Practice Good Theory

Playboy vs. National Review

noreply@blogger.com (Realist Theorist) — Wed, 26 Dec 2018 03:33:00 +0000

It is traditional to think of magazines like Playboy as corrupting of morals. Yet, there's no comparison to magazines like the "National Review". The wrong moral and political ideas can cause far more harm than viewing nudes.

Even Venezuela's dictator Chavez realized that the "wrong ideas" about life and philosophy can be more "corrupting" than a little nudity. A while back The Simpsons were ordered off the air, to be replaced by Baywatch!

Celebrating 4th of July

noreply@blogger.com (Realist Theorist) — Mon, 24 Jul 2017 02:46:00 +0000

A couple of years ago, I was in a small mid-western resort town on July 4th and thousands of tourists (mostly from elsewhere in the state) had turned out to see the fireworks. Trucks streamed in from all the nearby little towns and farms. The atmosphere was festive. There was benevolence all around. The red-white-and blue was respected, not as a symbol of something above us on an altar, but as a symbol of who we are. Not on a pedestal to be saluted -- though that too -- but, in casual clothing, in funny head-dress, in flashing lights to be worn for the evening.

All around was a feeling of family and of sharing a value. Very few cops in sight, and yet the thousands self-organizing in very orderly ways. If you asked those people, in that moment, if freedom was their top value, if the individual is important, if we should recognize the individual's right to his own life and happiness...you'd probably find lots of agreement. It's all good, but it is mostly emotional.

As you peel away and understand the intellectual roots, contradictions appear. I won't say the emotions are unfounded, that there is no "there there". When Hollywood makes a movie of a maverick going up against the world and winning, huge audiences love the theme. It is who they are: sometimes, on some topics, and in some emotional states.

Nationalism is dangerous when it goes beyond a general benevolent celebration of sharing good values like freedom and individualism. It usually does, and we have a good person like Robert E. Lee rejecting Lincoln's attempt to get him to lead a Union Army, even though he could "anticipate no greater calamity for the country than dissolution" and thought "secession is nothing but revolution". Why? For "honor" -- which really translates to honoring a convention where you are loyal to your home state.

Throw in ideas about the role of government in helping people in all sorts of situations. Thrown in ideas about inequality being caused by oppression. And faulty ideas about economics. And suspicions about bankers running the world. Add back the occasional cheering of the maverick who defies authority; but also add back the desire to control other people's behavior: if they're gay, or marrying someone of another race, or smoking pot, or even having a beer when they're 20 years and 11 months!

That is the contradiction that is America.

Still, you should feel free to choose what emotions you wish to invest in symbols like the flag. You do not have to salute a flag and think you're saluting a tortured contradiction that is eating itself from the inside out :) . You can salute it for the right reasons, or for what you think it once stood for.

Here's Frederick Douglas, speaking on the occasion, about a decade before the civil war: "This Fourth July is yours, not mine. You may rejoice, I must mourn." It's worth reading, particularly if your first reaction is to dismiss it. Was he wrong? Was he right for his time and not for ours? Or, does his admonition still stand?

"Should we celebrate 4th of July?" I don't think that's the right question. I think that -- right from Day 1 -- there were people who should have been celebrating it. Not just Americans.And, not all Americans.

I think the question should not be addressed to a group, but to each individual: "Can you celebrate July 4th without hypocrisy?" I think this is the greal lesson from Douglas's speech.

And, each individual may honestly answer "yes", even if the rest of the world cannot.

Novelist John Masters

noreply@blogger.com (Realist Theorist) — Tue, 04 Jul 2017 03:14:00 +0000

John Masters's novels aren't for everyone, but I enjoy them immensely. Masters tells a good story, and tells it well. His heroes are far from perfect; they are works-in-progress, who develop through the book, occasionally tempted by Dostoyevsky-like inner dialogs. Sometimes, they weaken and succumb to temptation.

The books are mostly adventures without deep themes. Indeed, the rare times that Masters tries to step back and find a broader moral theme, he is unconvincing: the narrative does not support his commentary.

The books are all based in India, and the protagonists are British. Each book is set at a different time, across the few hundred of years that the British traded with and ruled India. Two of the books are set during very significant events in British-India: the 1857 mutiny (Nightrunners of Bengal) and 1947's independence (Bhowani Junction). The historical interest made me curious, but I stayed for the story, and bought the other books.

Two of the books have been made into movies: Bhowani Junction and The Deceivers. The movies are nice enough, but miss much from the books. As a first book, I would recommend "The Deceivers": it is a story about the criminal tribe of "thugs" in India, and how a British officer tries to take them on. (On Amazon-UK, and Abe Books)

Early Christianity till the 6th century

noreply@blogger.com (Realist Theorist) — Sat, 24 Jun 2017 13:17:00 +0000

Why do some gurus endure? Jesus was not the only Jewish preacher, and I bet Mohammad and Buddha had competition too. In modern parlance: why did they "go viral"? Christianity really took off in Rome. Buddhism declined in India, but spread in China. Clearly, early advocates -- Paul in Christianity -- were critical.

I listened (thanks to Librivox) to about half of an old book, titled History Of The Christian Church During The First Six Centuries.

The book documents Christianities leaders, branches and debates up to around 600 AD. The book documents the growth of the church. It also explains how they changed some practices -- e.g. did not insist on circumcision -- in order to make conversion more palatable to gentiles.

However, the author did not explain why those gentiles (or other Jews) would switch to the Christian sect of Judaism. After Constantine moved the Roman empire to Christianity around 300AD, the rise of the religion can be explained by political sponsorship. However, I did not find what I was looking for: i.e., an explanation of the motivation (intellectual or other) of people who adopted Christianity in the first three centuries.

Three of the four largest religions -- Christianity, Buddhism and Islam -- spread very widely. I'm curious about how religions spread without political sponsorship. Why did Christianity grow in the first century or so? Why did Buddhism spread in China? (Political sponsorship was the key to its spread in India, and it faded when that sponsorship ended.) Perhaps a lot of Islam's success may be explained by early political sponsorship; but, here too, its spread to Indonesia and to the south-west coast of India seems to have been via evangelism and its message of individualism.

Older faiths just "were". Conquerors would convert new kingdoms to their faith, but there seems to have been little evangelism in older religions like Hinduism, Zoroastrianism, Mithraism or the old Greek or Roman practices. Could a large part of the success be explained by the evangelical impulse itself? Could it be as simple as that? I.e. that only a few religions made an organized effort to spread their faith, and that the three major ones are among the few that did?

Apart from the desire to evangelize, perhaps these religions owe much of their spread to the fact that they developed some types of methods, institutions and networks that were geared toward evangelism.

Looking at the original theology of these three religions, I cannot find anything radically unique to set them apart from other sects of their time. So, though I don't know enough to rule out that they really did fill some intellectual need that was not filled by their successors, I suspect that theology is only a minor factor.

