Friday, December 26, 2008

Saturday, December 6, 2008

The Tiny Three

Ah, how humble we become when the end is imminent. Since the beginning of the financial crisis, CEOs and other executives have continued to rape their own companies with stock options, corporate luxuries, and big bonuses. No matter that the stock options may not be worth as much as during the housing bubble heyday--$3 million of stock options is still a lot of money. And no matter that bonuses may not have been large either--20% instead of 40% of your executive pay is still a lot of money. But the public does not get upset quite as much about bonuses and stock options. They still remain a subtle form of income to the American public. It is the company luxuries about which that the lay public are outraged, at least for a little while. AIG executives going on an indulgent spa weekend after receiving your hard earned bailout money? Horrible. Yet the backlash was not even that severe. What actually happened, anyways? There was a good three, maybe four days of news coverage about it, and then nothing. There was no follow up in the news because there was no follow up on which to follow up. The executives at AIG got at worst a tongue lashing. How about that to expose the impotency of Congress--the very people who decided to put the next three generations of Americans into debt cannot even control the people begging for money. We will discuss that in the next article.

Now we have the Big Three automakers--GM, Chrysler, and Ford, begging for money to save the American economy from the crisis that would ensue from the collapse of the Big Three. The problem is, however, that the Bug Three have made no significant changes to protect themselves yet. They still spend ridiculous amounts of money on lobbyists and ridiculous wine and dine parties for politicians and influencers. The executives still collect extravagant salaries and stock options without fear of unemployment. You have to wonder how dire their situation is and how badly they really need money. So let's see...

The big three executives flew out to Washington DC on a private jet, which costs about $50,000 per flight. Their explanation was that they had several meetings to attend that day necessitating the cost of a private jet. I'd like to know what was stocked and available to drink on that jet, regardless of whether they actually drank it. But their explanation tells us quite a bit. The first is that they do not know how to manage their businesses. The financial crunch has been presents for a while, and they are only now realizing they need assistance? Three major auto companies, all lacking the foresight into their future economic position? That's bad management, plain and simple. No wonder the auto workers' pensions had problems before the market bust--it was mismanaged as well. How does giving lots of money to those same idiots solve the problem? It does not, of course. They then came back to Congress after the inital tongue lashing, but this time they came in brand new hybrid vehicles. Did they really drive all the way from Detroit to Washington DC in a car? Where did they stay? The Four Seasons or a Red Roof Inn? Where did they eat? The Palm or Red Robin? Most people will say that if you are begging for money, you do not waste money on an executive suite and you do not eat steak. You sleep on a cot and eat happy meals. I doubt Rick Wagoner had a difficult road trip. And given the supposed urgency of the needed bailout, why would you spend two days on the road in a hybrid vehicle? It's far more likely that they flew (again) into Washington and got picked up in their new hybrid vehicles. So now with even more desperation, the Big Three CEOs offer to take a salary of $1/yr to persuade Congress to give them the money. There is, of course, no mention of bonuses (which can still be given despite poor bottom lines, mind you) or stock options or executive perks. Very convenient. They also concede to Congressional oversight, knowing that it will be similar to AIG's oversight, which is the same as having a myopic grandmother proofreading the classifieds for typos. To the credit of some Congressional members, they said outright that they would work to deny any bailout of the Big Three. Unfortunately, very few if any members of Congress are this serious and not willing to sell out for pork or kickbacks.

Now there are massive layoffs occurring, and the rumors say that at least one of the Big Three will fail. This is apparently good reason for Congress to consider putting our children and grandchildren into another $15 billion in debt. The good reason being fear. Any rational person would see that the Big Three are based on failed business models. The fact that they are large companies does not in any way mean that they should not fail. If they fail it will be because their business strategies were poor, not because they were unlucky. The fact that they have gotten this big removes luck from the equation. There are thousands of large companies out there, and few are failing because they have a good business model, not because they were lucky. A mom and pop joint surviving this crisis is lucky. And international company failing in this crisis is just poorly managed. Politicians are fools to allow the fear of massive layouts nudge them into a wasteful bailout plan. What they should do is look at how much the executives (not just the CEOs) made from the auto companies over the last decade--during the entire time that the companies should have been better managed, luxuries curtailed, and bonuses made reasonable and reinvested, and MAKE THEM GIVE IT BACK. I would like the CEOs begging for money to explain why they should get $15 billion of taxpayers' money when the money the companies should still have on their balance sheet is the pockets, homes, cars, and boats of the executives.

We can also discuss the United Auto Workers Union (UAW) as well. Another mismanaged trust fund from which a failing economic student could learn. Now while health care costs are largely responsible for the funds shortfall, we must remember that it was agreed recently that the UAW will take over health care costs from GM in 2010. But the pension aspect still suffers from the same mistake of every failing pension fund. At one point it incorrectly began using the contribution of workers today to pay for the pension of the retired, instead of using money today's retirees contributed while they were working. A pension, after all, is really a group retirement plan. You must save money during your working years and let it grow so you can live off of it when you retire. With a pension you essentially pool the contributions of your coworkers. This is what has happened to Social Security. Apparently few pension fund managers realized the idiocy of the idea.

So I say let the Big Three fail. Perhaps a new Big Three will rise from the ashes and be better managed. And if the CEOs are truly serving the needs of the company and its many workers, they should sell their mansions, cars, and island houses, sell their stock at current value, put the money back into the company, and let someone else manage the company. It cannot turn out any worse than it is now.

Sunday, November 23, 2008

Pension Pensives

Went outside to get the paper today and saw the local headlines--Bracing for a Major Pension Fund Hit. Reading through the article you find out that the pension fund makes future estimates based on an 8.5% annual return. Not an unreasonable estimate, even though returns in 2003-2007 averaged 16% annually . You then read that the annual return for the pension fund is lower this year. Again, not surprising, considering the financial crisis. Then there is the prediction that the financial crisis will not truly impact the pension plan until next year. Well, of course. Many people believe that 2009 will be rougher than 2008. But then comes the kicker. They are considering raising taxes to make up for the losses of the pension plan because the pensions "are guaranteed by law and will not be affected by the downturn in the financial markets."

Excuse me?

Let me see if I have this straight. Teachers have to contribute about 5-7% of their salary to he pension fund. I contribute about 8-10% of my salary to my 401k. Their pension fund guarantees replacement of a very good percentage of their preretirement income when they retire, typically at an age earlier than most working Americans. My 401k will offer me only an income based on its growth over time and is limited by inflation. I have no guaranteed income amount each year. Their pension will run for a defined period of time, usually to death. My 401k will run out when it runs out. By today's financial calculators, I have less than an 80% chance of having enough money in retirement before I die. Living longer hurts me more. If their pension fund takes a huge loss from the financial crisis, taxes are raised to make up for the loss. If my 401k takes a huge loss from the financial crisis, I am up the proverbial creek without a paddle. Not only that, but I also now have to spend more of my earned money in taxes to make up for someone's else poorly performing pension fund. Money that I otherwise would have used to make up for my own market losses. And on top of that, they will not increase the salary contribution of teachers to the fund because of a ridiculous rule restricting the percent balance the fund can hold. So while people are getting laid off and taking salary reductions, teachers keep making the same amount.

How does this make any sense?

The answer, or course, is that it does not. It is a smaller model of the $700 billion socialist lobbying scandal that Congress approved because of the heightened fear they created. That is not to say there should be no fear of the financial crisis, just not the little-girl-in-the-woods-alone-at-night-with-coyotes degree of fear that was manufactured. You are paying to fix other people's troubles, who in turn will do little if anything to fix your troubles. So I will pay more taxes to pay for the retirements of teachers that save less than half of what I try to save for my tenuous retirement. All the while, they will strike every year because they want more money and more benefits. As the United States falls increasingly behind in education to the rest of the world, teachers are demanding more money because...because why exactly?

In order to solve this problem, the socialism and privatization must be separated. If teachers want to strike and get ridiculous salaries just because they have taught for fifteen years, then they should lose the public support of their retirement. If they want to make $130,000/yr after teaching the same grade and similar curriculum for a decade, then they can save for their own retirement, take the ups and downs of the market, and fund their own benefits. But if they want a public tax supported pension plan, then they need to take fixed salaries with absolute salary caps, and the state should be able to shunt surplus money from the fund for other state projects.

These days pensions are slowly becoming extinct. Only large scale defined pensions exist, and those will either implode or bite the hand that feeds them. With each market downturn, the pension funds available diminish, but the pensions paid out remain constant or increase (as people retiring and receiving pensions outnumber people receiving pension dying). Get another financial crisis like this in the future, when the population of define pension recipients grows faster than the funds, and the system will crash. Unless you can show that high school freshmen know how to multiply and divide two digit numbers or at least spell two syllable words correctly, you cannot justify a tax increase to pay teachers more for the same poor results. And believe me, simple math and spelling are benchmarks that you can easily use to show educational progress because creativity and imagination is worth squat if you cannot construct and write a coherent sentence or calculate the change you should receive from a ten dollar bill for a $2.16 cup of coffee.

Then there is the hypocrisy of tenure. But that is another article.

