obamacare. As for the court as a whole, if the SCOTUS can say the government may order someone to fight a war in Vietnam, or can take one person's house and give it to another private individual, then surely the government may order someone to pay a fine if they do not buy some product. People like Scalia say there is no constitutional right to abortion; he thinks the constitution allows the Feds to ban marijuana in states that have legalized it. No matter: if this unprincipled person will use the "individual mandate" as an excuse to vote against Obamacare, I'll take what I can get. Broader Constitutional impact: Allowing the individual mandate will be consistent with the myriad other rights-violations the SCOTUS has condoned. Shooting down the individual mandate cannot be done by any principled basis, if one continues to think other rights-violations are constitutional. Yet, despite all this, if this mandate is shot down, the court will be saying that there is some limit to what government can force people to do when if comes to economics and their health. Nobody will quite know what the line is, and politicians will find a way around it with ease. Yet, it would be a slender peg on which some future judge might base some future decision, to throw a small speed-bump in the way of statism. Breathing time: If the individual mandate can toss out Obamacare, we will get some breathing time. There's very little hope that the GOP will come up with a better plan. Still, a slender hope is better than none. If the SCOTUS only throws out the mandate, but keeps the entire act, I think it will have negligible impact to the future of health-care. In that case, Obama would probably stick to his guns, and recommend that mandates go into effect state by state. (The GOP love "states rights".) So, let's hope Obamacare (aka "The Affordable Care Act") is thrown out in its entirety. Blog cross-posted with permission. See link at top of post for original.