One tidbit that I found interesting was that the author identifies two hold-outs against Christianity after the Roman emperors had adopted it officially. The first was rural areas, particularly if they were isolated. No surprise there. The other holdout was the scholars in universities, who continued to dismiss Christian mysticism for a while after others had converted.

One negative with this book is that the author hints at mystical explanations for some historical events; but, it is not enough to distract.

All in all, it was a mildly interesting book. It helped make the period more real to me, but I'm still left with the questions I began with.

Family Roots

noreply@blogger.com (Realist Theorist) — Sat, 17 Jun 2017 06:00:00 +0000

"We come from a line of strong Norse and Celtic mix. We take what is our due." This is a line I read from a father, to a daughter, advising her to demand something she considered her right.

It is interesting how people look to their history in this way, because -- in fact -- this is myth. There's no biological transfer of philosophy across that time, and yet people invoke the myth, because it stirs emotion. It works like good heroic literature: it shows us what humans can do. We are inspired. If "these people could do so, so could I". The emotional reality is stronger, if we add "my own ancestors could do this,…" which translates to "people just like me could do this… and, so can I".

I was always puzzled by Rand's mention of the TV series "Roots". Though she said the author's idea of tracing his biological ancestors was tribalist, she also praised him for producing "a representative image of black people in America, from an aspect that had not been presented before". Wait! Why would it be tribalist to look for one's biological ancestors, but praiseworthy to look more broadly, at "black ancestry"? Rand's answer is that he portrayed black slaves as moral heroes: as people who never relinquished the idea that they were human beings with equal rights, in whose hearts the desire for freedom would never be extinguished.

Like the father in the quote above, the father saying "we can be heroes… because, this is who we are", the Roots series was saying "blacks can be heroes… because, this is who we are". Rationally, logically, factually ... we can be heroes because we are human, not because we are Norse/Celtic or Black. Yet, by narrowing down from "human" to "Norse" or "Black" or anything more specific, we make the picture more concrete, closer to reality, more achievable, and thus more inspiring.

This is the role of literature in myth: it makes the abstract concrete. This gives it a reality that is more real, and makes it a more effective motivator of emotion. The point, then, is not to look for family merely to know the nitty gritty, but to look for inspiration.

It does not need to be all positive either. We look to myth for strength, but we can spin inspiring tales from negatives too. A jailed swindler in the family, can become a cautionary myth of "people like us can be tempted by short term gain". Or, if the swindler's children were regular folk: "people like us, do not simply ape our parents" (Yes, that's a bit ironic.)

Metric system or Base-12 ?

noreply@blogger.com (RT) — Mon, 15 Feb 2016 16:04:00 +0000

The metric system (base-10) is easier to remember than older systems. Every unit is uniformly 10 times more than the next smaller one. Or 10, 100, 1000 times, if we consider only important ones. Also, by using prefixes like "kilo-" there are less words to remember. We use it in "kilogram", "kilometer". For length, we just remember "meter" and apply the prefixes. We don't have to remember: "inch", "foot", "yard", "furlong", etc.

However, the older systems came about for a reason and do not pooh-pooh our ancestors for using Base-12 systems. They makes it easy to get "a quarter", "a third", or "half". If things were sold by "the tens", the green grocer could give you "a half", but couldn't give you "a third" or "a quarter" without cutting up some fruit and vegetables (or eggs).

I was reminded of this recently, while watching a tutorial on web page layouts. The designer mentioned that he usually set up a grid of 12 columns. That way, he could split the page into halves, quarters and thirds very easily, using the same underlying 12 columns.

Don't get me wrong: I do support metric systems, but appreciate the rationale of base-12 systems. And, having two systems is worse than having one bad one. Remember the Mars spacecraft that crashed because two modules were using different systems and did not "know" it.

Now, let's make the calendar metric and give people born on Feb 29th an annual birthday please! Having the calendar linked to the sun still makes sense, but we can ignore the cycles of the moon.

There are some organizations that still campaign for older systems. If you're curious check out the "British Weights & Measures Association".

23andMe - The Birth of the Crony Capitalist

noreply@blogger.com (Realist Theorist) — Sat, 14 Nov 2015 11:54:00 +0000

The FDA has now allowed 23andMe to give their customers some health-related information. This is not everything: it is only the results tat the FDA considers more reliable.

On the face, this might look like a good thing, but it is probably the first step to corrupting one more little industry. Already, 23andMe is running ads saying it is the only genetic testing company offering FDA-approved health results. This is really deceptive because the FDA only approved a small sliver of their tests and because competitors can do the same even if the FDA has not approved them yet.

Consider the people who run 23andMe. Until recently they were fighting against FDA control. Now, how would they view a competitor who wants to offer a non-approved test? They'll probably insist on a "level playing field". Fast forward a year or two and they'll have a relationship with the FDA and may even sue a competitor who tries to offer something new saying it does not need FDA approval. Fast forward a few more years and they would have employed some ex-government folk, and would have initiated joint sessions where they try to get ahead of the FDA, by laying out what they think the rules and standards ought to be. That's when outsiders will scream "regulatory capture".

Two decades ago, Wal*Mart was proud to have a very tiny lobbying office. Microsoft boasted almost no "Washington-man" until the government came after them. Google started that way too. Step-by-step, each of them learnt how to play the game until, finally, they're close enough to government that libertarians can re-write history and say that businessmen are the evil drivers behind "crony capitalism". No, all along it is the idiot citizen buying something at Wal*Mart saying "they should be forced to pay their workers better", or installing Windows and saying "they should be forced to install their competitors' products automatically", or "they should be forced to give me search results for free", or "they should be forced to get approval from government panels before they offer me genetic tests".

Who needs teamsters when we have SWAT teams?

noreply@blogger.com (Realist Theorist) — Sat, 07 Mar 2015 14:08:00 +0000

When oil was first discovered in Pennsylvania, it was transported to the nearest rail head by horse. It was poured into liquor barrels, put on a cart and pulled by a team of horses. In 1865, Samuel Van Syckel procured a right of way and built a 5 mile pipeline. He faced a lot of technical challenges. The oil had to be pumped, and the pipeline's joints would need to withstand high pressure. Van Syckel was working with 15 foot sections of 2-inch wrought pipe.

After sabotage by unhappy teamsters, he hired guards to protect the line, and it was successful enough (he charged $1 per barrel) that he built a second line soon after.

Today, pipeline builders don't just have to get a right of way from farmers. They have to petition the government. And, they do not face desperate teamsters wielding pickaxes in a futile attempt to hold back competition. Instead, the government does the job more effectively. If the people's government, duly elected, says "no", their refusal trumps private property rights. And, it cannot be challenged by a measly force of private guards. Behind the "no" from the voters' representatives is the ultimate power of force. Not just pickaxes: try to defy it and bulldozers will raze your line; resist that and police with guns will haul you away and throw you in jail.

Who needs teamsters with pickaxes when we have SWAT teams to enforce the people's will.

