Friday, November 20, 2015

Government Supporters, Giving it Extra Credit

One of the tendencies among progressives, and among statist conservatives, is to give government far more credit for invention and creativity than it deserves. They point to projects funded or supported by government as evidence of the value of larger, centralized projects, but they forget you cannot prove a negative.

Because government is so intertwined in modern innovation and basic research, it is nearly impossible to prove what would be happening without government. People have forgotten that that big projects, like the Transcontinental Railroad, were actually boondoggles that catered to political cronyism, not genuine innovation. (There were better managed, more profitable railways that were crushed by the federalization led by the robber barons.)

The market, left to its own, might fill gaps. We simply will never know.

My thoughts on this are prompted by too many people claiming we need more and more and more federal spending, supported by higher taxes on the "rich" who clearly don't deserve their money. Of course, the math doesn't work, if you've ever bothered to watch "Eat the Rich" on YouTube:

Anyway, let's get into the concept that government is why we have great things. There is a role for government: maintaining order, protecting freedom, enforcing contracts, and protecting property rights. We cannot have stable economic growth and innovation without a trustworthy and fair government to act as something like a referee.

But, do we need government for the actual creative and innovative processes?
Tech's Enduring Great-Man Myth
The idea that particular individuals drive history has long been discredited. Yet it persists in the tech industry, obscuring some of the fundamental factors in innovation.

By Amanda Schaffer on August 4, 2015
Hero myths like the ones surrounding Musk and Jobs are damaging in other ways, too. If tech leaders are seen primarily as singular, lone achievers, it is easier for them to extract disproportionate wealth. It is also harder to get their companies to accept that they should return some of their profits to agencies like NASA and the National Science Foundation through higher taxes or simply less tax dodging.

And finally, technology hero worship tends to distort our visions of the future. Why should governments do the hard work of fixing and expanding California's mass transit system when Musk says we could zip people across the state at 760 miles per hour in a "hyperloop"? Is trying to colonize Mars, at a cost in the billions of dollars, actually the right direction for future space exploration and scientific research? We should be able to determine long-term technology priorities without giving excessive weight to the particular visions of a few tech celebrities.

Rather than placing tech leaders on a pedestal, we should put their successes in context, acknowledging the role of government not only as a supporter of basic science but as a partner for new ventures. Otherwise, it is all too easy to denigrate public-sector investment, eroding support for government agencies and training programs and ultimately putting future innovation at risk. As Mazzucato puts it, "It's precisely because we admire Musk and think his contributions are important that we need to get real about where his success actually comes from."
Much of the above article relies on the 2013 book The Entrepreneurial State: Debunking Public vs. Private Sector Myths by Mariana Mazzucato. The book implies, somewhat simplistically for an economist, that federal government spending has created our technology revolution. Prof. Mazzacato, of the University of Sussex, acts as a cheerleader for government, ignoring or glossing over the more complicated relationship between private invention and public investment in those inventions.

Federal spending can and does support refinement of inventions and basic discoveries. That's wonderful. Research labs do work that might not be profitable (like large particle accelerators smashing atoms) and may not have immediate market applications. But to credit government with too much is also problematic.

People forget that the National Information Infrastructure Act came about because government really did NOT see the value of the Internet. I was working on DARPA projects at USC and the Feds were convinced the networks were a toy at worst and a little better than physical mail at best.

The trope in this and other articles that things would have happened without a Jobs or Case or Serf ignores that there is a creative act in seeing how parts fit together. Jobs was a jerk, especially during the Next years (we were testers for Next). But, he said things we thought were nuts that proved to be true (Display PostScript, optical media, and so on).

And just because the government is a customer and offers contracts for something does not make it the only funding source. Yes, basic research is a function of our research institutes and universities, leading to great things, but take 3D rendering. Hollywood has actually spent more on computer imaging than the National Center for Supercomputing. So, private "frivolous" spending AND government spending overlap.

A side point, most of the "great things" mentioned in this article and elsewhere were the result of military spending, seeking better ways to kill and avoid being killed. Even our highway system was a "military" Cold War expense. Pretty sad, in some disturbing way. Orson Welles in "The Third Man" comes to mind and his speech on war as the mother of invention.

Private people, the Wright Brothers, and others invented the powered airplane. Government, during the Spanish American and WWI, realized these airplane things could be used to spy on and maybe kill other armies. Pershing in 1916 convinced the U.S. government to suspend the Wright patents (see the new book on the Wright Brothers), which they had been defending from competitors (a bit foolishly, as eventually their company and the competition would merge).

Lots and lots of money was spent "improving" airplanes to kill better. Guns, bombs, sights (telescopes), gear chains, and other technologies that ALREADY existed, were combined by government contractors (here, Germany, elsewhere) to create fantastic flying killing machines.

The "government" is given credit for these innovations, which government did fund… for better or worse. Meanwhile, what opportunities were lost in civilian application? We don't know. Can't prove a negative.


Already existed. Government wanted faster ways to calculate trajectories and targeting data. Government invested in ALREADY EXISTING technology to improve it for the purpose of… killing more people! Yeah! And, we now give government credit for innovations that BUILT ON existing technologies created to calculate financial transactions (National Cash Register, International Business Machines) that turned out to be great at doing the math needed to lob bombs at people.

And on and on. Existing technologies receive government money to improve their killing / defense potential and people mistakenly give "credit" to federal spending for more than the improvements and evolutionary advancements made.

There are examples of "pure" federal research. Definitely. But not as many in technology as people want to believe. Drones? Private first, and then the government realized they could be used to kill. Blimps? Private turned military (and still used today by the Navy). GPS was based on a private concept, but the federal government (until recently) didn't allow private application. (There's a law about exporting or using potential military technology… amazing how that limits private industry and ensures government "innovation" of some technologies. Remember, Apple couldn't export the G5 PowerMac originally. It had "military" uses.)

Friday, November 13, 2015

Taxes, Inequality, Debt, and Deficit

A September 2015 report from the Brookings Institute demonstrates that significant increases in top marginal tax rates would have minimal effects on both income inequality and the federal budget.

This report was prepared by William G. Gale, Melissa S. Kearney, and Peter R. Orszag. It should be stressed that Orszag was Pres. Obama's director of the Office of Management and Budget and a former director of the Congressional Budget Office. Nobody can claim Orzsag is a conservative or libertarian — he is an excellent analyst.

Read the report here:
A larger hike in the top income tax rate to 50 percent would result, not surprisingly, in larger tax increases for the highest income households: an additional $6,464, on average, for households in the 95-99th percentiles of income and an additional $110,968, on average, for households in the top 1 percent. Households in the top 0.1 percent would experience an average income tax increase of $568,617.

How would these reductions in after-tax income affect overall income inequality? To answer that question, we calculate the Gini coefficient on the full distribution of post-tax income under the three different tax policy scenarios. (The Gini coefficient is an index that ranges from 0, if everyone had the same earnings, to 1, if a single person had all the earnings and everyone else had none.)

Perhaps surprisingly, increasing the top marginal tax rate [from 39.6] to 45 percent or 50 percent has a trivial effect on overall income inequality. This can be seen in Table 1 below. Under current tax provisions, the after-tax Gini coefficient is .574. This compares to a Gini of .610 calculated over pre-tax income. Raising the top income tax rate to 45 percent reduces the Gini coefficient only from .575 to .573. Raising it to 50 percent brings the Gini to .571. If the 50 percent top tax rate is applied to income only above $1 million for married filers and $750,000 for single filers, the resulting Gini is .572.
Statistically, the results are insignificant in reducing income inequality. Raising taxes might feel good, but it accomplishes little. More importantly, you cannot really raise taxes on the highest earners and then cut lower-income taxes because doing so would not improve the fiscal situation of the United States.