Friday, November 14, 2008

Socialization and Privatization

We've already discussed the current economic crisis before. Everyone's discussed the economic crisis before and they are still discussing the economic crisis. The government is desperately trying to restore the public's faith in the financial system, which has resisted rate cuts and cash infusions. And now we have the 700B bailout plan that has people up in arms because intuitively they know that much of it will be misspent and that skepticism and anger erodes what little faith the well spent money will build. If only 1% of the bailout is misappropriated to CEOs, that is $7 billion dollars. And we know the government has a poor track record in keeping accounting errors to less than 1%, or even 0.1%, which would, or course, still be $700 million. This explains only some of the outrage over the bailout plan. While in pure economic sense the bailout plan can help to restore the financial system by allowing more lending and spending, in a societal sense it does not help everyone equally. In fact, it helps those who are in default much more than those who are not in default--bailing out the people who are largely responsible for this mess with respect to the majority of the public, who were more careful with their money. If this financial crisis had not occurred, and had the housing bubble continued to grow, the risk takers would have turned a very tidy profit. And would they have shared that profit with the rest of us? Of course not. It is not public profit. The profits are privatized. That is how free markets work and why businesses exist. But the housing bubble burst along with the credit bubble. And now these risk takers (we will refer to homebuyers to simplify thing) lost a lot of money. And with this bailout we are paying off that loss. The loss becomes a public loss. The loss is socialized. With the bailout we have positively reinforced high risk financial deals--homebuying when you cannot afford it, credit swaps, CDOs, and SIVs, all by removing any accountability for possible losses. What a fantastic system for the gambler! Imagine going to Vegas and being able to keep all your winnings, but splitting the losses with all of Nevada!

What if we flipped the scenario? What if losses were privatized and profits were socialized? What if you went to Vegas and had to split all your winnings with the state of Nevada and eat all your own losses? Well, for starters, you would not be gambling in Vegas. But what if instead of eating your own losses, you lost only a proportion equal to your earned income? That might not sound so bad to about 80% to 90% of you, especially considering that only 10% of Americans earn over $200,000 a year. For most of us, we might actually make money in this scenario. And what if instead of gambling with cards and dice we gambled with heart disease, diabetes, cancer, and other ailments? Why, we would have the American healthcare system! The popular view on how the American healthcare system should work is that everyone should be covered, but not everyone should have to pay for it. Medical care should be socialized, but the cost should be privatized. This system works well for the sick poor and the sick wealthy. It may also work for the healthy poor. It does not work for the healthy wealthy. Apparently the reward for doing well in life is some sort of Harrison Bergeronian penalty. The state of healthcare in America today tells you how well a socialization of care with privatization of cost model works for healthcare. This system has managed to stay afloat for so long because when it began the majority of the wealth was held by 1% of Americans. Over time that percentage has grown, and now we have wealthier people. But because the population as a whole has also grown and healthcare spending has multiplied, the cost has outstripped the contribution of the wealthy. Does this mean that reducing healthcare spending we can make this reverse bailout system viable again? Perhaps it can, but I doubt that spending can be curbed quickly enough before the system becomes bankrupt and costs become socialized as well.

Is there a solution to healthcare and the financial crisis? I do not have such an answer, but I would suggest that we keep socialism and privatization separate in a broad sense. If we want privatized profits from risky financial deals, we need to accept privatized losses from those same deals. I should not have to pay for Joe the Idiot's mortgage default because he was too ignorant about his own finances. Likewise, if we want socialized medicine then we should socialize the costs. I should not have to pay for Joe the Idiot's triple coronary bypass with my higher premiums because he refuses to stop smoking and eating at Applebee's every other night. Socializing the financial world will never work--it will lead to stagnation because no one will invest since there would no incentive to do so. Privatizing healthcare could work, but would lead to massive numbers of uninsured and likely an increase in prevalence of chronic illnesses. One possibility is to privatize medical care but socialize preventative medicine. That is, medical care of existing illnesses is available to those who can afford the insurance, but preventative care is available to everyone and is subsidized proportionally by everyone. Or for the financial world privatize investment profits and losses but socialize counseling and oversight for transparency.

Or we can revert to a bartering system and scrap the financials.

Saturday, October 18, 2008

Color of My Parachute? What Parachute?

So this will be only one of a billion articles on the jacked up bailout proposal. I will try not to dwell on the complexities of the politics behind it. Let's put some data out on the table first. Major banks are failing left and right--Lehman Brothers, Bear Stearns, Fannie Mae, Freddie Mac, IndyMac, Washington Mutual, AIG, Wachovia. There are billions and billions of securitized loans that have gone bad that need to be "written off". Buyers of these SIVs (structured investment vehicles) started freaking out that a small percentage of home owners were defaulting, because that meant they would not be making money from those loans. That fear was then displaced to other homeowners by association, such that the fear they would make little or no money from their purchace of SIVs was then exaggerated even more. And fearful investors do what you expect they would do. They tried to get their money back. They made a run on the investment banks that held these SIVs, trying to get as much of their money back. The problem is that the banks did not have enough "cash" on hand to cover the run by investors. (Think George Bailey in It's A Wonderful Life) So these SIVs then have to be "written down" and a company deficit established. And because these banks have accumulated so many of these SIVs over the years, a loss of a small percent in value is magnified a billionfold. That kind of loss can destroy a bank.

So what is the government to do? According to Secretary of the Treasury Henry Paulson, the answer is to throw lots and lots of money at the problem. After all, you only need to create an illusion of trust in order to get the public to spend and invest its money instead of stuffing it under the mattress. Creating actual trust would be even better, but that is not going to happen for at least the next five or ten years. It is this crisis of distrust that lead to the market crisis. People don't trust the banks anymore. And can you blame them? The banks took on excessive risks with your money and didn't tell you. There has to be some semblance of trust between the people and the banks if the market will recover. And the Secretary of the Treasury thinks the answer is to give the banks more money to piss down the drain. If I couldn't trust the banks to do due diligence on SIVs and the contents of the SIVs, why would I trust the banks will responsibly use $700 billion of federal money? And if people still haven't forgotten the stories about the $400 government toilet seat, why would anyone believe that $700 billion will actually go towards fixing the economy, instead of only $100 billion after all the pork projects and overhead costs are said and done?

Of all the bills that Congress has passed over the history of this nation, I would be so bold as to say that in the last 50 years no bills have been passed that did not have some pork or unrelated stipulation attached to it. This is why so many people are up in arms about the bailout. Not only does it fail to adequately punish the CEOs and executives that created the market mess, it wastes even more money in order to earmark a lot of money to bail out the banks. This is why it is so difficult to find a copy of the bailout bill for the public. If the public knew how senators and representatives added unnecessary provisions to the bill as a condition for their support, there would be an overwhelming number of upsets in the next round of Congressional elections. People worry so much about lobbyists influencing our politicians when its clear the politicians themselves have lost their way.

Without accountability a problem will happen again and again. As long as the executives are not punished for buying SIVs that they knew nothing about, or for not paying attention to what their buyers were buying, it will happen again. And again. And again. You have CEOs leaving failed banks with multimillion dollar golden parachutes. You have politicians brokering billion dollar bills under the guise of emergency and public good but adding in side deals to skim millions from the American public. And we are powerless to stop it. Why? Because the system needs to be reset. We don't need an election every few years where nubes campaign against the incumbents. That never alters the composition of Congress. What we need is a law that prohibits any Congressman (or Congresswoman for you females that care to be associated with politicians these days) from serving more than two terms. We do that for the executive branch, and we should do that for the legislative branch. That may allow less lobbyist influence, more sympathy for the constituents, and less money and power grubbing.

Saturday, September 27, 2008

Who Needs College: Everyday Life

So I had recently talked about how the Presidential campaign and conventions are treating the electoral process as a high school student council election. It's about popularity, libeling your opponent, and pretending to be sympathetic to all the concerns of your voters. This was quite disturbing to me because I expect the President of the United States, the leader of the free world, to be better than that. I don't want some prom king wasting my tax dollars unless that prom king also happens to be the valedictorian. But it is as it is in everyday life. The people will not elect someone who has the smarts to understand the intricacies of running a country. Just as high school students will never willingly elect the smartest candidate as student council president, the American people will never willingly elect an intelligent President.

Notice how I slipped in "willingly" in that sentence. I believe that the average American is really just like the average high school student. After all, the majority of Americans have at least been in high school, if not graduated from high school. And as of the date of this blog, college graduates are in the minority of the American population. It then stands to reason that the average American's most mature social interactions came from their high school experiences. Now you may argue that you learned better than that or your parents gave you a better example, but you would be in the minority. And it is a small minority. We must remember that even college students behave as though they are still in high school. You need not look farther than the Greek system of a middle tiered school. Of course, there are mature high school students, and there are immature college students. But we are talking about the majority of the population, which also happens to be the average person. Thus, they gravitate towards those who seem to be popular and powerful. If they happen to be well educated and experienced, then it's a bonus.

This bias is propagated into the real world after high school. I would daresay that I believe it is a prejudice that is developed in high school and carried into the real world, as opposed to learned in high because of interactions with the real world. I say that because there are so many other behaviors that you don't expect from a grown adult but would not be surprised if it came from a teenager. Let's look at the data. If you take all the CEOs of Fortune 500 companies, you will find that the overwhelming majority of them are taller than the average American. More are also men, but that's another article. If you have elementary school students learn the same lesson taught by two different teachers--one more attractive than the other, and then ask the children who they thought was the better teacher, the majority always select the more attractive teacher. There are many other experiments that have been performed that demonstrate the same prejudice. It sounds as though I am saying that the average person is consciously prejudiced. And for the most part, I am saying exactly that.