How're we doing? (A review of 2014)

noreply@blogger.com (Realist Theorist) — Thu, 25 Dec 2014 17:08:00 +0000

Overview: Like last year, 2014 gave us a slowly improving economy, and a rocketing stock market! Since the 2007-08 downturn, most measures of the economy have stabilized and have started to improve from their bottom. Even total-employment got back, though the more important number (Employment-to-population) is still low. The broadest GDP measure has been increasing very slowly. House-prices came well off their bottom, someway half-way to the old peak, but have recently flattened for a few months. Meanwhile, the stock market is at an all-time high.

Corporate profits are high since GDP is growing slowly while firms have kept a reign on costs. Companies have kept buying back stock at above-average levels. This is different from the type of excitement that drove the dot.com boom, because it does not cascade into higher salaries and expenditures: quite the opposite. In the short/medium term, this is "blah" for employment numbers and wages.

Here are some of the details:

Employment: After seeming to flatten last year, the Employment-to-population ratio jumped up by a percentage point. If we define recessions by level rather than by direction, and if we use this single measure, then we are still in a recession.

This measure is closely related to why people still don't think things are fine.

Real GDP per Capita: Real GDP per-capita picked up after seeming to flatten last year.

2014 was a bit better than 2013 and what looked like a flattening now looks like a resumed (though slower) trend.

Home prices: The Case-Schiller index has been rising for two years now.

Price-rise: The 10-year CPI expectation (using TIPS spreads) dropped under 2% almost to 1.5% [Which means that anyone who thinks the official CPI will actually rise much more than this over 10 years should buy TIPS.]

This probably reflects the generally low interest rates on US government debt as the dollar has been one of the strongest relative to other currencies.

Stock market: The stock-market is on a "what me worry?" tear. Rumors of its death appear to have been discredited. But that's how stock markets are: up, until they aren't.

In terms of months and level, it is looking long in the tooth, but history also says it is probably pointless to jump out.

Summary: There is a bit more enthusiasm about the economy, but not much. Lower gas prices will lower the GDP metric directly, but Christmas-related buying will probably improve to compensate. No great improvement is expected and, consequently, companies are unlikely to raise hiring or wages much more than they've been doing. Government entities aren't likely to go gang-busters either, but here too voters are a little more willing to approve funding for roads and schools. A "new normal" seems like a good guess: growth, but slow.

Even though the stock-market is booming, it is without excitement: more like "there's no other game in town, while the FED keeps rates low; and, profits are high through cost-control". The divergence cannot go on forever, but it can resolve itself in various ways. Much of the market-sentiment is driven by what John Hussman calls "superstition" about the Fed's ability to keep this playing out for a many more years. The FED continued to say that the turning point is far away, so the game could go on.

The biggest "anticipated wildcards" for 2015 will how the market reacts to the FED, and how the drop in oil-prices filters through (given that a lot of capital investment and employment growth came from the U.S. oil sector). A new downturn -- particularly in the stock market, if not the economy -- is likely before Obama's term ends, but he might squeeze through... and Democrats will have something to brag about.

Personal Balance Sheet repair

noreply@blogger.com (Realist Theorist) — Sat, 26 Jul 2014 12:00:00 +0000

Private debt is often a bigger problem than government debt, in a mixed economy. Governments encourage private borrowing, and force some citizens to underwrite the losses of others. The great recession is essentially a tale of private debt gone wild.

Greenspan's folly: After the dot.com bust, Americans did not tighten their belts for long. Look at the first chart. After dropping slightly for two years (2003-04), debt payments rose as a percent of disposable income. This was Alan Greenspan's "clever plan" (TM) to get out of the recession: "borrow against your house".

A different (private) response: Then came the housing bust of the "great recession". Bernanke would have liked to repeat the Greenspan "solution", but this time, Americans were more scared. They have been repairing their balance sheets (see 2008 and beyond).

Flat levels of liability: Meanwhile, the total level (nominal) of household liabilities has flattened out (2nd chart) for the first time since the 1950's. On a log-scale (3rd chart), and compared to household net worth, one can see the flattening is less dramatic, but still real. This is not just about people borrowing less; large amounts of debt were written off: foreclosures, bankruptcy, etc.

Not enough: Households have not done enough. The Fed's response to the great recession has caused a financial asset boom that has introduced complacency. The rise in household net-worth (chart below) might even convince households to start borrowing again. Household ought to have cut back more drastically, but lets take what we can get.

Gross figures: One problem with the numbers above is that they are across the whole economy. The stock-market boom could implies that much of the increase in net-worth has been seen by the upper half of the population, with the lower half still in bad shape.

Going forward: A pause in borrowing usually precedes a turn toward confidence, and a credit-boom. That's a danger today: that people will forget the lessons of the recession and go back to splurging. Time will tell.

Voters do not want to tackle entitlements

noreply@blogger.com (Realist Theorist) — Fri, 04 Jul 2014 19:54:00 +0000

In a previous post I predicted Social Security will be around for a long while. Briefly, if you are between 30 and 50 you will likely receive social security, but you will receive less than promised if you're in the upper-middle income range. (If you're 20 or so, I have no prediction to make. I wouldn't rely on it. Still, by the time you're 30, you you can re-evaluate the situation.)

The math of Social Security does not add up, but each time it has faced a crisis, the tax-rate has been raised. The Wiki has a table showing how it crept up, along with a list of changes, showing how "benefits" were cut, particularly at the higher end.

Even among "conservatives", only about 10% think social security should be phased out. Therefore, the program will stay. About 30% of voters, across the political spectrum, think benefits should be reduced, while the majority (60%) want the program kept as is. This means raising taxes is the most viable political solution.

Voters show a similar reluctance to changing Medicare (and Medicaid).

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Corporate Tax breaks

noreply@blogger.com (Realist Theorist) — Sat, 19 Apr 2014 12:00:00 +0000

"Tax break" is a fuzzy term, with no objective definition.

Personal tax example: My taxable wages already exclude some actual wages: my deposits to a "Health care Flex account"; the amount I put into my company's 401-K savings plan; the money my company pays directly to a health-insurance company on my behalf. The government is saying that if I spend my money a certain way, they will tax me less. Already, on the top line of my tax form, I've got three "tax breaks".

Continuing on, interest from municipal bonds is exempt from federal income tax. My dividends are taxed a bit lower. My investment income is broken into two parts: short-term gains and long-term gains, and I get a "tax-break" on the long-term gains. The interest I pay on my mortgage and on student loans gets me a deduction. Supporting a child gets me another deduction. My charitable donations earn me a deduction. Once again, the government is encouraging me to spend in certain ways, to have children, and to earn from certain sources. It's "tax-breaks" galore.

Flawed concept: "Tax breaks" are just part of the network of tax-rules. There is no objective benchmark or baseline from which we can measure. There is no "ideal tax" starting point, even approximately, that we can start with and say that any tax lower than that is a "break" and anything above is a "penalty".