The federal government is broke. Beyond broke. As of the moment I'm writing this post, these are the dark facts of U.S. finances:

Debt as of Nov. 12, 2015: $18.6 TRILLION

Deficit for 2015 (to date): $433 BILLION ($426 billion was forecast in 2014. Ooops)

But raising the taxes on the rich to a 50 percent rate? That would raise only $95.6 billion, not even a quarter of the deficit. Forget any new spending. The tax increase would likely have no net effect, either, because generally Democrats and Republicans call for lower taxes on the middle and lower-income brackets to accompany higher taxes in the upper brackets. If anything, we tend to increase the deficit when making adjustments to rates and tax breaks for the first four quintiles.

Here are the numbers from the Brookings report:
Increasing the top rate to 50 percent with the same redistribution scheme would bring in an additional $95.6 billion in revenue, leading to an additional $2,650 in post-tax income for the bottom fifth of households. Applying a new top rate of 50 percent to income above $1 million for married filers and above $750,000 for single filers would bring in an additional $63.5 billion in revenue, which would result in $1,760 in additional post-tax income for households in the lowest quintile.
It isn't that we shouldn't adjust taxes: someone has to pay for the debts of this nation. But the point is that we are so broke that only cutting spending would have a significant effect on the debt or deficit.

Assuming you did increase the top marginal rate to 90 percent, you might (and only might) raise up to $160 billion per year, assuming the wealthy only exploit a minimum of loopholes (good luck with that assumption). That $160 billion? That would not come close to balancing the annual budget in its current state.

The only way to balance the budget? Grow the economy, cut spending, and raise some tax revenue. Nobody will like all the steps needed to achieve all three of these. Not me, and not my progressive friends.

We don't need a truly balanced budget, but we should aim for a much smaller annual deficit and a significant reduction in the overall debt. In my view, and that of many macroeconomists, the federal debt should be half or less of U.S. gross domestic product (GDP), or about $6 to 8 trillion at this time.

Unfortunately, our national debt now exceeds the GDP of the nation. We owe more than the entire economy generates in a year. That's a very sorry state of affairs, caused by a public that doesn't want to pay for the largess we demand from government and our various international exploits. (Surprisingly, our military spending is only 19 percent of the overall federal budget, including non-discretionary spending, and most is for personnel-related costs.)

Raising taxes, it seems, does little to address inequality, debt, or the annual deficit.

We should be ashamed, since we the voters helped create this mess.

In my now ancient post from 2011, The 90 Percent Tax Rate Myth [] I attempted to explain that 1) that marginal rate was an illusion (much less any effective tax rate) due to the number and types of deductions allowed and 2) it wouldn't make much difference to the federal budget.

Since 2010, I've explained "the rich" couldn't pay for much of anything; not even a few months of government services if we confiscated all their wealth. See Taxing the Rich vs. Reality
[] and this great YouTube video, Eat the Rich [].

Sunday, September 13, 2015

Not All Degrees are Equal

The Georgetown University Center on Education and the Workforce ( tracks the return on investment (ROI) of college and specific college degrees. Though going to college is better than not, assuming the individual graduates on time and from a good school, what you study also affects earnings.

What we know about college and income:
  • Obtaining a four-year degree is worth about $1 million over a lifetime compared to not earning a college degree.
  • Obtaining a degree from one of the 20 most elite universities is several times more valuable than earning a degree from a non-elite undergraduate university. 
  • Obtaining a science, technology, engineering, or math degree from any respected school is better than a liberal arts degree, by an average of $3.4 million in lifetime earnings!
  • Obtaining a liberal arts degree from a low-ranked school is similar to not having attended a college!
The following charts are from the CEW 2015 report, based on 2014 data.

Since the median (half above, half below) household income for 2014 was $52,250, two married liberal arts graduates from a university would likely earn slightly more than the national median as a household. Two STEM graduates marrying would begin their professional lives more than 50 percent above the median!

Individually STEM, business, and healthcare graduates out-earn the national median household income by mid-career. The following chart illustrates the gap between degrees and earnings in mid-career. 

Because studies in the United States and Europe suggest that "like marries like," we find that wealth increasingly concentrates with couples in the STEM and business fields. Two teachers marrying versus two technology experts marrying? That's a significant gap between those households of $60,000… a gap greater than the median household income. 
People with similar education tend to work in similar places and often find each other attractive. On top of this, the economic incentive to marry your peers has increased. A woman with a graduate degree whose husband dropped out of high school in 1960 could still enjoy household income 40% above the national average; by 2005, such a couple would earn 8% below it. In 1960 a household composed of two people with graduate degrees earned 76% above the average; by 2005, they earned 119% more. Women have far more choices than before, and that is one reason why inequality will be hard to reverse.
The lifetime earnings gap is enormous for one person. It's massive for two highly educated people in the STEM fields.

For a technical household that's a $6.8 million lifetime earning advantage if both partners have STEM, business, or healthcare degrees. That's a lot of money, all based on what people choose to study. 

In 2012, Bloomberg found that STEM degrees, and schools offering STEM degrees, offered a better ROI than other universities. This trend has held for the last three years.
Nearly a third of the top 30 schools were engineering schools, including the top three institutions: No. 1 Harvey Mudd College, No. 2 California Institute of Technology, and No. 3 Massachusetts Institute of Technology. All three schools had 30-year ROI well above $1 million, a claim only 11 schools could make. On average, engineering schools had ROIs of $603,362, more than double the ROI for liberal arts schools ($245,943), more than triple that of business schools ($141,014), and more than 26 times that of arts and design schools ($22,328).
The only schools that fared better than engineering schools were those in the Ivy League. Seven of the eight Ivies are in the top 15, and the average ROI for all eight was more than $1 million. While costs for these schools are high, several factors worked in their favor, including generous financial aid and excellent graduation rates—both in terms of how many students ultimately graduate and how long it takes them to do so. The weighted net cost to graduate was $84,241—less expensive than half the schools on the list, and half the cost of the most expensive.
A final thought. Duke University has identified schools that seem to correlate with lifetime earnings, as well. Averages are notoriously bad statistics (median being a better measure), but higher median earnings do align with higher average earnings. 

Here are the 20 universities with the most "successful" undergraduate alumni as of 2014:

1. University of Pennsylvania

2. Harvard University

3. Yale University

4. University of Southern California

5. Cornell University

5. Princeton University

5. Stanford University

8. University of California, Berkeley

9. Dartmouth College

9. University of Michigan

9. University of Texas

12. Duke University

12. New York University

14. Brown University

14. Columbia University

16. Massachusetts Institute of Technology

Friday, August 21, 2015

Fascist! The Left-Right Spectrum Is Bogus


It's the insult that's separated enough from "Nazi!" that it remains popular on blogs, in columns, and even within books claiming to be scholarly. Books claim to identify liberal fascism, conservative fascism, and I am fairly certain there must be a book about moderate fascism.

The problem is that left-right political dichotomies fail to appreciate that political theories and governmental systems overlap and intertwine. American liberals and progressives point to the nationalistic and "traditional values" of Italian Fascism to claim all fascists are of the right. American conservatives and libertarians emphasize the origins of the Italian fascist movement from within unions and socialist organizations to claim all fascists are of the left.