This prejudice is manifested in other ways, of course. Anyone who has worked for a mid to large sized company know this. The cliques, the cattiness, the offhand insults, and the behind the back gossip. People outside the clique are not trusted, excluded, and mocked. Exactly what happens in high school. If you've ever come across a bad neighbor this happens. All this occurs out of prejudice, which occurs out of ignorance, which often but not always occurs out of laziness. The average person is too lazy to gather the proper information needed to make a judgment. So he makes a judgment based on data readily available. In an ideal world, this "thin slicing" of information offers sound judgments, but in reality the average untrained person mixes his prejudices in with a thin slice of data and ends up with a poor assessment of the situation. It is unfortunate that we do not learn this when we are in high school.

So does this mean that we got lucky all those times we chose great leaders? Possibly. In this day and age, definitely.

Thursday, September 18, 2008

Who Needs College Anyways? Part 1

There are many studies that been performed demonstrating that a human's frontal lobe continues to develop until his twenties. This has been very important information, especially for auto insurers, since the frontal lobe is responsible to critical thinking and decision making. That means that a 17 year driver is less likely to make a smart decision while driving and therefore is more accident prone and should pay higher rates for insurance. This is further supported by the overwhelming number of observations of teenagers driving too fast, texting while driving, and trying to beat yellow lights. Is there a logical extension to this data? I believe so, and I would refer to it as the Are We Still In High School? effect, or AWSIHS.

We've all been there. Well, most people have. I would daresay that the slight majority of people have not so fond memories of high school, with more women than men not wanting to do it all over again. And why is that? The answers are simple and obvious. High school is a microcosm where the cliques rule and gossip is fact. If you don't play by mob rules, you don't play at all. But how does the hierarchy of high school maintain itself without collapsing on its nonsensical basis for existing? Anyone who has gone to high school knows the answer to that question--diversion and character assassination. Granted, these are fancy terms beyond most high school students, but it the sociopolitical sense they are perfect descriptors.

How does diversion and character assassination work? It's very simple. When you are accused of inappropriate behavior (in high school this means being a geek, being a flirt, being anything other than the established social norm in the school) whether it is true or not, the most effective method of defending yourself is not to defend yourself or address the accusations. Protesting "I am not a geek" only brings more attention to the possibility you are a geek and causes more people to believe you actually are a geek. You can see that there is no discussion as to whether you are indeed a geek. Gossip is fact in high school, remember? The most effective defense is to divert the attention from you and onto your attacker. And you divert the attention by mocking you attacker. If there is one thing people can't seem to stop themselves from joining it is the fair weather mockery of a person.

You can envision how this plays out in high school with infinite permutations. Someone runs for student council, saying change is needed because current school politics only favors the athletes. His incumbent opponent, an athlete, likely has nothing good to say in his own defense (this is high school politics, after all), and so simply mocks the way his opponent talks, or dresses. Or creates some disastrously specious slippery slope to make his opponent seem like a nutjob. You can substitute girls for the boys, cheerleaders for jocks, use the in clique versus the out clique, and so on. The diatribe remains the same at heart.

Have we seen this recently? Of course we have! The current Presidential campaign! I knew it seemed familiar. It was simmering over the spring, and is now boiling over since the Republican and Democratic conventions. Seriously, it's a campaign for student council president of United States High. I have not heard a detailed and coherent plan for any issue by any of the four candidates in both parties. We are electing someone who can steer the country and take of adult issues, not someone who knows how to mock the speech of the opposing candidate. Yet, the cheering at the Republican and Democratic conventions would suggest otherwise.

Another feature of the AWSIHS effect is reductionism. As in high school, there is a reduction of candidates into political parties, and then further into classically associated beliefs of the party. For instance, one would reduce McCain to a Republican, and the further into a prolife/antichoice candidate. At that point, it would not matter whether he favored sending more troops to Iraq, including one's children, to die for a cause embroiled in controversy. It would also not matter if he favored drastic cuts in Medicare, choking off one's affordable access to medical care. The reduction point does not have to be abortion. It could be Iraq, "middle class" tax cuts, environmental slant, or anything else. The result is the same--disregard for other issues.

With all this, who needs a college education? Everything you need to know to survive today's world you learned in high school. Without even cracking a book or taking a test. You experienced it. You lived it. You're still living it now. Next up, AWSIHS in everyday life--you don't actually have to grow up like your parents warned you.

Monday, August 25, 2008

How About Subprime Scuttling?

Here's more proof that people do really care about real life--people are still talking about the subprime mortgage mess. We finally have a real world topic other than the invasion of Iraq that lasts longer in the media than Tom Cruise jumping on Oprah's couch or Britney Spears shaving her head. There may be hope for us yet. But let's not get too optimistic. There is still talk of "bailing out" borrowers who are defaulting or about to default on their mortgages. And by "bailing out" I mean using the money of people still able to pay their mortgages and of people who don't even have mortgages to cover the principal that the defaulters cannot cover.

There are several plans that have been proposed by several people, but there is one basic idea common to all of them. To recap the mortgage crisis, people who could not afford the house they bought and lenders who did not care if the buyers could afford the house they bought, bought houses and lent money, respectively. But then the lenders, who would have cared a lot more if they maintained ownership over the loan, sold the loan. If I loan you $10 at 10% interest, then sell that loan to someone for $11, it doesn't matter to me whether or not you can come up with $11 because I'll have made my money already. That's what lenders did. Only to make things worse, they packages the loans and sold them in bulk to groups of investors. That then diluted the perception of risk. So if I sold your $10 loan to my friend Joe, he would definitely care if you could come up with $11 in the future to pay off the loan. If you didn't seem like the type to be able to pay, he surely would not buy the loan from me. But I could sell your loan to 10 people for $1.10 each, and given the dilution of risk, they may not care quite so much if you could pay up in the future. That's what happened to these subprime mortgages.

So of course, these borrowers began to default on their mortgages. And as more and more of them defaulted, the owners of the loans (now sold, or "securitized" and dispersed) began to fully appreciate the risk of owning part of these loans. Of course, they would like to ensure that their investment in safe, but they cannot, because that is the point of buying loans. So as defaults become more frequent, the investors' risk of losing money rises quickly. After all, a defaulted loan pays no principal nor interest. Without principal, the investor gets none of his initial investment back, and without interest he makes no profit. So an investor can either stomach the risk and quite possibly lose a lot of money, of he can sell his stake of the loan. And that's what investors did. And the banks that sold the loans had to "buy" back the loans from the investors, albeit at a lower price. That leads to massive writedowns by the banks and loss of a bank's capital.

Okay, so it's more complicated than all that. But the flow of money and passage of the buck is true. Now so far, nothing has occurred that should make anyone believe the government needs to bail out these fools who bought a house they could not afford. That is where the supposed aftermath comes. What happens if a house in your development goes into foreclosure because the owner defaulted? Statistics say that neighboring house values drop about 4%. It goes up more if more owners default and lose their houses. That means that Joe Schmo loses home equity and cannot take out a HELOC (Home Equity Line Of Credit) because his house has little or no equity now, and so he cannot put in that backyard pool, or buy that BMW X5. Joe then theoretically spends less overall and that hurts the economy, and maybe your business then feels the crunch. Also, property taxes will fall because now homes are worth less. That means your district/city/county will have less to spend on potholes and teacher salaries (or on kickback endorsed construction contracts and high school athletics). So you can see how the greed of several million people affect everyone financially.

What's the solution, then? Well, according to the "experts", the solution is to bail out the borrowers. Most could care less about the banks and investment institutions, who are blamed for lack of disclosure to borrowers regarding risks and lending to borrowers at high risk of defaulting. And how do we bail out the borrowers? We reduce all their mortgages to an amount closer to the new price of their houses. The government takes over the mortgage and steps in if they default on the new lower price mortgage. But don't you worry, general public, not one cent of taxpayers money will go towards this schema unless the borrowers default on the new loan and Uncle Sam has to step in the foreclose. The foreclosure process does cost money, after all. Thus, the default and foreclosure rates will level out and decline, neighboring house prices will stabilize and climb, Joe Schmo will take out a HELOC and spend spend spend, and your community can keep it's inflated budget going strong. Everything will be all right.

Excuse me? Why are we simply giving these people a lower price mortgage? And they still get to keep their house? So we are essentially treating the bad borrower as an innocent victim? The only way that will ever happen is if you divert the public's attention by saying the economy is going to implode if we don't...oh, that's already happened.

The inherent problem that is not being addressed in that the vast majority of borrowers who are now defaulting did not buy a house to have a home. They bought a house to have a cash cow. They bought a large house with a little money and a lot of unfounded optimism that the real estate market would continue to grow. An important point to make is that even people who have had mortgages for over a decade and are worried about their house value falling bought a house for a cash cow. A house is an investment. Investments are risky. If you cannot handle the risk, you shouldn't make the investment. The correct solution is to refinance the bad borrowers for a slightly longer period of time (40 years), but not too long in case they aren't around to pay, and for the SAME AMOUNT as the original mortgage. They would get to keep their house in this case. Alternatively, they can LOSE the house and have to pay the difference in original mortgage and selling price of the house (as though they simply sold at an inopportune time) and possibly with a longer term on the new mortgage. Both ways preserve the nature of investing as a risk and allow some leniency to ensure payback.

The poor handling of the mortgage crisis is a clear case of capitalist gains and socialist losses. Capitalism works both ways. If you want the chance to ride the real estate bubble, you have to accept the chance it'll burst on you. And you'll have to suck it up and take the loss like an American, because this is one ant that isn't going to help you come winter, grasshopper.