Corporate tax breaks: Tax-breaks for corporations are no different. Just as the government encourages me to save or to spend on health-care or housing or education, similarly it might encourage a corporation to invest in machinery, to invest in solar energy, or a host of other things. The tax-rules are all man-made and arbitrary anyway.

Double taxation: In the U.S., large corporations pay tax as separate entities and cannot pass the net income back to their owners tax-free. If they do, the dividends are taxed. If they invest it internally, and raise the value of the company, the owners pay tax whenever they sell the shares at a profit. The rates are a bit lower, but this is still "double taxation". Viewed this way, any income tax the corporation pays is a penalty... an extra tax that comes from the arbitrary rule that it will be taxed twice. It follows that any "tax-breaks" to corporations aren't even breaks in the fuzzy sense: they merely reduce the double-taxation penalty.

Of course, "double taxation" itself is a fuzzy term that starts with the premise that citizens should pay a tax based on their incomes. This is an arbitrary rule, as are all the other tax-rules.

There is no such thing as a tax-break.

John Locke on innate ideas

noreply@blogger.com (Realist Theorist) — Sat, 29 Mar 2014 13:00:00 +0000

Rand says that ideas are not innate. Even the broad axioms like "existence exists" that everyone takes for granted have to be gleaned from experience. This is contrary to epistemology that says that certain fundamental axioms are known a priori (e.g. see Ludwig von Mises). However, Rand was not unique in rejecting innate ideas.

John Locke (Book 1 of "An Essay Concerning Human Understanding") argues against the notion of innate propositions. His opponents consider notions like "What is is" (similar to "existence exists") as being innate in the human mind. Locke sets out to refute this view. Broad "speculative propositions" about existence, non-contradiction and identity are not innate, but must be discovered by man, through the use of reason. Moreover, other knowledge is not derived are a deductive conclusion from these broad propositions.

Reason is the faculty to discover all knowledge: Having addressed "speculative" propositions, Locke then turns to moral and practical propositions. Ideas like justice, "do unto others as you would have them do unto you", worship and even the idea of God ... ... none of these are innate to man. While he agrees that many of these concepts and propositions are valid, true and useful, one cannot simply take these on trust or faith. One look purely within oneself for knowledge. Instead, man has to use reason.

Reject faith, and base the concept of God on reason: Locke explains that many men learn these broad principles at a very young age, and think of them as innate because they are so ingrained, and because all their neighbors seem to agree. Yet, says Locke, principles held like this stand on the shaky foundations that also include the superstitions of childrens' nurses and the fear of being different from one's neighbors. By his nature, man needs principles; therefore, a man who cannot or will not use reason to find true principles, will accept principles by default (e.g. from his culture).

Labor Participation

noreply@blogger.com (Realist Theorist) — Sat, 15 Mar 2014 12:00:00 +0000

Feb 2014 report: "Good news" - U.S. total employment is only a few months away from reaching its peak (2007-08). The total number of people employed fell off by about 6 million people, and has now risen over 5 million from the bottom. The "bad news" is: the working-age population grew by about 12 million in the meanwhile; and employment is only just getting back to the pre-12 million level.

Participation rate: Oddly, of those 12 million, 10 million say they aren't looking for work! The "participation rate" has plunged. Today, anyone listening to business news knows that is one reason the unemployment rate has improved; i.e. fewer people have been looking for jobs.

Not Early Retirement: The other day, a talking head on TV said that people are taking early retirement. Sounds plausible, but it shows ignorance. Here are two charts for U.S. men aged 55-64

The mid 1990s, saw a reversal of a long-term down-trend. Instead, more men in this age group have considered themselves part of the labor force (top line), and have actually been employed (bottom line).

Look at the blue ovals.

The recent recession has not seen any change in the percent who want to participate. The actual employment fell, and then has risen.

BTW, the gap between those two lines shows "unemployment".

Not an aging population: It is true that the U.S. population is aging, and it is true that this will continue to bring down the participation rate. However, this does not explain the last few years. Rather, it is the younger age groups that have seen a drastic fall off in participation rate.

More kids going to college full-time: Participation rates among younger age groups have fallen.

I don't know if kids are really going back to college at a hugely higher rate than before, or if they've simply given up looking, since their families can support them. I assume it is a mix of both.

College loans are up significantly. And, more kids are staying with their parents for longer. Chances are that many who have given up, would actually like to work.

This data is for males and females, summed up. That might explain the increase in the 1950s and 1960s.

Source: BLS series (LNU00000012Q,LNU01000012Q,LNU00024887Q,LNU01024887Q) with some computations and averaging.

Men 35-44 years: This is the best sex/age group to understand the core of unemployment. It is not confounded by three major social-trends: youth working vs. studying, women working outside the home, and retirement patterns. Here's what the data looks like for this group:

Long-term trend: The most striking thing is that the lower participation rate is a very long-term trend, not something recent.

In the 1950s, about 97% of men in this age group wanted to work. In the 1990s -- even before the dot.com bust -- it was 92%. So, where did that 5% go? What are they up to?

We know they are not in the army, nor are they incarcerated, because those two populations are excluded from the base numbers already.

In a 1980 paper "The Decline in Male Labor Force Participation", Donald Parsons created a model of how increased disability payments might, hypothetically, lower the participation rate. The projections matched the actual data, showing that the model was plausible.

Have more people moved on to disability rolls, supported by tax-payers? [Though disability rolls did rise since the dot.com bust, they only explain part of the data.] Are they being supported by family, and perhaps indirectly by other welfare schemes? Are they working, but saying they are not? I do not know. I would love to see a recent study that focuses on that 5% and explains why they are not looking for work, and who is paying their way.

Short-term: Consider the last two decades from the chart. The participation rate fell faster than trend during the current recession. This explains why many economists say that the major factors behind the drop are cyclical, not secular. In other words, the rate was falling, and the great recession caused it to fall much faster.

If so, we should see the rate start to flatten, and perhaps rise a bit, and finally get back to its downward trend.

If conditions in the economy improve, participation will stop falling, and the unemployment rate will stagnate, and may be rise. .

Summary: Long term participation rates are falling among working-age adults. The consequence is less people working to produce things in the economy. This is an important long-term issue, that ought to be address by cutting back on disability payments and other long-term welfare. The short term rate fell sharply with the recession, and will probably flatten, causing the unemployment rate to flatten too. The real danger is that we have a new recession sometime in the next few years, and our current position becomes the best we'll ever have!

[A previous post on the same subject is here.]

Theories of History: A survey of the "Mind drives History" theory

noreply@blogger.com (Realist Theorist) — Sat, 22 Feb 2014 10:00:00 +0000

“...You cannot resist an idea whose time has come.”(Victor Hugo). Actions flow from ideas. That's why tyrants imprison intellectuals.That's why the Stasi monitored and controlled the spread of ideas. (Movie to see: "The Lives of Others")

Religious view of History: The ancients thought God was the prime-mover of history. It was the unfolding of His plan. For polytheists, history might be a story played out between different Gods. Man could have a role: a King or a people could make God happy or angry, driving historical reward or punishment. God might give you a promised land, or send a plague. Religious guru Pat Robertson still thinks God rewards and punishes America from time to time!