As professor Crispin Sartwell writes:
The left-right spectrum is often characterized in terms of two extreme poles. One way to see that this is incoherent is that these poles can be defined in mutually incompatible ways.
Reducing this down to the (relatively) minor differences between the two major parties in the United States, they are both statist parties interested telling citizens how to live via federal laws, regulations, and the tax code. For the progressives, it's okay to regulate my food, my car, my healthcare, and other aspects of life that I can't be trusted to choose wisely. For the conservatives, it's equally okay to dictate what I can watch (and when) and what secrets I can keep from prying eyes. Statism is simply a matter of kind.

Both parties talk about life, liberty, equality, and freedom. (I'm not sure either mentions the pursuit of happiness anymore). The talking heads and pundits, especially the loudest voices, quickly point to the "fascism" of one side or the other. And we wonder why so many people reject the parties and don't vote.

The United States political parties are both corporatists. But wait, that's a trait of fascism, right? Yes, and no. It's a trait of any political system in the era of corporations. (Public companies didn't exist in current form before the Industrial Revolution, but mercantile companies did exist, and national leaders pandered to those.) For the Democrats, tax breaks to "green" companies and "socially responsible" companies is good, and tax breaks for carbon energy companies is bad. For Republicans, military research funding is good, while tax breaks to green companies is "picking winners and losers" via centralized social engineering.

My point should be clear by now: our parties both pick winner and losers, with close ties to corporations that align with their political and philosophical visions of what is "good" for the nation. And both parties appeal to patriotism, "equality" (at least of opportunity), and other sources of nationalist pride. Both parties talk about small business, working people, and so on, and so on.

Are they both fascists? No. Neither major party is anything close to Italian Fascism. (Colleagues on left and right will argue with my assertion by finding outliers on the fringes.)

In practice, fascism was both anti-liberal and anti-conservative, seeking to transcend class while opposing communism and neoliberalism. It is, at best, a complex rejection of pretty much everything except what the fascists decided was good. Read the books by Roger Griffin on the topic of fascism and the problems with left-right divisions become even more clear (or less clear). Complicating the left-right model, every government claiming to be fascist has also claimed to be socialist in some way. Yet, fascists oppose communism and models of egalitarian equality.

Historians have built careers on claiming Fascists and National Socialists are of the right, including Roderick Stackelberg. Because Stackelberg offers a simple, comfortable, and (at least for progressives) morally clear definition of "left" as supporting equality among people, thereby suggesting the "right" not only accepts but celebrates inequality, his version of left-right is popular on left-leaning websites and in politically progressive books. Apparently, we can ignore the "Fascist Left" that gave rise to Benito Mussolini and the German socialists who initially supported Adolf Hitler. Yes, there was a left-right within Fascism, too.

(I've noticed that people feel superior after telling us that nobody is superior. Maybe that's the hallmark of political rhetoric: accidental superiority through seeing the "obvious" that other, less enlightened citizens cannot see. )

Things are simply not so simple.

There are radicals from the left and right who consider themselves libertarian, something few people seem to know or appreciate. There are conservative communitarians (the Amish certainly fit this model, as do some Orthodox Jews). Theoretical and implemented political structures get blurry.

A year ago, Sartwell addressed the problems of the left-right divide for The Atlantic. You should read the entire article, with which I'm certain most of my colleagues will disagree — since many have told me so. ("I have nothing in common with the right! Nothing!" Yes, because that's how we should start academic queries into serious questions of dichotomy.)
The Left-Right Political Spectrum Is Bogus
by Crispin Sartwell
June 20, 2014

Note: Sartwell teaches philosophy at Dickinson College. He is the author of the collection How to Escape.

Americans are more divided than ever by political ideology, as a recent Pew Research Center study makes clear. About a third of people on each side say of the other that its proponents "are so misguided that they threaten the nation's well-being." They're both right about that.

My prescription isn't civility or dialogue, which though admirable are boring and in this case evidently impossible. Rather, my approach is "philosophical": to try to confront both sides with the fact that their positions are incoherent. The left-right divide might be a division between social identities based on class or region or race or gender, but it is certainly not a clash between different political ideas.

The arrangement of positions along the left-right axis—progressive to reactionary, or conservative to liberal, communist to fascist, socialist to capitalist, or Democrat to Republican—is conceptually confused, ideologically tendentious, and historically contingent. And any position anywhere along it is infested by contradictions.
Only someone with no knowledge of United States history could deny that the Democrats and Republicans, and earlier parties, swapped positions and geographic power-centers every three to four generations. Today's parties are "flipped" versions of their nineteenth-century ancestors.

Conservative Richard Nixon might be among the most progressive, centralized presidents in U.S. history. Certainly Abraham Lincoln was a unionist, a federalist of the most dedicated variety. Meanwhile, Thomas Jefferson and Andrew Jackson were vehement individualists, opposed to large organizations and central powers.

What about religion? Aren't the Evangelicals in the Republican Party trying to control everyone? That's a bit more complex than this moment in time suggests. As Sartwell writes:
…To take one example, the radical and egalitarian reform movements of the early and mid-19th century in the U.S.—such as abolitionism, feminism, and pacifism—were by and large evangelical Christian, and were radically individualist and anti-statist. I have in mind such figures as Lucretia Mott, Henry David Thoreau, and William Lloyd Garrison, who articulated perfectly coherent positions that cannot possibly be characterized as on the left or the right.
The idea that the individual is sovereign is the key to libertarian, classical liberalism as developed by John Stuart Mill in On Liberty. To implement and protect these personal freedoms, Republicans turned to federal powers. Negative rights, protections from encroachment on liberty, still had to be codified.

It was the Republican "Federalists" who used federal law, and Constitutional Amendments, to expand the right to vote and other protections to women and minorities. The GOP used federal power to tell states what was and was not acceptable. Curiously, the GOP also argued in favor of states' rights to decide issues of slavery, because the North wanted to ignore federal rulings that support the notion slaves were property. See how messy even "states' rights" can get? For them until you're against them. Marijuana legalization is an example of this "states' rights" argument flipping from right to left.

If we return to fiscal capital, instead of human capital and freedom, surely there is a clear difference between left and right? Isn't the real battle among political and economic ideologies about the state versus private capital? Sort of…

As Sartwell writes, that's the easy left-right discussion, and one both sides in the United States (and elsewhere) seem to accept. As I wrote in the opening, the United States' political parties are both corporatists.
The most common way that the left-right spectrum is conceived—and the basic way it is characterized in the Pew survey—is as state against capital. Democrats insist that government makes many positive contributions to our lives, while Republicans argue that it is a barrier to the prosperity created by free markets. On the outer ends we might pit Chairman Mao against Ayn Rand in a cage match of state communism against laissez-faire capitalism.

The basic set of distinctions on both sides rests on the idea that state and corporation, or political and economic power, can be pulled apart and set against each other. This is, I propose, obviously false, because hierarchies tend to coincide.
We do love our cage matches. And, from the left, all one has to do is scream "Ayn Rand! The right loves Ayn Rand!" and the cheers of support will ring out through the blogosphere. (Che was much worse, someone who ordered and watched executions — despite some glossy and romanticized biographies — but Rand… she's a louse and a louse associated with libertarians and the right. Every side as its flawed champions.)