Monday, August 11, 2008

Skipping a Generation

It's baby mania! Who can resist the cuddly cuteness of a baby? It inspires only gushes of awe at the miracle of birth and hope for another generation. And what about twins? So cute! Triplets? Cuter! Sextuplets? Can we take them home? How is it that babies of multiple births are more like kittens of a litter than people? A discussion for another time. There are two trends in pregnancy that are making headlines more and more frequently. The first is that women are waiting longer to have babies. This means that more and more women are older when they have their first child. The second is that there are more and more women having multiple births--twins, triplets, quadruplets, sextuplets, etc. From the individual woman's standpoint, it makes sense--establish your career and other dreams while you're young, then have a child that you can comfortably raise in this financially troublesome world. From a sociological standpoint, there are broader ramifications on the balance of society.

First let us clarify some points. I don't know if the average age of first pregnancy is rising or falling. That more and more women delay pregnancy into their thirties and forties would suggest that the average age should be climbing. But taken with the data that the average age of first sexual experience is falling over time, you would expect that many females are getting pregnant earlier as well. I would believe that the average age of first pregnancy is not changing much at all. I would believe that the ranks are swelling at both extremes of the spectrum--younger and older.

There are also data that demonstrate a large increase in the incidence of multiple births. Looking at twins alone, which is obviously the most common multiple birth outcome, that incidence has increased over time. Within twins you can have monozygotic and dizygotic twins. Monozygotic twins come from the same egg, and dizygotic twins from different eggs. With the coming of age of fertility medicine, and with more and more older women using fertility drugs to get pregnant, you can guess that the incidence of dizygotic twins has increased, whereas the incidence of monozygotic twins has not. Fertility drugs to increase ovulation results in a higher chance of fertilization of not just one egg but multiple eggs. Also, implantation of multiple fertilized eggs increases the chance that not just one but multiple zygotes will attach and thrive in the uterus.

Let's look at the celebrity news. Celebrity baby news has always been a front page story. I don't remember when there were this many multiple births among celebrities--Angelina Jolie, Marcia Cross, Julia Roberts, the list goes on and on. It seems that these twins are also dizygotic or fraternal twins as well. Now I can't comment on whether or not these celebrities had fertility treatments, nor do I care what their publicists tell the magazines, but the data implies the answer. And while not of the same gossip caliber as celebrities, older women all over are seeking fertility treatments to help them have children. It is not just for women who have had severe endometriosis or intrapelvic scarring or primary hormonal imbalances anymore. It's become the botox of obstetrics.

What is the ultimate impact of all this? If we accept that there are more women getting pregnant at both extremes of age--teens and late thirties to older, then you would have a very interesting scenario. Let's follow two hypothetical females, Andrea and Betty, both are 17 years old, making them Millenial-Gen Yers. Andrea gets pregnant on her prom day, while Betty waits until much later and gets pregnant at age 37. That puts their children in two separate generations. While that may not seem so unusual these days, it was quite rare just a few decades ago. But with the advent of fertility medicine and the increase in women delaying childbearing, you can see that it will become more and more likely that there will be a wider and wider generation gap between parents and their children. We can already see some of this in families that must maintain a two income stream in order to survive. Many of these families rely on their parents for daycare, resulting in childcare by a generation two steps back.

It is difficult to predict how this will affect family and societal dynamics, but one thing is for sure, it will something that neither Norman Rockwell nor the latchkey kid have experienced.

Wednesday, July 23, 2008

At Least You Have Your Wealth

I had recently been at the hospital to visit a friend and had discovered that hospitals will no longer be paid for any treatment given for a hospital acquired urinary tract infection. That seemed to make perfect sense. Why should a patient have to pay for a problem the hospital caused and then treated? I then also found out that the list of unreimbursed diagnoses was growing monthly, and now included hospital acquired deep venous thromboses (blood clots in the legs or arms) and MRSA (a resistant Staph bacteria) related infections in an uncolonized patient. These are all good ideas to help reduce the burden on the United States healthcare system, but it didn't take a second thought to figure out that it wouldn't be enough to save the system.

On my home I stopped to get gas, and while I was waiting inside I noticed four teenagers drive up. One got out and came inside. He went up to the register and asked for a pack of Marlboros. The cashier asked for ID. The teen replied, "Oh, I don't have it on me. But he knows me," and gestured towards another gas station worker, who did not acknowledge the teen. So the cashier gave him a pack of Marlboros and the teen paid and left. Outside of the disappointment for the blatant disregard of the law and the obvious hazards of smoking, I was struck by the fact that my children are going to have their paychecks garnished to pay for this idiot's nebulizer treatment and hospitalizations for COPD exacerbations and angina in a few decades. Is this fair? No. No it is not fair.

People are always saying that healthcare is getting more and more expensive. Medicare is going to go bankrupt. Employers are going to shift the burden of cost to the employees. And the best solution that people can formulate is to pay healthcare providers less. Now I can understand if healthcare providers are fleecing cystic fibrosis patients or breast cancer patients out of their life savings. That would be just plain wrong. But what about the obese patient that refuses to change his lifestyle even after developing diabetes? What about the smoker who will not quit and develops emphysema or lung cancer or has a heart attack? Do we simply pay the healthcare professionals less for the care they give these patients? We whine that the government needs to pass more laws and set more regulations because more than half of us are obese. And then we complain that the people treating our complications are charging too much. That would be like telling the government to pass laws to reduce cell phone use while driving (which some have done), but then complaining that our mechanics charge too much to repair the dent we got after a fender bender because we weren't paying attention while chatting on the phone. And then, of course, forcing the mechanics to lower fees to even below those adjusted for inflation.

The latest ideas are those that steer or simply default the public into doing the right thing, and making it harder and requiring a more active role to "opt out". This is true for 401k plans. Everything about 401k plans tells you that you should enroll, yet less than 30% of workers did less than ten years ago. But now, employers automatically enroll employees, who then must "opt out" of the 401k plan in order to not save for retirement. So now the majority of workers have a 401k plan and are likely better off for retirement.

So I have a new idea to reduce the cost of healthcare. There will be no insurance coverage for any conditions caused by smoking. Tobacco is the number one cause of mortality in the US. It is responsible for heart disease, lung disease, and several cancers. It is also a plight on the environment, both by its smoke and the butts. Over 90% of all smokers simply drop their cigarette butts on the ground as though it will evaporate like a drop of water. We as a public have generally supported the rising taxes levied on cigarette sales because it is accepted that cigarettes have no redeeming quality to the general public. Cigarette taxes have risen quite a bit over time, and those taxes have paid for a lot public good. There is still more good that can come from cigarettes. Imagine all the money that is spent on healthcare related to consequences of smoking. All those imaging studies--xrays. CT scans, cardiac catheterizations; and all those medicines--plavix, spiriva, nebulizers, portable oxygen; it all costs billions of dollars a year. And that doesn't include open heart surgery, hospitalizations, defibrillators, and office visits. We need to save the system money so that people who are unlikely enough to have health problems can afford health care. We do not need to expend that money on people who do not care about their health. So if you want to save money on your healthcare costs, it behooves you to live cleaner.

This unfortunately is not practical in this day and age. People would simply lie about smoking. You might catch the occasional offender in the act, as you might catch a driver on the phone in New Jersey, but that would be rare. But if someone developed a test for smoking, or for nicotine (as smokeless tobacco is just as bad) that was easy, cheap, and reliable, then there would be hell to pay for not taking care of yourself. Given also what we know about neural and cerebral changes that occur in smokers, scans may also be a possibility in the near future.

Ultimately, a sin tax should be confined to the sinner and not trickle down to the public.

Monday, June 16, 2008

Core Curriculum

There is a Luke Wilson movie that actually made it to theaters last year, titled Idiocracy. Not a good movie, to say the least, but the premise was quite interesting. It is based on a future America where Americans have gotten stupider and stupider over the decades and centuries such that the great USA is populated and run by morons. Language has no rules. Simple addition is difficult for everyone. Attention span is nonexistent unless it's with respect to sex and sports. If it were not for the computers that still miraculously seem to be running despite tech support, it would be the dark ages all over again. My first thought was that this future is an impossibility. There is no way that people could actually be getting dumber. We have advances in technology, medicine, and electronics everyday. We can do more now than our parents could in their day, and even more than our grandparents in their day.

But that is an unfortunate generalization.

The fact that we can do more now in terms of communications, medicinal treatments, eco-anything, and activities of daily living does not imply that we are all smarter. It simply demonstrates that some people are smarter because they have developed these advances. The rest of us are either the same or dumber. And the evidence seems to indicate that the latter is becoming the trend.

For starters, the rules of the English language are disappearing. Grammar and word choice are becoming optional. I have a lot of respect for teachers, but I would bet that less than half of all K-12 teachers can tell you when to properly use a comma, or when to hyphenate a two digit number in a sentence. And if most of them don't know, you can bet even more students will never know. This then perpetuates to future generations until there is no correct way to use a comma or a hyphen. What does it matter, you say? Languages evolve over time. The vernacular always changes. Remember old English? Or olde English? We've come a long way. I will concede that point. But what we are witnessing is more than evolution of a language. It is loss of parts of a language because of ignorance. Just the other day I was watching Good Morning America and there was a satellite video interview with a marine. The caption read, "Lt. John Doe, Marine Core". Are you kidding? Who typed that? Did they graduate high school? And even worse, who's double checking? Did they go to high school either? Not knowing the difference in "core" and "corps" is not an evolution of language. It's stupidity.