Deterministic views: Secular historians are split. Some people see little pattern and lots of accidents, while others try to integrate history more broadly, seeing either nature or man as the driver. Jared Diamond argues that geography and the availability of domesticable animals lead to certain ways of working, and to certain human institutions. Then, as way leads on to way, one society ends up rich and industrial while the other stays primitive. Marxists speak of material forces and productive relations molding and driving ideas. In this view history is driven by man, but not quite consciously -- much determinism remains.

Ideas as the conscious driver: Finally, there are historians who say ideas drive history. At the level of a particular ruler, and one generation, Emperor Ashoka might massacre many thousands, but then he turns to Buddhism and becomes an entirely different ruler. A yarn says that, upon meeting Harriet Beecher Stowe, Lincoln greeted her by saying, "so you are the little woman who wrote the book that started this great war." While false, the fable reveals the thesis. Across generations, the spread of Confucian ideas can mold the culture, with historians tracing elements down to the way Chinese rulers run their country today.

Gibbons ("History of the Decline and Fall of the Roman Empire") blamed the adoption of Christianity by Roman elites as a major factor in undermining a previously worldly culture and thus weakening the Empire. He speaks of the Christian belief in the importance of an after-life as undermining a focus on this real life.

Consider Max Weber's thesis: praising the Protestant work-ethic and the ascendancy of individualism created by the idea that the priest and church (the social hierarchy) is not the ultimate arbiter of truth, and crediting this with thriving Capitalism in Northern Europe and the British Isles (which we can extrapolate to America). Thomas Macaulay sees a deeper ideological trend, where successive generations threw off their superstitions and adopted a more secular and worldly epistemology. The Italian Renaissance is usually traced to a similar epistemological evolution, driven by the rediscovery of Roman and Greek philosophy.

Thomas Carlyle thought that hopes, aspirations and ideas of the people at large formed into ideologies, and created competing forces. Then, certain men came along and took charge of those ideologies, or helped mediate between competing ideologies, becoming leaders and shaping the political system.

John Locke: The ideology of the American Revolution can be traced to Thomas Paine's best-selling "Common Sense". While aimed at common folk and even illiterate listeners, its ideas can be traced back to John Locke. In turn, one can trace his political ideas to his epistemology ("An Essay Concerning Human Understanding") which put reason front and center as the practical fountainhead of knowledge.

Gustave Le Bon (The Psychology of Crowds - 1895) said this: "The great upheavals which precede changes of civilisations such as the fall of the Roman Empire and the foundation of the Arabian Empire, seem at first sight determined more especially by political transformations, foreign invasion, or the overthrow of dynasties. But a more attentive study of these events shows that behind their apparent causes the real cause is generally seen to be a profound modification in the ideas of the peoples." (emphasis added)

Keynes said, “Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.”, but what he left unsaid was that economists like him would not weigh the individual versus society the way they do, except that they are slaves of some "defunct" philosopher. Keynes can channel Plato without being too conscious of the ideas that have come to him via cultural osmosis.

Summary: Regardless of what theory you support, one thing is clear: many historians draw a link from philosophical ideas, to major historical events. Many of these theories are fleshed out in great detail in their works, examining other factors that help take an idea to fruition. In this post, I do not want to praise the "mind-driven" theories over theories like Jared Diamonds. My purpose here was merely to survey some of the popular advocates of the ":mind drives history" genre.

Bonus: Enjoy this theme in the poem "We are the music makers..."

We are the music-makers,
And we are the dreamers of dreams,
Wandering by lone sea-breakers,
And sitting by desolate streams.
World-losers and world-forsakers,
Upon whom the pale moon gleams;
Yet we are the movers and shakers,
Of the world forever, it seems.

With wonderful deathless ditties
We build up the world's great cities,
And out of a fabulous story
We fashion an empire's glory:
One man with a dream, at pleasure,
Shall go forth and conquer a crown;
And three with a new song's measure
Can trample an empire down.

We, in the ages lying
In the buried past of the earth,
Built Nineveh with our sighing,
And Babel itself with our mirth;
And o'erthrew them with prophesying
To the old of the new world's worth;
For each age is a dream that is dying,
Or one that is coming to birth.

Arthur William Edgar O'Shaughnessy

A Debt Ceiling is a good thing

noreply@blogger.com (Realist Theorist) — Sat, 08 Feb 2014 19:53:00 +0000

Two laws that disagree: The U.S. government budget has a deficit. This deficit adds to the debt. By approving the budget, Congress implicitly approves an increase in debt. However, the U.S. also has a debt-ceiling. Debt cannot go beyond this without Congressional approval, even if Congress has already approved a budget that pushes the debt higher.

Why have two laws that can conflict? Secretary Lew says this does not make sense; but, he's wrong. The budget is only an approximate forecast, and that's all it can be. A budget might set some tax at 33% of income, but how much taxable income will people have? If it is less than forecast, the tax inflows will be less than forecast, and the deficit will be higher.

Personal budget ceilings: Analogously, I might plan on buying ice-cream for the kids once a month, but the number of kids at practice varies. Across all sorts of expenditures, in some months I might blow my budget. So, I might have a second control: e.g. I will not let my bank account go below $X , or I won't let my credit card balance go above $Y. If I suddenly have an expensive car-repair, ice-cream may take a hit: the budget bows to the ceiling. The ceiling rules because it is the simpler rule about net-impact. I budget all these things, but will not break my ceiling. If I am likely to, I must start to cut.

Ideally, the government would not run deficits and government debt would be ZERO. We should cut government expenses, including social-security, student-loan subsidies, and so on. Meanwhile, from where we are now, we should start by strengthening the debt ceiling.

A stronger debt-ceiling: For instance, we could have a law that says this: when CBO scores a budget, the projected debt should end up at least 5% below the debt-ceiling. If it does not, the budget needs to be re-worked. If Congress cannot agree to re-work, all government expenditures, including expenditures on "entitlements" like Social security should be reduced by x%, in order that the projection comes back to 95%. Then, each quarter, the CBO should be asked for a revised estimate, and if the debt is projected to be over 95%, the same thing should take place.

Today, the debt ceiling is a stumbling block that forces congressional negotiation. That can be a good thing, but I'd rather see it strengthened, have it work to reduce the budget automatically, and also -- most importantly -- impact "entitlements". That could be a debt-ceiling worth fighting for.

Most religious states in the U.S.

noreply@blogger.com (Realist Theorist) — Wed, 05 Feb 2014 01:47:00 +0000

Gallup just released its poll of religion across states. To be classified as "very religious" the respondent has to say that religion is important in their daily live and also that they attend religious services almost once a week. So, these are "regular church-goers" and their cohorts across other religions. The non-religious say religion is not important. The "moderately religious" say religion is important, but don;t attend regular services.