People fight, literally killing each other, over which side is "better" than the other. Capitalists versus communists. Fascists versus everyone. And in the end, everyone is really fighting versions of themselves. Why is that? Because the communists are now capitalists. The capitalists are now socialists. The genuine fascists… are still confused.
State and economy are merged in different permutations in Iran and Egypt, in China and Russia, in the U.S. and the E.U. We might say that the current Chinese state combines the most salient features of Maoism and corporate capitalism: It's all devoted to generating maximum cash and putting it on a barge—destination: the very top of the hierarchy. And yet it also attempts to bestride the earth with the iron boot of collectivist totalitarianism. Now, that appears incoherent if you are trapped in the spectrum. A conventional political scientist associates capitalism with John Locke and Adam Smith and democracy ("liberalism," I suppose). On the other hand, since socialists reject free enterprise and propose grand redistributionist schemes, they require a big, powerful state. For a long time, people thought of the Chinese system as combining opposed or contradictory elements.

I'd say no one is so sure anymore. We should think instead of the Chinese state as a provisional culmination of both state socialism and corporate capitalism. In ideology, they are opposites. But we don't live in the textbook on political ideologies. We live in a world where corporate capitalism has always completely depended on state power, and the basic practical thrust of left statism has always been annexation of the economy. The Soviet Union was a variety of monopoly capitalism, and the modern American state is a variety of state socialism.
Yes, Sartwell is correct, we are all everything and entirely confused. But that won't stop us from fighting over the details of the balance (or imbalance) among all the various positions. We have our tribes and are going to stick with them.

How did the tribes get so much power? Because they told creation myths that fed into their versions of right versus wrong. Ideology is rarely logical, but we convince ourselves that ours happens to be logical and natural. Or, as Marx claimed, scientific!
Our mistake was that we believed the account these ideologies gave of themselves. But that scrim was always thin. There are capitalist theoreticians who have fantasized and recommended stateless free markets, and there are communist theorists who have fantasized no markets at all, always glossing over the fact that what they actually meant was the permeation of every aspect of life, including markets, by the state. These were fantasies. What these people wanted appeared to be entirely opposed, but they were each devoted to their own sort of hierarchy, and hierarchies tend to coincide.
We're all heading in the same direction, but our stories claim otherwise. Stateless markets? Marketless states? Doubt anyone could tell the difference. Maybe I'm just as guilty of cultural and ideological blindness as everyone else Sartwell describes. My faith in markets is based on a distrust of government, but in the end power exists somewhere.
The idea that free markets are historically distinguished from large, powerful states is an ahistorical ideology shared by the capitalist right and the communist left. We might think of the left-right spectrum as a single ideology rather than a taxonomy of opposites. Thus, the left/right or Democrat/Republican split—which turns American politics into a hyper-repetitive, mechanical set of partisan bromides about free markets versus government programs with egalitarian results—depends on a historical mistake.
Another indication that the divisions of left-right are artificial and confusing is that most of us agree with some people and positions from across the supposed political spectrum. Until the last decade, I've never understood how the two political parties were defined, with moderates from the two parties more alike than members of their respective parties. (That's no longer the case, since it is hard to locate moderates.)

As an agnostic libertarian dedicated to equal rights and opposed to corporatism, I don't "fit" with either party — but I agree with many voters I've met on many issues. Yet, for some inexplicable reason, "libertarians" are grouped with social conservatives, corporatists, and supply-side monetarists. Seriously? Where do my ideal fit within the Republican Party? They don't. Not even close.

I'm not part of any political party, and politicians in the two major parties might want to reconsider their own associations. The parties are incoherent and internally divided by conflicting interests.

Business leaders don't want Republicans talking about social issues. Manufacturing union leaders don't appreciate Democrats talking about environmental policies. The interests of constituents in the parties don't align. Should police (law and order supported by Republicans) follow their union leaders (labor supported by Democrats)? Parties offer confusing delineations. Agreeing with "enough" of a party's platform, or having a historical bond to the party seems sufficient for many people.
It's awfully strange that Rand Paul and John McCain belong to the same political party and are generally held to be on the same end of the political spectrum. I'd say they each disagree more profoundly and substantially with the other than either disagrees with Barack Obama, for example. Some of the most historically salient "right-wing" movements are monarchism, fascism, fundamentalism, and libertarianism, which have nothing in common except that they all have reasons to oppose Marxist communism, and vice versa. Yet they also all have similar reasons to oppose one another. Toss in David Brooks Burkeans, security-state neocons, and so on, and you have a miscellany of unrelated positions.

The left pole, meanwhile, could be a stateless society of barter and localism; or a world of equality in which people are not subordinated by race, gender, and sexuality; or a pervasive welfare state; or a Khmer Rouge re-education regime. The Nazi Party, Catholic Church, hereditary aristocracy, Ayn Rand capitalists, and redneck gun enthusiasts are all on the same side of the left-right spectrum. So are hacktivists, food-stamp officials, anti-globalization activists, anarcho-primitivists, and advocates of a world government. It would be hard to come up with a less coherent or less useful way of thinking about politics.
Our fear of the "fascists" of the other side, the party we know will increase concentrated power… leads us to concentrate power, simply in the other direction. We become the thing we feared, but of course our centralized power won't be problem. With our side (whichever that is) now in power, equality and justice can prevail! Until they don't.

Sartwell uses the progressive, scientific and bureaucratic left as an example of the best plans not meeting expectations.
Examining another familiar opposition, between "equality" and "liberty," produces another cluster of contradictions. The left holds up "equality" as a fundamental value. The means leftists propose to increase economic equality almost always increase political inequality, because these means consist of larger state programs: more resources and rules, coercion and surveillance in the hands of officials or state contractors, including in welfare-type programs. The welfare state is more pervasive now than it was a century ago, and we now have institutions like compulsory public education. These are achievements of the left, programs they are still trying enhance, but have they actually resulted in more equal societies? Quite the contrary, I believe: They have led to ever-more-frozen hierarchies. The mainstream left is a technocratic elite, with a cult of science and expertise and an ear for the unanimous catchphrase. This is anything but a meritocracy; it an entrenched intergenerational class hierarchy.
What seems to astonish Sartwell is that the "sides" at battle agree on the nature of the conflict. Why do we agree on this capital versus the state definition of political disputes? And isn't this something of a modern invention? Until the Italian banking system emerged thanks to the House of Medici, economics and politics were pretty simple: monarchs ruled, everyone else did as told — or plotted to kill the monarch to install a new monarch.

History aside, we've decided this capitalism-state balance debate is the stuff of real and intellectual wars. That conflict is the outline of modern history since the nineteenth century.
Milton Friedman and Vlad Lenin, Ho Chi Minh and Barry Goldwater, Barack Obama and Rand Paul, Francois Mitterrand and Margaret Thatcher, Ronald Reagan and Fidel Castro, Friedrich Hayek and Thomas Piketty, Paul Krugman and Augusto Pinochet: They may well have disagreed about this and that. But they have agreed, or said they did, that the state was a force that was historically pitted against private capital. To reduce one was to increase the other and vice versa. They vary inversely and the balance between them that you recommend constitutes the fundamental way of characterizing your political position.

This spectrum stretches from **authoritarianism on the one end to authoritarianism** on the other, with authoritarianism in between. It makes anything that is not that incomprehensible. It narrows all alternatives to variations on hierarchy, structures of inequality, or profoundly unjust distributions of power and wealth. There are alternatives, and the one I would suggest is this: We should arrange political positions according to whether they propose to increase hierarchy or to dismantle it. Instead of left and right, we should be thinking about vertical versus horizontal arrangements of power and wealth.
I doubt Sartwell would agree, since he suggests authoritarianism also dominates in the middle, but it seems that a "balanced" private-public, individual-group dynamic gets closer to some sort of less centralized power. Or maybe not.