There are clear offenses against the English language everywhere--double negatives, split infinitives, dangling participles, and ending sentences with a preposition. And those are the obvious problems. There are also mistakes in tense, plurality, and punctuation. Now my grammar is far from perfect, but I do know when I need to look up a rule on commas or semicolons. There are also problems with math, which makes for easy exploitation, as explained in my last article, "Number Theory".

I think that there will be an even more pronounced divide between the well educated and not so well educated, just as today there is a wide divide between the rich and the poor. The problem is that erudition does not always follow wealth, as many rich celebrities such as Paris Hilton and Jessica Simpson have demonstrated. So what does that mean the future will hold? It means big changes are still needed. There needs to be objective goals that can be tested objectively. The No Child Left Behind Act was too lenient. If you can't spell it doesn't mean you don't test well. It means you're not ready to graduate. There should be no more excuses. All fifth graders should have at least the same knowledge, and those requirements should be more extensive. It shouldn't matter whether or not you have a learning disability. There are so many special education teachers these days that you can get special attention and learning methods and whatever else you need. But if cannot do what a fifth grader needs to do, you cannot become a sixth grader. Period. If we can improve education in America, we might avoid an idiocracy in the future. Otherwise, it might be Atlas Shrugged come to life.

Friday, June 6, 2008

Number Theory

Marketing is pervasive in a capitalist society, as you need to be able to sell your products and services. In the olden days (read your grandparents days) you could fabricate any sort of data and make any claim in order to peddle your wares. Soft drinks because miracle elixirs and colored plastic became xray spectacles. But now there are rules and regulations. People won't put up with being fooled and scammed out of their hard earned money anymore. Now companies are responsible for their claims and must have supporting data. Just this year Airborne settled a lawsuit for claiming that its tablets prevented colds when it clearly did not. We can get into the absurdity of the ruling and penalty in another essay. So what's a business to do? Spin the data, of course! And there are many ways to convey true data to either subconsciously convince or simply scare them into agreeing with you.

If you asked someone what the gross national product of the US is, for example, how many people would know? Not many. But if you followed up the question with, "More or less than $200 million?", a lot of people will give you guesses close to $200 million. If instead you followed up the question with, "More or less than $1 billion?", you would get a lot of guesses close to $1 billion. This clearly does not work with people who already know the answer or have a very good idea of the answer. Thus, it is not usually helpful in negotiating salaries or prices.

How about the old relative instead of absolute comparison? For example, if I told you that taking Pill X increases your death rate two times, would you take Pill X? Probably not. Many of you probably already question that statement, and why wouldn't you? This essay is about the power of suggestion and you should be suspicious. What if I reworded the Pill X statement and said that Pill X increases your annual mortality from 0.01% to 0.02%? Does that make you think any differently about Pill X? What if it increases your annual mortality from 1% to 2%? What if instead of Pill X we talk about controlling blood pressure? If I tell you that a your blood pressure is 20 points higher than normal and thus doubled your risk of having a stroke? Would that get your attention? What if I told you that your risk of stroke went from 0.22% annually to 0.44% annually because your blood pressure was 20 points higher than normal? Would you still be as impressed?

The trick of multiplicity is also common. You see it in the stock market. At an average 7.8% annual return, $100,000 would be $125,272 in just three years! In three years you could have made over $25,000 without doing anything! The sad truth is that the majority of people don't have $100,000 sitting around to just invest in the stock market. They have a couple thousand, and that's only $253 after three years. Granted, it's free money, but it really doesn't make you want to jump into the stock market when you also know it could crash with the next credit crisis. (There are of course, very good reasons to invest in stocks. I just find this argument to be counterproductive.)

One more tricky number tactic is the false idol. It is a form of specious reasoning and incorrect syllogism. Let's consider autism. The prevalence of autism is anywhere from 5 to 30 per 10,000 children. For simplicity in this example (an example, i will remind all readers who are passionate about autism) let's say the prevalence of autism is 0.1%. That means of 1 million children, 1000 will have autism. Let's now say Company Y has developed a breath test for early diagnosis of autism that is 99.9% sensitive and 99.9% specific. That means if you tested 1000 autistic children, 999 of them would test positive. It also means that if you tested 1000 nonautistic children, only 1 of them would test positive. Sounds like a good test, right? Would it be worth $1000 to parents that want to know if they need to make special arrangements for their child months if not years in advance? To me it's worth one penny. Look at the table below.

If we take a million children, 1000 will be autistic, and 999 of those will have a positive breath test. On the other hand, there will be 999,000 children who are nonautistic, but 999 of those will have a positive breath test (0.1% of them given a 99.9% specific breath test). So if you look only at the children who have a positive breath test, there will be 1998 of them, 999 autistic and 999 nonautistic. That means if the breath test is positive, there's a fifty-fifty chance the child will be autistic. You might as well have flipped that penny. The point is that as the disease become less common, the test has to be closer to perfect. If autism were prevalent in 10% of the population, this fictitious breath test would be fabulous.

There are more number plays out there to deceive and scare you, but again, that's another essay.

Sunday, June 1, 2008

Passe Words

I was editing a database over a VPN connection the other day and was alerted that my password would expire in 12 days and if I would like to change my password now. I clicked "yes" and was given a text field to type my old password, my new password, and my new password again. This was not a new occurrence. I have changed my password before, but now I was reminded of how insane the concept of passwords and security has become today. Three rules, which I know in my gut help strengthen security of information, actually worsen security when applied practically to the general user in this day and age of digital information, web 2.0, and multiple email accounts.

Expiration date on passwords. Passwords now expire like milk and eggs. Who knew passwords could spoil? Some servers require that you change your password every 90 days. Some even sooner. Fortunately, many servers do not require that you change your password ever. Imagine what madness that would be if you had to change all your email passwords, online banking and investment passwords, work related program passwords, and whatever online anything you have an account with passwords (like theater tickets, electric bill, cable bill, phone bill, etc) every 90 days! The benefit of changing your password is obvious. It's harder to hit a moving target. If the password changes frequently, a hacker only has so much time to try to figure out the password. And if you go by brute force and combination of characters, you'd have to start over again each time the password changes. The problem is that people have a hard time coming up with passwords already, and this is made worse by the next two rules.

No repeat passwords. Passwords now must be retired like an aging 007. Right now the rule prohibits users from reusing their last 3 to 5 passwords. Quite irksome. That will at least triple the number of passwords you need to think up. I know that most people are like me--lazy. They won't have a totally different password for everything. Passwords are reused from site to site so they can be remembered. So maybe it's not such a big deal to come up with a new password a couple of times a year. I can always change a '1' to a '2' or a '0' to an "O', or add a "." to the end of the password. I'll just have to remember what I changed. Too bad I can barely remember to take my multivitamin every night.

Special characters for "strong" passwords. Really? Special characters? Now a strong password is considered one that is at least 8 characters long, contains both upper and lower case letter, numerals, and special characters like an ampersand or umlaut. If you consider such a miraculous password, it would be quite strong, indeed. Who would guess that your gmail password is 'Prk)8639' other than a brute force guessing machine? No one, really. And that also means you if you forget it. For a higher level of security you risk a much higher rate of resetting passwords. I'm not sure that's really an improvement in security, then. Another way of looking at "strong" passwords is from a purely mathematical point of view. If you had a 3 digit code you had to create, you would have 1000 codes to choose from--0-9 for each of the three digits. But what if i told you that in order to have a "strong" code, you had to have a number between 0-3 and a number between 6-9? Now you don't have 1000 codes to choose from--you have 672. You actually have fewer codes to choose from, and from a hacker's prespective, fewer codes to try. Of course, when you talk about all the keys on a keyboard with upper and lower case included, there are an incredible number of combinations, and forcing the inclusion of certain characters should not reduce the number of combinations by any great number. But I don't like my options restricted. Is "prk)8639" a weaker password than "Prk)8639"? or even "prk8639"? I believe that these restrictions are mostly designed to prevent people from creating passwords like "ilovejohn" or "221bbaker". It's very easy to use people's personal information to guess their password.

So where does that leave us? I think that following the rules will result in people writing down their passwords. There is no way that the average user can remember several "strong" passwords that are changed every several months. And if more servers require these password rules, it'll only get harder. Doesn't writing down you passwords negate the security? Of course it does. But the servers will ridiculously recommend that you keep your written passwords in a safe place that only you know about. How vague and third gradish is that? Instead of trying to figure out which of several trillion or more passwords yours could be one only needs to find the piece of paper you've written it on and stealthly hidden under your mousepad. Or better yet, you could put that piece of paper in a safe that requires a key. No combinations or you're liable to forget that, too. Just don't lose your keys.

For now, I'll struggle with the "strong" passwords. But if I don't have to use them, it's "123" or "admin" or "god" all the way. Is anyone that naive to use those passwords anyway?

Tuesday, May 20, 2008

Six Minute Naps

I am falling asleep as I write this. Sad, considering it is 9 a.m.and I even got a decent night's sleep. As I type this, I have a dread of how this day is going to drag on forever, and 5 o'clock will never come around. I used to think that going outside and getting some fresh air would do the trick; wake me up and reset my wake-sleep cycle. Or at least shut off that annoying melatonin from my pituitary. And caffeine. Caffeine does nothing for me. It doesn't even give me an extra heartbeat. No, I need something better, something simple.