The bad news is that this year's poll slightly reversed the trend, moving slightly back toward religion (this is a poll of about 175,000 people). Check out the original link, above, for a listing of all the states from high to low.

I took the top ten and the bottom ten states. For these, I checked out Dave Leip's excellent "Atlas of U.S. Politics", getting presidential results for each of these states for 1996 through 2012. I wanted to visualize red-states and blue-states, and their correlation with religiosity. Here is the result:

Except for Bill Clinton's second-term election, the red/blue divide correlates almost perfectly with religion.

Personal savings flat once more

noreply@blogger.com (Realist Theorist) — Thu, 26 Dec 2013 15:35:00 +0000

A downturn in the economy or the stock-market usually causes people to pause spending to see where the chips will fall. Even people/businesses who think their jobs/revenues are relatively secure become cautious. This caution, in turn, implies less sales for some businesses, creating a downward spiral. Only to a point, though: as it spirals down, business profits start to increase and personal savings increase too. Confidence starts to come back.

Savings rate: The red circles in this chart show temporary increases in the Personal Savings Rate during recessions. Unfortunately, after each recession the personal savings rate started to decline once more.

We see that the savings rate has flattened once again. This is the flip-side (and downside) of confidence. [Update (2017/June: This rate still remains mostly above the 5% mark]

Retirement confidence: Compared to previous years, workers who are still employed are less confident that they will have enough money to live comfortably in retirement. (Source: EBRI Retirement Confidence survey). About 28% say they are "not at all" confident, compared to about 10% - 15% before the current recession hit.

Here's my rough chart, pulled from the EBRI details. It shows the breakdown (total 100%) in three categories of confidence.

On average, social security makes up over 40% of retirement income, and this is likely to continue for the middle class and below. The upper middle class, will get less than was promised, but often they're also the ones who saved a bit more on their own. The rising labor-participation rate among older workers shows that some are adjusting by working longer than they'd expected. (For most, one extra year of work can mean in inflow higher than multiple years of returns on their retirement accounts.)

Spending: According to a Gallup poll, in 2009, about 50% of Americans said they were "spending less". Today, only 40% say they're doing so. This is to be expected as confidence grows. When the recession hit, the bulk of the working population who still have their jobs pause large expenditures, cut out a few luxuries, and shop smarter. As things settle down and the world has not ended, things go back to normal.

As this Bloomberg article says, people have been more willing to raise their purchases of cars and durable goods, but are still cautious about spending on services. Where I live, the price of a haircut has not budged for almost a decade!

What's next: As a group, Americans need to save more. The downside of growing confidence is that people stop fixing their spending patterns. It would be great if Washington would re-start the conversation about Social-security, to remind people that they need to be saving more, because the government will be giving them less. That's not on the cards. Perhaps a mini-recession within this recession could be a wake up call!

How're we doing? (A review of 2013)

noreply@blogger.com (Realist Theorist) — Thu, 05 Dec 2013 11:32:00 +0000

Overview: Slow economy, rocketing stock market! Since the 2007-08 downturn, most measures of the economy have stabilized. Despite this, total-employment is still lower. The broadest GDP measure has been increasing very slowly. Meanwhile, house-prices have turned up for the last two years, and the stock market is at an all-time high.

Corporate profits are high since GDP is growing slowly while firms have kept a reign on costs. In addition, companies have been buying back stock at above-average levels. This is different from the type of excitement that drove the dot.com boom, because it does not cascade into higher salaries and expenditures: quite the opposite. In the short/medium term, this does not bode well for employment numbers and wages.

Here are some of the details:

Employment: Though the unemployment rate has been falling, it is mainly because so many people (particularly younger folk) have given up looking for jobs. For the core age-range 25-54 years, employment % is flat.

(BLS has latest data)

Real GDP: Real GDP picked up after pausing for about a year. It is growing slower than before, with people like Bill Gross of PIMCO saying we're in a "new normal". The graph is from the FRED database. The Y axis uses a log-scale, to make it easier to see growth rates. I have added hand-drawn, rough (by eye) "trend lines". Real GDP has grown steadily after each recession, but the rate has slowed a few times. With that said, the current trend is not long enough to tell; see how it was similarly slow in the late 1970s.

Here is a per capita version: The flattening is clear.

Retail Sales: Have resumed their pre-recession pace. A flat first half of 2012 now looks like an inconspicuous blip.

Home prices:
The Case-Schiller index has been rising for two years now.

Price-rise: The CPI has stayed relatively low -- under 2% for the last year. Using the TIPS to calculate the market's "expected inflation" shows it is under 2% going out 10 years, reaching 2% only 30 years from now!

Summary: There is no enthusiasm about the economy. The Christmas season might improve on last year, but it is unlikely to be great. Consequently, companies are unlikely to raise hiring or wages much more than they've been doing. Government entities aren't likely to go gang-busters either. At the Federal level, even without another debt-limit stand-off, we will probably not see a new fiscal splurge. So, "new normal" seems appropriate.

Even though the stock-market is booming, it is without excitement: more like "there's no other game in town, while the FED keeps rates low; and, profits are high through cost-control". The divergence cannot go on forever, but it can resolve itself in various ways. Much of the market-sentiment is driven by what John Hussman calls "superstition" about the Fed's ability to keep this playing out for a many more years.

I still think a new downturn is very likely before Obama's term ends. Let's see.

Twitter feed

noreply@blogger.com (Realist Theorist) — Mon, 14 Oct 2013 10:33:00 +0000

If you use Twitter as your main article/link "feed", use the button below to get a tweet whenever a new post is added to this blog.

Follow @PracGoodTheory

Smoke and Mirror recommendations -- Vox Populi

noreply@blogger.com (Realist Theorist) — Sat, 12 Oct 2013 14:21:00 +0000

What do socialite Lois Pope and lawyer Tim Broas have in common?

Someone is paying for Google-searches of their names. "Reputation" firms offer a few cents for each search. Some paid-search is legit (e.g. keeping tabs on where one ranks), but most is an attempt to "game" widely-used search-engines..

Fake everything: Other than search, "workers" will post fake reviews for books, and even for photo-portfolios put up by models. They will plagiarize articles and post them to a site that is pretending to be informative. Recently, a businessman was convicted for posting negative Yelp reviews about his competitor's business. Another businessman claims that Yelp offered to bury negative reviews for a fee. The New York attorney recently went after people posting fake reviews to Yelp, and other such sites. Even the Israeli government is paying students for positive reviews. Wikipedia just cancelled 250 sock-puppet user accounts used by a paid PR firm.

Physical world: Back in the physical world, the author of "Leapfrogging" figured out how to make the WSJ Best seller list: by selling 3000 copies rapidly. This is achieved by having 3,000 orders being placed on Amazon prior to publication, so that they're all triggered when the book hits the street. Via Amazon Mechanical Turk, you can have 3,000 separate people place orders for your book, and even have them delivered to (say) 3,000 CEOs. [Perhaps WSJ should shift to a monthly-model, and also publish a list of books where sales suddenly plummeted.]