I was hoping we wouldn't find those moderate fascists.

Friday, August 14, 2015

Uber Is NOT the Problem

Stop complaining about how unfair Uber is, social justice crusaders.

Simple market truth: Uber would not thrive if public transit, mass transit in various forms, and licensed providers such as taxis were good enough to meet market demands.

Don't complain about Uber not having to comply with the Americans with Disabilities Act and other regulations while mass transit must.

Think about what these complaints reveal: mass transit, with all that it must do to comply with laws, regulations, and union contracts doesn't have many happy supporters. Why is that? If the rules are so wonderful, why does anyone want an Uber or a Lyft? Why is Zipcar rising in popularity?

Mass transit works in densely populated, geographically small areas. That's not most of the United States, with two-thirds of us living in suburban or rural communities.

I support public transit. In fact, I believe public transit, by its natures, should be free to use because the benefits are shared in the community. I've never understood charging fares on top of receiving taxpayer supports. The people reliant on public transit are often those least able to afford the ever-increasing fares in many cities.

I also, however, believe the services should be put to bid and operated competitively by private industry on a per-rider basis, just as I believe public roads and buildings should be the result of private industry bids. Companies vying to make a profit at the lowest cost to a community might (and historically did) deliver better mass transit.

The social benefits of removing cars from roads and increasing employment opportunities outweigh the direct costs of mass transit. Even as a libertarian, I'm okay with getting people to and from work so public dollars don't have to directly support those same citizens. If we're going to demand people work (I certainly am), then we should make it easy and more rewarding to work than to receive direct assistance.

I also oppose high-speed rail plans in most of the United States. Seriously, we should be telecommuting long distances, anyway. Plus, our population in the suburbs and exurbs have this odd history of moving. As people move, you can't reroute train tracks. Trains are also complex failure points. When one train stops, the system stops. The U.S. is not Japan, and the trains elsewhere aren't as perfect as proponents suggest.

If a private company has a better model for trains in the United States, then I'm all in favor of letting a company move ahead with trains.

But I absolutely, completely support alternative energy buses, light rail, and some subways in densely populated regions. I've even voiced support for an aerial tramway in places like Pittsburgh, which would allow construction in a densely populated region with steep hills.

Studies are now revealing that Uber and other sharing services go where public transit service is at its worst. Uber is competing, and winning, for those riders in areas that trains, busses, and medallion taxis have failed.

Uber, Lyft, Zipcar and other private solutions indicate there are problems, serious problems, with how public mass transit and publicly controlled monopoly-like transit serve communities. Don't blame private industry for trying to meet a clear market demand.

If we could fix mass transit, then Uber would be sidelined. But, our transit systems are horrible, from the routes to the drivers. That's not Uber's fault. Campaign to fix public transit and I'll support you, within reason.

Investing Isn't Gambling (Usually)

When Genius Failed
When Genius Failed (Photo credit: Wikipedia)
No, Wall Street isn't Las Vegas. Investing is not gambling.

Notice I use the word investing, not speculating.
NOTE: I am not an investment adviser or broker and this blog post is meant only as an overview of basic investment research and theory within the academic discipline of economics. If you want investment advice, talk to a financial professional and your retirement planning specialist. 
In 1973, Burton Malkiel published the seminal work on efficient market theory, A Random Walk down Wall Street. If you had invested $100,000 that year in a broad, large-cap index fund and held it for the next 30 to 40 years, you would have earned better returns than if you had invested with more than 85 percent of active fund managers. Not by just a little bit, either. According to Charles Wheelan's Naked Economics, you could have outpaced the "stock pickers" by $140,000 with a simple S&P 500 index fund.

In a Las Vegas casino, the house returns 98% of bets. The longer you play, the more you lose. Because the 98% payouts are distributed unevenly, there can be very big winners, a few small winners, and many losers. The house always takes in more than it pays out. Gambling is an illogical faith in your ability to beat the odds.

Gemaakt met Wall Street Professional
Gemaakt met Wall Street Professional (Photo credit: Wikipedia)
The stock market, however, generally offers positive returns to all long-term investors over a decade or longer. In other words, if you invest broadly in the market, and everyone else does the same, few individuals will exit the market as losers. In theory, everyone can "win" overall, as long as the economy grows.

The trick to investing is to avoid falling victim to promises of unusual gains. Magical charts, impressive models, and equations only a economist can decipher do not produce better results for most investors. Having faith in chart readers or fundamental investment advisors only guarantees that these brokers and their employers will take a portion of your money.

There is a persistent myth that Wall Street investing is somehow different from other financial transactions. The reality is that buying and selling shares in publicly traded companies is not more or less complex than other financial investments. Unfortunately, the financial industry not only has a motivation to suggest investing is beyond the average person, but also many brokers and market economists believe they can beat the odds.

Some leading economists have had spectacular failures trying to beat the financial markets. From Long-Term Capital Management, founded by two Nobel laureates, to Richard Thaler's behavioral investment fund, economists have not matched index fund returns. For short periods of time, less than two years, some funds do outperform the market averages; yet as stated above, over longer periods an overwhelming majority of stock pickers fail to anticipate market trends.

Investing is not about trying to beat market averages and indices. Investing means buying and holding a broad, diversified portfolio of stocks, corporate bonds, and possibly municipal and treasury bonds.

Buying a stock is either directly or indirectly investing in a company in return for a small percentage of ownership in the company. If you buy an initial public offering (IPO) or a secondary offering, you are directly investing in the company. If you buy shares on the open market, you are purchasing somebody else's share in the company.

Investors buy shares in companies they believe will gain value over time. Unless you are buying a direct offering, remember that you are buying shares from someone else who believes the company is either at peak value or might actually decline in value. As the saying goes, "there are two sides to every stock transaction – one certain the stock is on its way up, and one just as certain the stock is on its way down."

Of course there are many reasons to sell shares. Not everyone trying to liquidate stocks believes companies are going to lose value. For example, a retiree might sell shares on a regular basis to supplement his or her retirement savings. People might also sell shares to raise emergency funds.

However, there are no "undervalued" stocks in a transparent market. Even in an emergency, a stockholder is selling shares in a market with millions of other shares of the same company. Sellers want the highest possible returns, even those selling in a rush. As I will discuss in a future blog post, markets do trend towards fair and accurate valuations.

Speculators and daytraders are not investors. These individuals buy and sell shares within hours, minutes, seconds, or even fractions of seconds. High-frequency traders try to profit from the small and rapid changes in stock prices throughout the day. Statistically, they earn returns approximating market trends. Yes, some will outperform the market on a given day or even for a few months. Yet, in a down market the same individuals tend to lose much more money on their trades.

Many financial advisers will disagree, but statistics indicate true investing offers good returns with the least risk. In fact, long-term investing in the stock market can outperform almost any other form of retirement savings including treasury bonds and other guaranteed returns.

As long as the economy is growing, even at a slow rate, stock values will increase. Innovation has not stopped, companies continue to create new products and services. If you invest in an index fund, it should return capital gains.

Sadly, financial news networks in the general media treat the stock market as if it were a sporting event. Hyperbolic headlines and interviews with overconfident advisors lead people to believe that the stock market is too difficult to comprehend. The reality is far removed from those headlines and the harried pace of online trading. Stocks are a simple, straightforward investment in companies.