I need a six minute nap.

That is correct. A six minute nap. Not a five minute nap. Not a three minute nap. A six minute nap. I suppose a ten minute nap would be great, but I think I will use the extra four minutes to finish typing this essay. Apparently six minutes of sleep is enough to focus your mind and refresh you. Lahl et al did a study now published in the Journal of Sleep Research looking at how many words subjects could recall after one hour. In the first group, subjects stayed awake. In the second group, subjects napped for one hour. In the third group, subjects napped for only six minutes. The long nap group was able to recall the most words, followed by the short nap group, then the awake group.

Given the process by which be remember and recall information, Lahl hypothesized that executive functions of the brain are impaired by sleepiness, and that even a short nap allows better executive function. That means that taking a short nap after lunch can actually make you think more clearly in the afternoon. In fact, many Japanese companies set a short period of time for employees to nap after lunch in order to increase afternoon productivity. And while longer naps may result in greater executive function improvement, even a short nap has benefits without wasting company time.

How napping actually improves your mental capacity is not clearly defined. Theories include the increase in flow of neural activity to and from various parts of the brain, changes in hormones such as ACTH and GH, and rewiring of the brain during sleep. I'm sure someone has done PET scanning of the brain during sleep and with memory recall to help describe what happens.

But it looks like everything I need to know I did learn in kindergarten. Now where's my swatch of carpet?

Wednesday, May 14, 2008

The Early Bird Gets The Worm

It seems that with each generation teens and even children experience life earlier and earlier. Whether or not this is right or beneficial for the generation is debatable and depends on the experience. Even then, people differ in their opinion. Given how quickly the world is changing these days, perhaps certain life experiences need to be imposed on the heirs of the earth.

Almost everyone would agree that which each successive generation sexual experiences are obtained at earlier ages. This is certainly very distressing to the majority of people. It is essentially a no-brainer that parents and even society be wary of sex and adolescents. But some experiences are not no-brainers, such as work experience. Now I don't mean sweatshops, but rather the simple wage earning jobs like paperboy, babysitter, or working at the mall. I believe that experience is meaningful to a teenager or even a tween. It teaches the value of money and hard work. It also teaches some of the basics of business. It would not be difficult to find a parent, however, that disagrees. Some parents believe youth should be spend being youthful, and that you have your entire life to slave and work for the man. Needless to say, it does not appear that the age at the time of first employment has being falling over the years. There is still a minimum age at which employment is ludicrous.

One experience that that has parents polarized is that of computers and the internet. I know many parents out there who plan to never let their children watch television until driving age. I also know many parents who use television just to get some time to cook dinner or pay the bills. The same thing can be extended to DVDs and movies. Some parents think that having a rear entertainment system in the car will rot their children's brains. For others it makes a car ride quiet so they can conduct business on their bluetooth headset.

The internet is almost an entirely different beast. Not only is there multimedia content everywhere, but there is also easy access to any and all information your child can request. Again, I know parents who only let their child use the computer without internet connections to watch a handpicked parent advisory council approved media clip. And then there are parents who are proud their child can associate the word "apple" with a computer as well as a fruit. And no parent is without fear of the dangers of internet communications. It only takes one story of a pedophile soliciting a child online to get computer privileges further restricted.

But I ask, why restrict a child's access to technology? The knee jerk answers are that your child will be able to spend more time outdoors, experience nature, have more meaningful human contact, or "have a life". Sadly, these are the responses of the crunchiest of the granola parents. There is no need for such an extreme view. Technology and the internet are everywhere. They are woven deeply into everyday life--cell phones, text messaging, email, GPS, online banking, digital television, credit cards, and much more. Google and Microsoft have created some of the wealthiest people because of technology, computing, and internet innovations. It's a trillion dollar industry that only seems to be picking up speed. And given the growing complexity of computers and software, woe be the individual that cannot use these tools efficiently in the future. I'm not saying that any Millenial that cannot write code for a widget is going to be severely disadvantaged in a decade, but rather that any tween who does not know how to email or surf the web or use office productivity software proficiently will be at a severe disadvantage in a decade. And acquiring computer skills is easiest during youth. I know middle aged parents that struggle to send a mass email or even a blind carbon copy email. And with most companies transitioning to a digitized system, employees who cannot operate the system are the first to be laid off.

It seems too early, but children should surf the web with their parents, send emails to grandmom, granddad, and cousins, learn the differences between Java and Ruby, and learn how cell phones work (including the GPS phone locater and what an ICE number is). Once they get that far, it should not be difficult for them to create an excel spreadsheet to see how saving some of their summer job income will help them tremendously when they want to buy a house one day.

Tuesday, April 22, 2008

Saving the Economy

Pennsylvania is the next state "up for grabs" in the Presidential "competition", and all three candidates are revising their plan to revive the country's faltering economy. On this day of the democratic primary in Pennsylvania, I have a suggestion for the candidates on how to improve the economy. It is not a novel idea, nor a difficult idea to realize. It will reduce the amount of taxes that are collected by the government, but not enough that it cannot be recouped through some other venue. So here it is.

Make interest paid on educational loans tax deductible across all income levels.

It's hard to imagine why this would improve the economy, but if you bear with me, I'll explain. We need to start with some basic facts. First, when adjusted for inflation, Americans make more money today than in 1970. But, when corrected for level of education, Americans make less now than in 1970. Second, more and more Americans have college diplomas, and having said diploma is becoming more and more necessary to find a secure job. In 1970, a college diploma set you apart from many other job applicants. Nowadays, not having one sets you apart from other job applicants. Third, obtaining a college degree has become more expensive, even when adjusted for inflation. Witness the blowup from partnerships just short of collusion between universities and tuition loan companies. Fourth, college graduates earn more money than high school graduates. Fifth, people who make more money generally spend more money, and for any number of reasons--more expensive products, greater number of items purchased, etc. And lastly, people who earn more money pay more taxes. People who are in the top 10% of income pay 50% of the tax collected by the government.

Put those six facts together, and what you have is a growing population of higher income earners who are more educated, but also carrying larger education loans. This group is covering a greater percentage of tax dollars and is also spending more for the health of the economy. The problem is the income limit for tax deduction of student loans, which creates a catch-22. You want people to spend more money. You want people to be better educated. You need the taxes these people pay. But because of the disproportionate level of student loans (like the hosing bubble), the equilibrium that is created hinders many people from getting that higher education. Creating an incentive like tax deductible student loan interest will work as an incentive. The reduction in taxes will be minor, since we are only talking about deducting interest payments and not principal payments. But the potential change in thinking about education could be enormous.

I don't disagree that education of children is important. If you can't get into high school, you can't get into college. Certainly. But if paying for college in not in your long term financial interest, you'll end up with a country run by high school graduates, which will not turn out well for the United States. If we are serious about reclaiming some of the educational and academic ground lost to European and Asian countries over the years, we need to make it not only sensible and practical but advantageous to earn that degree. Other countries may not have the same degree of wealth disparity, but education is still a revered benefit that is a worthwhile investment.

Wednesday, April 9, 2008

Web Ads

I was watching television last night--not any particular show, just the food network to have something in the background. There was a V8 commercial where a man is avoiding vegetables everywhere. He has a shish kabob with only cubes of meat while his wife has a classic kabob. He looks to get shredded cheese at the salad bar, but realizes he's in the shredded carrots bowl. It was hilarious, but it got me thinking, who watches commercials anymore? Pretty much everyone I know owns a TiVo or a DVR or uses on demand or Netflix. You either fast forward through the commercials or get content without commercials. There aren't too many occasions where people watch advertisements on television anymore. You have the Superbowl, New Year's Eve, and maybe holiday programming, where Christmas Story is replayed over and over again. And even then, people have a tendency to change channels to avoid commercials. So even though more people are watching television, fewer people are watching commercials. This has given many advertisers pause, since the classical thinking of advertising is based on exposure--the bigger your audience, the bigger the impact of the advertisement. And for the most part, exposure was seen to parallel the exposure of the television show. With the advent of DVRs and on demand, exposure is now likely overestimated.

But wait, you say. the VCR has been around for a very long time. people could just tape their shows and fast forward through commercials in the 1980's. While that is true, VCRs were only able to record one show at a time, and required more user input to program. Sure, there was VCR+. And sure, there was the ability to set a weekly recording schedule. But it was simply a pain in the ass, and being home for your favorite show was easier. Now you can set up season passes in a flash, record two shows at once, get your shows on demand, or get last year's season on dvd before summer begins. And with people multitasking more and more, there is less time to be spent watching commercials. Thus the last true haven for commercials is the big ticket sports event--the Superbowl, the NCAA tournament, the World Series, the Bowl games, etc. Sometimes if you have a hot enough show, you can get people to watch it in real time with the commercials, so they can talk about it the next day with their coworkers and friends, but even then all you have to do is watch it an hour later and you'll be able to skip the commercials.

So what are television advertisers to do? Some have tried heavier marketing for product placement within shows. There was even a brief attempt to create a seamless transition into a commercial by using the cast of the sitcom. It seems the future of television advertising is not in commercials. It will be in product placement within the shows. Commercials will still be watched by many people, but they will reach a much smaller audience and be less effective because of that. We may see a transition to greater advertising with movies and dvds. These two media platforms still retain some control over what you watch before the feature. If you get to the theater early, you watch trailers and commercials. If you put in a dvd, you cannot fast forward past the piracy warning, and now possibly, several commercials as well.