Detection and Control: Yelp says they suppress 25% of reviews as suspicious. Google tries to counter fake searches. That's why "reputation" firms limit how much they pay per 'worker' per day (so that Google does not get suspicious?) They often disallow workers from India, Pakistan, Philippines, etc.,

Ideas: Google should sign up as "workers" and do some "fake search" assignments. Except, instead of adding to real search results, they should collect details of who is paying for search, and then bury them. Another counter-intuitive possibility is to make a tool that makes fake-search easier for the "workers". If they could offer workers a tool that makes fake search easier (e.g. by doing multiple at a time, and by being tailored to the types of things "reputation" firms ask for) they could allow workers to earn, while the "clients" wonder why their page-rank falls. Google should have true stories to tell, about people who tried all sorts of techniques, but got buried as a result. Another counter-measure would be for Google to pretend to be a "reputation" firm, hire workers, collect their IPs, and stop recording their searches for ranking.

Not new: Fake reviews are not new, as anyone with an Amway or Herbalife "friend" can tell you. Yet, those two companies have great sales and profits, so pretence can work on some, and to some extent. I think it will always be that way: people will use "signals" that are flawed. It is similar to people who use the Nobel Prize or the New York Times as a signal, to conclude that Paul Krugman's spin is more accurate than (say) Tyler Cowen's balanced approach.

Caveat Emptor: People will always try to game a system: i.e. to achieve the "letter" of the metrics, without fulfilling the spirit. Advertising is useful, but comes packaged with spin. For the Oscars, panelists get "background" presentations, trying to influence them in favor of the pitchman's movie. You cannot be immune from being fooled by smoke and mirrors, but I'm confident that rational folk can adjust to the new fakeness like they did to the old. While Google and Yelp help by counter-measures, everyone else can keep the impact low by healthy scepticism. Let your cousin buy the network-marketed mattress with magnets -- it ain't for you.

The Great Degeneration - by Niall Ferguson

noreply@blogger.com (Realist Theorist) — Sun, 22 Sep 2013 12:50:00 +0000

In "The Great Degeneration", Niall Ferguson argues that the west is stagnating because of broken "institutions".

The cause of Ascendancy: Ferguson rejects Max Weber's "cultural" explanation of a Protestant-driven industrial revolution. After all, the same root "culture" ended up in a very different East and West Germany or North and South Korea. While Jared Diamond's "geography" might explain why Eurasia was wealthier than the Americas, it does not quite explain the ascendancy of Western Europe. Finally, iIf genes are crucial, how to account for the gap between East and West German IQ scores, and how to explain why Eastern genes did relatively well until the last few centuries? The crucial factor, says Ferguson, is the socio-political institutions adopted in some countries: property rights, rule of law, and private voluntary organizations.

The role of Philosophy: He is right, but this explanation is incomplete: why did certain institutions develop in certain countries? Did human experimentation just happen to hit the right mix in England, or is there more? Even if the concretes of "the Protestant ethic" cannot get all the praise, there were important abstract ideas behind it. The key was the growing element of individualism. The preceding Renaissance gives credence to this more abstract version of Weber's thesis playing out in Catholic countries. Undercutting the role of church and monarch, and promoting the efficacy (and then the rights) of individual men, was a key movement that changed everything.

Critical Institutions: Ferguson thinks the British turning point came with the 1688 "Glorious Revolution" when the "rent-seeking", "extractive" elites -- the nobles -- began relinquishing power to newer elites. These new, non-hereditary elites were more inclusive; they needed and built institutions based on property rights. (Aside: Echoes of Rand's notion of an "Aristocracy of Money", replacing the old nobility. In George Bernard Shaw's play "Widower's House" we see denunciation of a slum-landlord, but the socialist author also shows regret at the way the nouveau riche can marry their way into the old aristocratic families.) Not surprising, though, that an aristocracy of money should engineer the creation of wealth. Even Whig wars, says the author, were waged less for glory than for profit. Ferguson praises the work of Hernando de Soto , arguing the importance of formal property rights. There is growing recognition that in some African countries, tribal-land, not yet allocated as individual property deeds, has held back development, invites corruption of tribal chiefs, and raises the importance of family and social ties relative to the ability to create wealth.

The East rises: Ming & Qing China did not experience the types of changes happening in the West, and Islamic law held back certain types of institutions. Meanwhile, the modern era began with colonialism replacing monarchical rent-seeking through extractive policies of its own. Post-independence elites imposed their own corrupt regimes, often breaking down even the good institutions of the colonists. Recently, non-European countries have recently been moving toward a rule of law. The process (from Paul Collier) is: reduced violence, property rights between citizens, checks on government, lower corruption.

The West stagnates: Meanwhile, says Ferguson, institutions in the west have weakened. The law (including regulation and licensing) has become overly intrusive and complicated -- law for lawyers -- ending up being a negative force. In addition, it pushes a uniformity of method that undermines variation and adaptive evolution. (Even in the private sphere, bureaucracy like ISO-9000 driven QA always results in lowered productivity. Add in "Sarbanes Oxley", Dodd Frank, environmental regulations, and the costs mount. We see Germany abandoning nuclear energy and the U.S. preventing the Keystone pipeline; just two examples of the purposeful retardation of wealth-creation that has become routine.)

Entitlements: Ferguson sees the high government debt-levels as an indication that the system is broken: with inter-generation inequity being a key problem. He muses on the irony of the younger generation supporting politicians who want to ignore the issue, rather than people like Paul Ryan (who at least talks about social security). Young people rose up in the "Arab Spring", and Ferguson wonders if young people will rise up in the West some day. (Actually, we have seen some of this in Greece, and perhaps a little taste in the U.S. "Occupy Wallstreet" movement and in the enthusiasm for Rand Paul.)

The way out: Can the west stop this process without first going through a big shock? Ferguson thinks the only alternative is if "civil society" institutions can once again increase their role in education, safety-nets, local projects. He thinks government involvement has lessened the support for such organizations and has made the system more fragile.

This short book is an easy read, and Ferguson seems to have the history right. Unfortunately, he does not really offer much in terms of predictions or solutions.

U.S. Participation Rate

noreply@blogger.com (Realist Theorist) — Sun, 08 Sep 2013 16:50:00 +0000

If you follow economic news, you know that the "participation rate" (the % of people who say they are actually looking for a job) has been falling in the U.S. [See the blue line in the chart.] [Source: the great Calculated Risk blog.]

The overall participation rate was expected to drop as the "baby boom" generation retires. That's not the cause though. As this chart shows, the participation rate within the 25-54 year group began to fall after the dot.com bust, flattened out, and then began to fall again after the housing bust.

This age group does not go back to college in huge numbers. Some of them were probably part of the huge increase in "disability" rolls. Others probably stay home with a spouse to support them, having decided to wait things out until the economy improves.