Unfortunately, even the professionals rush to buy stocks on the way up and sell those same stocks as markets decline. If you buy shares or invest in index funds every month consistently and hold onto those shares for several years, ignoring both panics and euphoric promises of wealth, you should do okay as an investor.

Friday, August 7, 2015

Libertarian Realism v. Caricatures

The simplistic, and intentionally misleading, discussions of "libertarians" and classical liberalism tend to paint all libertarians as "anti-government." These popular caricatures of libertarians appear in various "progressive" publications and on many websites. The common theme is if libertarianism worked, Somalia or {insert lawless nation here} would be libertarian paradise. Yet, libertarianism requires functioning courts, enforceable laws, and the planning of some shared commons. If contracts don't matter, if you can take my life without consequence, if we can't travel across territories, then we don't have individual freedom or commercial markets.

You can find these high-school level analyses equating Somalia with libertarianism easily online without my help; these are works I'd never accept from my college students. It's no better when classical liberals caricature progressives as uncritical supporters of all big government. Most progressives I know reject quite a bit of big government and government regulation… when the system opposes something progressives might like. We all take something of a cafeteria approach to government and economics, picking and choosing what we support ideologically, religiously, philosophically, et cetera.

Complicating any discussion of "libertarians" is that there are left, right, center, and who-knows-what libertarians. Marxist libertarians are a real thing, as are nationalistic libertarians. There are even anarchists who adopted the libertarian label.

Most libertarians and classical liberals are realists. We are not rigid ideologues, because life, politics, and economics are not perfect models of anything. Instead, we attempt to favor the individual and individual property rights whenever it is possible to do so without significant negative consequences on a community. In other words, we favor the individual until doing so doesn't seem to work. Yes, that's vague and imprecise, a line we move as science, technology, and even cultural values evolve.

Traditionally, libertarians in the United States are associated with political philosophies of "Negative Rights." I have argued this label reflects a rhetorical twist, likely reflecting a negative view of libertarian values. However, we are stuck with the terminology we have.

Negative Rights

  • Limits what government should do, by listing what it cannot do to the individual.
  • Rights of non-interference to live as you want, with those rights protected against government and, (yes) through government, from other individuals.
  • Locke, Mill, and Thomas Jefferson are historical supporters of negative rights.
  • John Hospers, The Libertarian Alternative (1974).
  • In the United States, "conservatives" and "libertarians" claim to embrace (some) negative rights.

Positive Rights

  • Limits what the individual should do, while granting "rights" from the government to the person.
  • Rights of the individual to basic needs, as determined and allocated by government policy.
  • Karl Marx (1818–1883) major proponent of positive rights: government cares for the person.
  • In the United States, progressives, "liberals," socialists, and Marxists embrace (some) positive rights.

Total freedom and total centralization are both flawed. And most people recognize this, including libertarians. Why progressives cannot imagine others are pragmatic is beyond me. The result, in the West, is that our modern national governments and economies are hybrids that constantly rebalance their negative and positive rights to reflect the values and cultures of their citizens. Swing too far towards negative rights, the next government might swing too far to the positive rights — and vice-versa.

The libertarians, the classical liberals, know that government must exist to ensure property rights, contractual agreements, honest capital markets, and basic commons such as roads. However, we start from the perspective that government should do the minimum necessary to promote and ensure freedom and transparent markets. We always ask, "Is this community task best suited to government, industry, or should it even be performed?"

Basically, libertarians assume the worst of large organizations and seek to limit large government, large corporations, and large anything else. We aren't "winner takes all" monopolists, because monopolies are not a good idea. We aren't in favor of tax break for some businesses and not others. We aren't in favor of uneven playing fields, but we also don't seek to even the final scores in most cases.

An example of libertarian logic: government should oversee the planning and construction of roads. Private companies should bid on these projects, however, because competition lowers prices. Government can and should set the requirements for these bids, including safety requirements, but government is the manager in this model, not the construction company.

Limiting the role of government doesn't require hating government. If anything, effective and trustworthy government helps markets function. Bad government, either too weak or too strong, can ruin markets and the freedoms of citizens.

What we argue about in the United States is balance between private and public roles, not that one or the other shouldn't exist.

Monday, August 3, 2015

Bubbles are Everywhere

Absurdly high prices. Debt. Stocks in 1928. Tech companies in 1999. Housing in 2007. The 1637 Dutch Tulip Mania.

These are the things people associate with economic bubbles.

Ask most people and they will tell you a bubble is when people pay more for a thing than it is worth in a reasonable market. That's a simple model for demand bubbles, but not the complete picture.

For many quantitative economists, the basic bubble is the speculative, positive price variance bubble. But, there are also negative bubbles, when pricing collapses yet producers continue to believe demand (and prices) will soon increase offset the oversupply. These are deflationary gluts.

Bubbles, positive and negative, occur when the market price for any good or service rapidly departs from the long-term median trend of price stability.

A severe bubble is when a significant number of consumers are willing to go into debt to obtain a good or service with the primary intention of selling the good (or service-related improvement) before retiring the debt. Basically, bubbles are the result of leveraging purchases on products you don't intend to keep through their useful lives.

Wait! Don't retailers and investors do this?

Sort of. A retailer, however, attempts to add value to the purchase price. If I am a grocer, my value-add is that I take time to locate the best fruits and vegetables, assembling them into a single location for your convenience. I might add other services, too, like information labels, expert employees, and keeping the produce in great condition.

Only a foolish grocer would convert his or her entire produce lane to the single most expensive fruit or vegetable available, purchased entirely via credit. Diversity is part of the value-add.

It is credit that marks most bubbles.

An easy example that currently concerns me is the automotive market. People are using low-downpayment, extended-term loans to buy cars and trucks at elevated prices. Many consumers hope to sell or trade in these cars before the debt is retired. In all likelihood, the optimal utility of these vehicles will not be realized by the almost-owners (remember, the lenders own this glut of cars) before they part with the cars and trucks. Paying more than is logical for a good you will never actually own? That seems like a potential bubble.

If you won't retire the debt on a purchase, why did you make the purchase? Will the utility return exceed the cost?

In the housing market, the old-fashioned dream was to pay off the mortgage and own the house. The bubble started when people borrowed to purchase homes they never intended to live in or rent beyond the term of the loan. My wife and I bought a house in this situation, rationalizing the payment as better than renting. That's not always the case, despite tax incentives that make home ownership seem desirable. (You should do the math, to compare rent versus the true cost of homeownership beyond the basic mortgage payment.)

The negative asset bubble is built on false hope, too.

The Irish Potato Famine was a destructive bubble created by false hope that planting more of something that was failing to grow would somehow outrace the blight. Producing more of something, or trying to produce more, is a deflationary bubble that pops with the same destructive force as the inflationary bubble.

Some argue there are no bubbles or gluts, because markets self-correct. If everyone plants potatoes and the potatoes survive, the price of potatoes falls. The falling price leads (smart) farmers to invest in other, more diversified crops. The market stabilizes as supply and demand come into balance. The bubble is just an extreme supply, demand, or price fluctuation, not unlike the small fluctuations of any daily market.

For services, I consider a bubble paying more than the service can return in the misguided hope that somehow the market will recognize the magical human capital a consumer has (not) gained. College degrees in some fields are like this. People pay to invest in their "human capital" but the market isn't recognizing the investment as valuable enough to offset the cost of some college degrees.