The web is facing a similar dilemma. There are millions and millions of website in the great ether that earn a great deal of money from advertising. And it is the same faulty logic that was carried over from television advertising. The exposure of the user (or viewer) to the advertisement is paralleled to the exposure of the user to the content (or show). But instead of fast forwarding past the advertisement, users simply ignore the advertisement. One survey estimates that only 0.02% of advertisements are "clicked through". That may mean millions of "click throughs" given the trillions or more advertisements one the millions of web pages out in the ether. But given the millions of products that are advertised, it seems an inefficient method of advertising. This is because most of the web advertisers are advertising for their internet business. And shopping on the web isn't like shopping at the supermarket. You can't walk down an aisle and notice the new granola bar that you saw advertised on a billboard when you drove into work. Business on the web takes a great deal more exposure to harness customers. Web ads are the equivalent to the impulse candy rack at the checkout lane or the bright neon signs above the buildings in Vegas.

Of course, I don't work for the large conglomerates that advertise through web ads, so why do I care how they waste their money? I actually don't care how they waste their money. But if perchance one day I can reap the benefits of this system, I will gladly join the crowd.

Tuesday, March 25, 2008

The Anti-Retirement

Financial issues have been on my mind a lot these days. My generation has completely different financial waters to sail through to reach retirement and beyond. The baby boomers, who are and are approaching retirement, have had golden opportunities. They got to see the housing bubble more than quadruple their home equity, making it a reliable source of retirement income. They saw double digit percentage growth in the stock market for decades, making retirement accounts grow plentifully. They also saw more reasonable education loan terms, making investments in college education simple. And they benefited from low rates of inflation overall, with only short bursts of crisis (witness the 1973 oil embargo lasting several months).

My generation, on the other hand, will have fewer opportunities and none will be golden in comparison. We have seen the housing market bubble burst, and many of us have seen the little equity in our homes vanish, leaving behind negative equity. Those of us who have not yet purchased homes will find it even more difficult, for even though home prices are declining, lenders are tightening the reins, requiring up to 20% down, and even refusing to lend to people with modest credit scores. Add to that the rising local and school taxes, which affect new home purchases. These taxes are not paid by the baby boomers living in homes they have owned for 25 years. These taxes are paid by those in my generation who decide to join the homeowner club. Because of the housing crunch, the stock market has suffered. It is unlikely that we will see double digit percentage growth very much in the next several decades. There is a huge difference between 6% annual return and 12% annual return. It's about a factor of 2, meaning that your money takes twice as long to double in value, so a $10,000 investment becomes $20,000 in 11.5 yrs and 5.75 years, respectively. Thus, after 46 years, $10,000 becomes $160,000 and $2,560,000, respectively. Very disheartening indeed. But that's not all. Education expenses have grown almost as fast as the housing bubble, making a college education up to 4 times as expensive in terms of adjusted dollars. And the disparity in income between high school graduates and college graduates has widened, making it almost mandatory to get a college education just to find a job. And lastly, inflation may certainly rear its ugly head again, as we find manufacturers raising the prices on products they've shrunken. We are paying more for a smaller bar of soap. Included in that is also the rising price of gasoline, which is likely to hit $5 a gallon in the next 12 months.

We should also mention Social Security and Medicare at this time. Current estimates by most analysts would predict that Social Security, Medicare, and Medicaid will require the entire federal budget in order to exist in 2070. And that's if the physician reimbursements are cut 41% over that time frame. Congress has repealed the cuts in the last three years in order to prevent physicians from refusing to see Medicare patients. (If you knew your income would drop 41%, would you be looking for a new job or fight the system? Apparently, both.) That means it is likely these three social service plans will bankrupt the system even earlier. So where will my Social Security check be? At this point I'm a little skeptical that I'll even have one. A common misconception is that the Social Security taxes you lose in your paycheck are somehow going to a big federal bank where they will wait until you hit retirement to be paid back to you. In fact, the Social Security taxes you pay are for the current recipients of Social Security. So my generation is up a half leg, being that we are a smaller generation than the Gen Yers and the Millenials. But health care is getting more expensive. Insurance is getting more expensive. Medications are getting more expensive. There is no solution in sight, since the Presidential candidates won't talk about it for fear of derailing their campaign. It seems that at the very least I will have to be responsible for a large part of my medical costs.

So what is an after-baby-boomer to do to prepare for retirement? Max out my company's 401k? Make sure I have 6 months of pay in an emergency fund? Max out my Roth IRA? Pay down credit card debt? The answers to these question are all yes, of course. But they are non sequitur to the original question. These financial recommendations are sound, but will be very unlikely to prepare my generation for retirement. Unless the stock market enters another atypically long bull run, I'll be down $2.4 million without doing anything wrong. It will make me feel less depressed about the $50,000 of lost home equity in comparison, though. There is no good answer to the great question. The combination of lower yields, rising prices, later start date for saving, and reduced funds for contribution make it impossible to be secure for retirement. The math is straightforward and simple.

Having accepted the sad fate of being poor or bankrupt in retirement, I do wonder what happens when you run out of money after you retire. No one ever talks about that scenario. It's always just a cautionary reference, "make sure your savings will last up to 30 years after you retire." What happens if you don't have money? What if a baby boomer lives longer than he expected? What if he spends too much after he retires? Does he file for bankruptcy and move in with his kids? Does he move into a nursing home and become a ward of the state? Does he get a job? How does he eat? Is he homeless? Why don't people talk about this? There must be at least 1% of people that don't have enough for retirement. We've spent 6 months talking about the 1% of homeowners that have defaulted on loans because of poor planning. How about the people that planned poorly for retirement? It must not turn out well for those folks, but I'm not worried. If a large part of my generation is headed for incomplete retirement savings and history repeats itself, the federal government will bail us all out. So I can just spend my money as I wish and extend my credit to the tomorrows. The fed will save me from the consequences with a retirement stimulus package in 2045.

Saturday, March 22, 2008

Fueling the Gas Price Hype

America's financial outlook remains teetering in the balance. Warren Buffet says we are in a recession. The fed says we are in an economic downturn. Nonetheless, the housing market is still roiling, investment banks are bracing for more write downs, and oil is over $100 a barrel. Oil hit $107 a barrel last week before falling below $100 again. Gas remains over $3 a gallon and is predicted to climb to as high as $4.50 a gallon by late summer. It may even hit $5 a gallon by some predictions. There has been a lot of press about the price of gas. The oil embargo 1973 showed how high gas prices could cripple an economy. Certainly gas over $4 a gallon would be an ominous sign, but I would beg to differ.

I don't believe gas prices are really all that indicative of the general economic health. While it is in many respects a necessary resource for most people and businesses, it is not treated that way. I will argue that gas could go up to $6 a gallon until people actually curb their driving. There are three reasons why gas prices can climb much higher.

When you go to buy or lease a new car, there are certain qualities you look for. Surely, make, model, color, transmission, and cost are very important. You also look at the packages or perks--power anything, stereo, GPS, rear entertainment, moon roof, leather, heated seats, etc. But there is one thing that everyone looks at when buying or leasing a car, whether it is conscious or not--fuel efficiency. It's nearly impossible to miss. Numbers in large bold font right on the window sticker of every car, "18 mpg city, 25 mg hwy". We are all aware of the fuel efficiency of our vehicles, but do we register it? I would guess that if you asked a hundred people on the street why cars get less mileage in the city than on the highway, over 95 of them would have the right answer. Stop and go driving burns more fuel per distance traveled. More fuel is wasted by accelerating than by maintaining speed. This much is intuitive and does not require higher education. Yet every day as I drive to work there are people zipping in and out of lanes, racing to the get to the red light first, and tailgating if you aren't driving more than 10 miles over the speed limit. Does this aggressive driving waste more gas than cruising at the speed limit or even the common speed? Of course it does, and I think people know this. When gas is expensive enough that people actually drive less aggressively, then you'll know we have a gas crisis at hand.

Another reason people will spend $5 or $6 a gallon on gas is because they aren't paying for it. That's right, they aren't paying for it. What I am about to say may not be able to be proven, but given the history of people trying to cheat to IRS, I think it's more than likely true. Let's look at the big picture first. If gas prices go up, companies that deliver goods must pay more for gas. Which means that consumers in turn will pay more for goods, thus diverting the extra cost from the business. Companies have little incentive to stop driving because they are not taking the brunt of higher gas prices. But if there is a significant decrease in business because of the increase in prices from the increase in gas prices, they may decrease deliveries. Let's take it one step further. For people who have "company cars", they use that vehicle for both work and personal purposes. But I will guarantee that it all gets written down as "work" use and the company pays for all the gas. This may not seem like a terrible thing, especially for people who own their own business, since that money would come to them anyways, but that money will now also be tax deductible, offering more savings. Tell that someone who actually pays for gas with taxable income and see what he thinks about it. There is a reason the IRS is targeting more small businesses for audits now.

And the third reason gas can go up to $6 a gallon? Because people simply don't care that much, despite the hype fueled by the media.