The inflationary example of the college bubble is that students are assuming more and more debt for their educations. While in school, many are not earning what they might in the job force. This is particularly true of some liberal arts graduate degrees. The opportunity cost of going to college, plus the debt, means that some people might not experience a positive return for the investment made in their human capital. Lots of debt, but no lifetime earnings gain is a bubble as long as people keep assuming more and more debt, pursuing more and more education.

The deflationary example of this is that most graduate students in English and writing programs know there are few permanent jobs. We know this because there is a glut of adjunct professors of writing and a glut of editors in the private sector. Yet, because these students believe, with absolute certainty, that their futures will be different and that the job market will someday recognize their value, we have a record number of graduate students in MFA programs. The MFA programs keep raising tuition rates, students keep assuming debt, but there is no demand (logical or not) for the newly-minted writing experts.

The education bubble isn't like the Tulip Mania, because the engineering student taking on debt will be (statistically) fine. He or she will find a great job and the returns will be realized. But the writing graduate? Unless the utility value is simple intrinsic pleasure, the result is a deflationary cycle that cannot end well.

Teachers of writing? Lower and lower pay as the supply shows no sign of decreasing. Editor? Again, lower and lower pay. Writers? Heck, websites expect us to generate free content. When will people stop chasing degrees with no return? There's no way to predict the end of a psychological bubble. At some point, though, the potential students won't line up and colleges will need to scale back programs or cut tuition… or both. There will be financial pain and ripples throughout the higher education market. (Yes, it is a market.)

Bubbles, as you can see from above, end badly. Someone loses money… or worse.

The Math of Bubbles

Time for some statistics. Sorry, but I need to use math-ish stuff to explain bubbles a bit deeper from an economics perspective.

We'll use grocery store produce for this discussion of bubbles. Avocados seem to be a nice model to study, since the average price this summer (2015) is approximately $1.00 each.

Economists interested in consumer prices survey a representative sample of stores every month to track changes in the cost of living (the Consumer Price Index). Some of these economists sample major produce lines and the data are used to help famers, wholesalers, retailers, and others anticipate likely pricing trends on everything in the produce aisles.

Statisticians try to survey a small but generalizable population. Let's pretend they survey ten stores from different chains and in different regions to represent the overall market. (There are sampling models that help estimate the smallest reliable sample, which is how we can survey a small group to predict national trends.)

In probability, we should be able to plot the prices of the avocados from various grocers and find something of a bell curve. The average price, known as the mean, should be near the middle of our data. Most prices will be near that middle price. Too high, and people won't want avocados. Too low, and the grocers go out of business (along with others in the supply chain).

In our price chart, half of the grocers will price avocados higher than the mean price and half will price them lower than the average. (There is something known as "skew" that results from outliers — those outrageous prices at organic stores and the low, low prices of corner fruit stands. But, statisticians correct for skew and compare median to mean for other adjustments.)

The standard deviation is a calculated value that tell us how far from the mean value another value is likely to be. A good "instrument" finds that about two-thirds of values fall within one deviation of the mean. In a perfect retail market environment, our survey should find that most avocados are near the average price.

In a "normal distribution" (a good old-fashioned bell curve) we can calculate the standard deviation from the mean and break the distribution of the avocado prices into subsets. Within one deviation from the mean we should have 68.27% of data points. Within two deviations, we find 95.45% of data points. Ideally, 99.73% of all data in a normal bell curve fall within three deviations, plus or minus, from the mean.

Here are the prices our survey of avocados finds:
$0.50, $0.75, $0.90, $0.95, $1.00, $1.05, $1.10, $1.25, $1.50, $1.75

The mean (average) price is $1.08, calculated by summing the prices and dividing by the number of grocers visited by our statisticians. Economists want to know the standard deviation, to determine a range of "normal" pricing. (Take a deep breath!) The standard deviation is found by taking the square root of the average of the squared deviations of the values from their average value.

What this means is, we square how far the prices are from the median and add up all those new values. These are called raw deviations.

For $1.00, the deviation is $0.08 ($1.08 mean minus the $1.00). We square the eight cents, and do this for every value in the survey, including any sample that has no deviation.

Our squared deviations adds up to $1.16. We take the mean of these deviations, dividing $1.16 by the ten grocers for a variance of $0.12. Basically, we now know that prices within 12 cents of the average price are within the variance spread. But, we don't have a standard deviation yet. For that, we take the square root of the variance. Finally, we have our SD (standard deviation) of 36 cents.

For our avocados, the average price (mean) is $1.08 and the standard deviation is $0.36. Prices from $0.72 to $1.43 won't worry an economist or statistician because two-thirds of avocados should be selling in that range if our study sample was representative of grocery stores. But, if prices suddenly spiked above $1.80 or fell below $0.35 something serious has happened to the market. We assume this because prices moved outside two standard deviations from the historic mean price.

It isn't a bubble if people are making guacamole with $1.80 avocados and selling it for $5. A genuine bubble escalates, thanks to investors hoping to resell the item. In a bubble, for no logical reason such as a sudden disease or a drought cutting supplies, enough avocado consumers are willing to pay $1.80 or more that this becomes the market price for avocados. Other consumers are pushed out of the market. The price continues to rise as some hoard these over-priced avocados. Investors buy the avocados at $1.80 hoping to sell them for $2.00 to someone else. Prices continue to spiral upwards thanks to these investors, many of whom know the higher price is absurd but are willing to gamble on prices continuing to climb.

Every investor is looking for the "bigger sucker" to pay more for the avocado just purchased. And the next sucker is looking for the next one, and so on.

Some people will cut food they want to afford avocados to sell on the black market. Maybe people give up other items they want to invest in avocados. A few investors work more hours to earn money for avocados. In the worst instances, investors buy avocados on credit. We now have a bubble by both traditional and statistical perspectives. We're outside two standard deviations… and climbing higher on psychology.

And the bubble will burst. Avocados purchased for resell on the black market will rot. Farmers might change crops or retailers might change inventory mixes as prices plunge… back to normal. For those who borrowed money or worked extra to buy avocados, there were lost opportunities to invest more wisely.

The best lesson from all of this is to buy what you need and invest cautiously. Watch out for bubbles, even though most bubbles are recognized when it is too late.

Wednesday, July 22, 2015

Here's Some Anti-American Dream Nonsense...

The Statue of Liberty front shot, on Liberty I...
The Statue of Liberty front shot, on Liberty Island. (Photo credit: Wikipedia)
It's hard, really hard to make it big in America.

Well, yes, success takes work, especially if you are trying to start a business, but some in the media and within academia seem to want to convince their audiences that unless you are born wealthy and white, there's almost no hope at all of living the American Dream.

The United States does have widening inequality. There are complex explanations for this, including the fact that our wealthy are wealthier (on average and at median) than the wealthy elsewhere. Income inequality, which isn't the same as wealth inequality, is also increasing for many complex reasons.

But, there are actual signs that more people can and do start businesses. You wouldn't know that, though, based on how some present research data to the public.

The following article from Quartz (The Atlantic) is so flawed, statistically and philosophically, it demonstrates how the media promote the "America isn't fair!" narrative.
Entrepreneurs don’t have a special gene for risk—they come from families with money - Quartz 
University of California, Berkeley economists Ross Levine and Rona Rubenstein analyzed the shared traits of entrepreneurs in a 2013 paper, and found that most were white, male, and highly educated. “If one does not have money in the form of a family with money, the chances of becoming an entrepreneur drop quite a bit,” Levine tells Quartz. 
Okay… but from 1996 to 2013, the percentage of white entrepreneurs fell from 76% down to 61% so the trend is fewer white males, but the article doesn't report the trend of entrepreneurship in the United States. The number of hispanic businesses jumped from 11% to 20% over that same period.