Monday, March 3, 2008

Charity in Vain

I was watching Lost the other night, not because I enjoy the show but because someone else was watching it and I was in the same room. It was the episode where Charlie goes into the hatch and turns off the jamming frequency but then drowns as foreseen by Desmond. Later on Hurley goes off on a rant about following Locke so that Charlie's death would not have "been for nothing". That got me thinking about all the times in television shows and movies that the line, "he didn't die in vain," or some form of that line has been used to give meaning to a character's existence. I also thought about the myriad of news stories about slain children or servicemen and how if someone turned over a new leaf because of that tragedy or if some charity was successful at raising money that meant the death was not "in vain" or "for nothing". But are we simply making up a reason to comfort ourselves?

There are obviously many ways we measure a life's worth. There are monetary measures in terms of insurance, damages in wrongful death suits, and net worth accumulated over one's lifetime. There are also the accomplishment measures in terms of community work, societal impact and changes effected, charitable work, and masterpieces created. You can also measure life's worth by family and friends. Each of these measurements typically represents either total assets or total potential of assets over a lifetime.

So how is it that a posthumous accomplishment, change, or payout makes the loss not for nothing? If seven year old Jack is struck and killed by a drunk driver, does getting a law passed as Jack's Law that stiffens the penalty for DUI or forces bars to collect car keys make little Jack's death not "in vain"? If puppy dog Toto dies from neglect, does bringing awareness to animal abuse make his death not "in vain"? You could say that at least some good will have come from a tragic event, or that other people will be able to learn from these mistakes. But it would seem rather that these are simply "too little too late" good deeds to make the person suffering the loss feel better. Is that necessarily wrong? No, it isn't, because there must be some way to cope with grief. It's simply advertised as something more meaningful and lofty when it isn't. "I am educating people about drunk driving because I am devastated about my son's death and don't know what to do with this grief inside of me." That makes more sense than, "People should be aware of the dangers of drunk driving so my son's death will mean something." There is an innate hypocrisy in the second, since his son may not have been killed by a drunk driver had he gone out and educated people about drunk driving.

The same phenomenon is seen with charities. Let's be clear up front--charities are good. They serve good purposes. But have you ever noticed that when someone has a person close to them diagnosed with a disease or disorder, suddenly they are the biggest proponents of charities for that disease? Whereas before it affected someone close to them, they may have only been partially sympathetic to the charity if at all? The two most obvious examples of this phenomenon are autism and breast cancer. You could put two donation jars side by side anywhere. Label one "Find a cure for autism," and the other, "Find a cure for muscular dystrophy." At the end of the month, guess which jar will have more money? It doesn't mean you are a bad person if you put your money into the autism jar and not the muscular dystrophy jar. It just means that you're up a creek without a paddle if you have muscular dystrophy. And only a fraction of people would actually put money into both jars, which is why you rarely see charities asking for money right next to each other. How many fund raisers have two different and unrelated charities being supported?

This very predictable behavior of people toward charities is also easily exploited. Witness breast cancer awareness month. Created by Congress in good faith, October is slated for public education of breast cancer. With this awareness, the American Cancer Society and Susan G. Komen foundation gain a surge in charitable donations to education, research, literature, etc. With this awareness, for profit companies can generate more revenue by putting the right shade of pink on their products and stating that they will donate a portion of the profits to the Susan G. Komen foundation or the ACS. A portion such as 10% or less of the profit from the sale of the pink labeled said product. And so while shopping people are more inclined to impulse buy a pink labeled Susan G. Komen supporting product because "it's for charity, after all." So what losses the companies take from donations, they more than make up for in increased sales. A win-win you say? It's a win if actual researchers are shorted funding that goes into the executives' pockets? It's a win because some donation is better than no donation?

Then I have a charity for you. Donate to the Thin Slice of Life Fund. For each donation you will get a pink sheet of construction paper with a "Thank You" printed from my laser printer. But I promised that 5% of all donations received will go to the Susan G. Komen fund for breast cancer awareness and research. A win-win.

Sunday, February 17, 2008

Service Time Value

There is a concept called service time value. It refers to the use of an accessible and tangible measurement for outcomes not necessarily because it is the best way to measure the outcomes, but because it is one of the easiest and most convenient measurements available.

Confusing? Take the following example. Your clothes dryer suddenly stops working. The clothes will not dry. You go through the basics for a dryer, which include cleaning out the lint filter and making sure the gas/electricity is intact. Beyond that, you're thinking you have to buy a new $400 dryer. You call the repair service and the guy comes out to look at the dryer. He does the basics as well, of course, and turns the dryer on and off, playing with the knobs and dials. Then he takes off the front panel of the dryer, replaces the thermal fuse, and gets the dryer working again. You get a $120 bill for the fifteen minutes it took him to change a $2 thermal fuse.

Many people would be upset to at least some degree in that situation. $118 for fifteen minutes of work? How many people make that much an hour? Neurosurgeons? This isn't brain surgery, folks. It did not take seven years of postgraduate schooling to learn how to change a thermal fuse. It doesn't even take four years of college to learn that. If you watched the guy do it you would have learned right then how it's done.

On the flip side, not everyone knows how to fix a dryer. Or rather, not everyone wants to have to know how to fix a dryer. I have other things that I care more about other than the inner workings of a dryer. That's why there are warranties for these kinds of things--so I don't have to spend my Saturday looking up dryer specifications on Google.

But that is the concept of service time value. It is the use of the easiest and most tangible factor to measure the quality of the outcome. In the example of the malfunctioning dryer, it was easier to time how long the repair took rather than to qualify the difficulty or personal time it would have taken you to repair the dryer yourself. The same can be said for assembly, construction, and development jobs. It might take a computer programmer one day to put together a website, but that does not mean it is a simple task.

What are the broader implications of this concept? Time does not have to be easiest and most tangible factor. Take the No Child Left Behind act. Without reviewing the intricacies of the legislation, which can found at the department of education website, NCLB was supposed to improve the education in primary and secondary schools, and thus translate into improved vocational opportunities in the future for these children. The problem is that it is difficult to measure the success or impact of changes in the primary and secondary school systems on the future of the target children. So they used the easiest and most tangible factor they could measure--results of math and reading tests of the schoolchildren—the NAEP. Unfortunately, the results did not ultimately support improved math skills and literacy despite having an increase in average test scores over time.

What ended up happening was that were both rewards and punishments instituted for achieving and missing goal average test scores on the NAEP. Teachers and schools of students who averaged a higher test score received more grant money, which was taken away from those who did not meet to goal. So what is a school to do? Focus the majority of the education on the math and reading topics being tested. You can see how this may lead to a worse education rather than an improved education. Of course, schools that still teach everything else still provide excellent educations and also reach the NCLB goals. Thus the convenient measurement of test score averages has brought the NCLB, a bill with so much good intention, under tremendous scrutiny and criticism.

Health care is another area where we will see this concept. With health care costs rising every year and with more and more people requiring health care due to the aging baby boomers, politicians and insurance companies have devised a way to reduce costs. The idea is simple--they will reimburse physicians who practice bad medicine less, and physicians who practice good medicine more. But how do you tell the difference between a good physician and a bad one?

This seems like an easy task. There are many guidelines out there pertaining to all areas of medicine. Take preventative medicine--colonoscopy, mammogram, cholesterol, diet, exercise, immunizations, etc. Or diabetes--blood sugars, urine protein, cholesterol, blood pressure, eye exams, foot exams, etc. We can do this for just about any disease or syndrome out there. On top of these factors, many programs throw in "timely access to health care" and "doctor-patient communication". Some insurers also have IT related qualifications. On the surface, this seems to make perfect sense. Clearly, physicians that don't get their patients to have colonoscopies after the age of 50 are bad doctors. And the ones that have patients with perfect blood pressures are good doctors.

Think of the underlying message in that format. It insinuates that all patients do everything that is necessary for their health and that if a patient does not meet the recommended guidelines the physician is at fault. It also makes a very dangerous application of averaging. You could argue that the insurers are not looking for 100% of the patients to be at target, only 80%. Or 75%. But from where does that number come? It is an arbitrary number selected to fit what the insurers believe is "acceptable". And that's where the misuse of averages appears. No one actually thinks that inner city patients are the same as middle class retirees. Or that low income patients are the same as wealthy patients. Socioeconomic factors greatly influence healthcare delivery. It is well established that lower socioeconomic patients have poorer health for a variety of reasons. Their ability to afford medications and tests are hampered. They have less understanding of their diseases. The healthcare facilities in their area are less than state of the art. Reaching targets for these patients is more difficult. Will insurers now go to each medical practice and assess socioeconomic status to decide on appropriate percentage goals? That would be a near impossible task with the number of practices out there, the clear privacy violations it requires, and the need to update the determination every year as cities change.

An extreme example would be a physician that had a great deal of underserved patients who cannot afford many medicines and for whatever reason find their health to be a secondary priority. This physician would have a tough time controlling his hypertensive patients, ensuring that screening tests were done, and even getting adequate follow up appointments. His reimbursement would be low, and he would also incur a penalty for failing to meet standard of care. Now take another physician who has a practice near a newly built retirement development. His patients are well off and care about their health. They see him frequently, and can afford all their medicines and tests. This physician has excellent "performance" by the insurers measurements and will not only receive more money because his patients have higher paying insurances, but also a bonus for hitting all targets for standard of care. Without any other information about the two physicians, can you really tell if either are good or bad doctors?

There may not be a better alternative to the current proposed measurement techniques for improvement in education and healthcare, but at the very least we should acknowledge that there are two parties responsible for the outcome--the educators and the students and their families, and the physician and the patients and their families. The latter groups need to also have a stake in the bonuses and penalties if the models can even have a chance of working out.