Also, the number of new entrepreneurs without a college degree is growing faster than those with a college degree. As is the number of entrepreneurs from the bottom two quintiles of household income.

So, yes, existing entrepreneurs are still mainly white, male, and well-off financially. But new entrepreneurs are changing demographics. Leave it to The Atlantic to jump to some unrelated research and imply something… but I have no idea what they want to imply.
New research out this week from the National Bureau of Economic Research (paywall) looked at risk-taking in the stock market and found that environmental factors (not genetic) most influenced behavior, pointing to the fact that risk tolerance is conditioned over time (dispelling the myth of an elusive “entrepreneurship gene“). 
What does stock market risk-taking have to do with starting 99% of small service-oriented businesses in the United States? The nail salon? The maid service? The two people fixing small engines on-site? Car detailing? Most entrepreneurs don't have any relation at all to the stock market or its way of thinking about money and risk.
Resilience is undoubtably a necessary trait for success; many notable entrepreneurs experienced success only after leading failed ventures. But the barrier to entry is very high. 
For creative professions, starting a new venture is the ultimate privilege. Many startup founders do not take a salary for some time. The average cost to launch a startup is around $30,000, according to the Kauffman Foundation. Data from the Global Entrepreneurship Monitor show that more than 80% of funding for new businesses comes from personal savings and friends and family.
Wait a minute… those stats and claims don't reflect anything, either. Average is always a statistically loaded word. If one firm required $1 million and a second required $1 to start, the "average" was $500,000 to start a new business. Averages are useless. Report medians, please. And, even then we need more data and more analysis to know the mode and various deviations from the median.

The Atlantic should be ashamed of this story and the professors cited should be even more ashamed of manipulating how data are presented to the public.

Do you want to know more about who the new entrepreneurs are? Read these data:

In reality, more people from the lower-income quintiles and from various ethnic backgrounds are the new entrepreneurs. It seems the United States does still offer opportunities. But don't let actual data trends get in the way of implying there are insurmountable barriers to success.

Quartz and The Atlantic, after all, are manipulating readers for some reason. There must be a motive behind such outright sloppy analysis.

Friday, June 26, 2015

Free college won't address inequality

Populist proposals for free or reduced college tuition won't help reduce inequality and might exacerbate it. Yet, I still support tuition breaks at state universities for some specific fields of study to encourage more graduates in those fields.

How could free education be a bad idea to reduce inequality?
  • Educational attainment K12 corresponds to income, and parental education attainment;
  • test scores also correspond to income and parents;
  • free colleges still have limited space;
  • elite schools, both private and state, will remain elite; and
  • college breaks benefit the upper-middle class most.
Yes, some students from low-income and lower-middle would be helped by free tuition, but many already qualify for grants and scholarships. The reality is that college tuition is a middle class concern, like the home mortgage deduction. Politicians aim for the middle, where voters are.

Colleges are not going to build thousands of new classrooms and hire tens of thousands of instructors. Not that there is a shortage of doctorates (surpluses explain the adjunct armies). However, free tuition is likely to come from existing spending. That could reduce any (nonexistent) plans to expand facilities and faculty.

Nations with free tuition don't offer the palaces of learning and "student life" now used to recruit at US campuses. Our elite colleges, including many state universities, are resorts and health clubs with some classrooms. And the best have no shortage of applicants; they know the market. It is about the "experience" to many education consumers.

I'd love more focus on teaching, but that's not going to happen. Students now shop on other criteria.

With limited space, schools must use placement tests and other quantifiable entrance requirements. Vague standards lead to lawsuits, so expect rigorous admissions policies. And for whom will these tougher standards work? The upper-middle class, statistically.

Think about it this way: California's best students will still want to attend Cal Berkeley and UCLA, the crown jewels of the University of California system. Out-of-state and international students also want to attend these great institutions. Space is limited. Already, admission into these universities is difficult for all but the best of the best students. Make them free and that situation won't change, and the competition to earn admission will escalate. Who will be able to afford the test-prep, interview training, and other extras that might help with placement? The well-off, of course.

If grants are made, at roughly the median cost of a university, that also benefits the middle-class more than it does other groups (for better or worse). Unless grants cover all expenses, low-income and lower-middle students are likely to attend lower-cost institutions in affordable cities. The rich will attend whatever universities admit them, regardless of cost.

In Germany and Sweden, where universities are "free" (at least the tuition is), students still accumulate debt, and graduation rates are about the same or slightly lower than the United States degree completion rate. How is that possible? Because "free" doesn't offset room, board, books, fees, and the incidental costs of living in the expensive cities in which universities tend to be.

The "free" universities internationally also aren't the leading research institutions they once were. That's probably not a coincidence.

To control costs, time limits would need to be in place to prevent "perpetual students" from taking seats. Colleges and universities would start to resemble large high schools, without much flexibility. If you want the public to pay for higher education, there's simply no way to avoid cost controls and restrictions on choices.

If people complain that universities feel like businesses (a claim I reject, for many reasons), imagine trying to structure them to handle exploding populations with already limited state and federal funds. As with healthcare, the United States actually spends quite a bit on education… with the states and cities spending the most getting some of the worst results. How will this trend translate to higher education without spending restraints? No, there will be restraints and tough choices.

One choice that must be made by states: what degree programs to expand and which to cut. Free or low-cost could result, as it has in France, in an oversupply of humanities graduates. Not that I don't love the humanities (I have an English degree, after all), but yet more English and art majors isn't a good investment of public monies. No, that's not "fair" if you don't believe in telling people what they can study — which is why I only half-heartedly support public subsidies for select fields.

How can I still support low-cost or free state college and university education in some fields?

The science, technology, engineering, and math (STEM) fields are among the most important to our futures. I'd argue these are the fields that will improve lives. Though the humanities matter, they simply aren't the engines of progress. And, despite what some of my colleagues claim, there's no evidence studying the humanities makes for "better" people: consider the painter Hitler or the philosopher Lenin. And I'm not going to argue that STEM experts are any more (or less) humane. But, we need inventors and scientists to move forward.

More importantly, STEM degrees do promote class mobility more than the humanities. Engineering does pay more than being a theatrical artist. Medicine pays more than being a "{fill in the blank} studies" expert.

If we can help students from lower- and middle-income prepare for college admissions, and that will require investing in our K12 systems, then grants for STEM field degrees would be a great way to offer upward mobility.

Reducing the cost of college won't fix the K12 problems. It won't equalize parental influence. It won't change which career paths pay the most or offer the most social standing. Free college isn't a magical solution to anything, and it might make some things "worse" in terms of inequality. Our colleges won't be magically populated by students from disadvantaged urban and rural school districts. That's just not going to happen.

My assumption is that university population profiles wouldn't change significantly with "free" tuition.

It hasn't worked to shift inequality in Germany or Sweden, and low-cost education elsewhere has had little to no effect on mobility. The higher mobility in other industrialized nations has more to do with their narrow class segments, a far more complicated issue than free college tuition.

Promising free or "affordable" college is really about appealing to particular voters. It isn't about improving educational quality, which has actually stagnated in the free-tuition nations.

That doesn't make "free" a horrible idea, but it won't address inequality.