Changes, by Age and Sex: How has the housing bust impacted participation rates across age and sex? For example, people around 65 years old have a lower participation rate than those around 45. However, which one changed most? If the participation rate in 1990 was the baseline, what was the change to 2000, and then to 2010? This might point to behavioral changes. Here's my chart of the numbers. Scan down the right-hand side to get a feel of the distribution. (Source: BLS Table 3.3)

Late to work / Late to retire: The most striking thing about the chart is that the participation rate is increasing among older folk and falling among the young. This is not necessarily a bad thing. Indeed, as more kids opt for college and as older people are in better health, these two are trends to be expected. However, look at the line for Men 16-19: it was already dropping into 2000, but it has plummeted after that: clearly, the housing bust has made a difference. Or, take Women or Men 62-64 and notice that more of them were already staying in the workforce, but the housing bust has made this shoot up much more. The impact shows up more in the 20-24 group: men's participation was already falling, but plummeted; women's participation was rising slightly, but turned down.

Men 35-54: Also note the lines for Men 35-44 and 45-54. The housing bust did not impact the trend since 2000, but why has the trend has been negative since 2000? I wish there were more statistics on the reasons behind the fall in their participation.

Focus on the post-2000 change: What if the 1990-2000 trend had stayed steady for each age/sex group? How does the 2010 data differ from such a steady-change assumption. I end up with a new chart.

Once again, the most stark change is by age. There was a trend for older people to work more, but the housing bust has clearly forced more of them to postpone retirement. The youngest have clearly put off getting jobs much more than we could have predicted from the trend.

Of these, the more troubling are younger people who are staying at home, or using some very general and basic college to pass time.

Structural changes: The most negative structural change is probably not at the extremes. The fall-off in participation rates among both men and women aged 35-54 is probably here to stay. It is around 2%, but it does add the the drag on wealth-creation and points to a "new normal" of lowered GDP.

Geeky footnote on the calculations: The charts are drawn by subtracting one rate from another (say the rate in 2000 from the one in 1990). It would have been more accurate to express the change in the rate as a percentage of the original rate. However, doing so does not change the conclusions, so it was not worth it. Also, the dates are chosen because they are census years, the actual inflection point were different.

Once again, the most

How're we doing on Home Prices (July 2013)?

noreply@blogger.com (Realist Theorist) — Thu, 18 Jul 2013 03:49:00 +0000

The first two measures compare prices to rents and to median income. Doing so, factors out the "nominal" aspect of price-change.

Price-to-Rent ratio: Over a year ago this measure was almost down to the 1990 average. Since then, it has almost flattened out, falling only slightly.

Source: As always the best source for such charts is the Calculated Risk blog.

Price-to-Income ratio: A very similar pattern here. (Caveat: Chart only up to 2011)

By both these measures, we can see that prices are slightly above their historical average, but only slightly (and way below their boom-time prices). They also seem to be flattening out.

Seems a decent enough time to buy a home.

Debt Obligation Ratio: Instead of price, this measure looks at the monthly payments. Since interest rates are low (they've risen in the last month though), by this measure people are spending a historically low percentage of their incomes on mortgages. Other consumer debt is not high either, by historical comparison.

Again, a decent time to buy. In fact, if one considers interest rates to have bottomed, it's a good time to buy.

Home ownership rate: This is the one measure of these four that is not so great. Though it is off its peak, it is not down to historical levels.

In other words, there is no huge "pent up demand" for homes.

Summary: Home prices could drop a bit it more while bottoming out. However, it seems a reasonable time to buy, base on "U.S. averages", if one plans to keep the house for many years. Buffett and Schiller have been saying so for about a year, and they're pretty savvy on this topic. The numbers above support them.

Caveat and Disclaimer: It's said that "all real estate is local". All the graphs above are national averages; local situations can vary quite widely.

How much Social Security will you receive?

noreply@blogger.com (Realist Theorist) — Tue, 14 May 2013 15:30:00 +0000

Will social security be there for you? It is almost cliche to say "it will be gone by the time I retire". Yet, almost everyone is relying on it. Are you relying on social-security to be there for you? If you're preparing for the worst, good for you; but, what's the most likely way in which this will unfold?

How are "benefits" calculated? This a very rough calculation:

First, estimate your average annual salary over your lifetime (up to the max. of about $100K, after which payroll taxes are not deducted).
You are promised $90 for each $100 of average earning, but only for the first $9000. Then, for the next "slab" you are promised 30%. Finally, for anything over $55K, it is 15%. (Benefits are indexed to CPI. These numbers assume 2010-equivalent dollars.)

Sample calculation: Suppose you just retired, having started working in the late 1960s. Your peak earning years were probably around 1990. Let's say you earned an average of about $ 32,000 per year. Suppose that (adjusting for inflation) it works out to $60,000 per year in 2010 dollars.

Look at the blue line in this graph. For an average of $60,000 after inflation adjustment [x-axis], you are promised a benefit of around $25,000 a year [y-axis].

Similarly, someone who earned an average of $100,000 gets just $30,000 in benefits.

(Use the "retirement estimator" at the SSA site, to get a better estimate of your promised benefits.)

So now you know how much you are promised. Next, look at the red line. That is my best guess for what you will actually get. At $60K, you will get $18K a year instead of $25K. And, if you are at $100K, you will get about $21K instead of $30K.

Anybody who is 30 to 50 years old should not expect to receive any more than this. If you are in your 20s, I have no guess for you. Don't bank on much.

(Warning: This is NOT expert advice. Expect real numbers to be quite different. Check everything with your accountant.)

My key assumption is that at some point, when as it becomes increasingly more obvious that Social Security must change, the country will implement some "middle-of-road" plan that uses elements from the various proposals now on the table. I assume it will be close to the "Simpson-Bowles" plan, because that one was bi-partisan.

Simpson Bowles (Dec 2010): A bi-partisan congressional group proposed changes in social-security, in order to extend its life. The red line in the diagram above shows their proposed benefits. It makes the benefit-schedule more "progressive" (i.e. the richer you are, the less you "get back"). A person with the higher average earnings will "lose" a larger amount. Depending on your level of income, instead of the current promise to pay you 30% - 42% of your average salary, the new promise will be to pay you about 20% - 35%. [Note: These changes are phased in gradually. The promises will be lowered a bit each year.]

Other Simpson-Bowles recommendations:

Raise retirement age: under current law, it will rise to 67 year. They propose it keeps rising, linked to life-expectancy. They expect the retirement age to be 68 year in 2050.
Raise the maximum salary cap for payroll-tax, from the current $107,000 to the equivalent of about $170,000. This means that people earning above $107,000 in salary will pay a 13% tax when they otherwise would not. Since they only "get back" 5%, this is just a way to tax "the rich" (aka anyone who earns over $110K or so).
Use a "chained-CPI" cost-of-living formula that increases benefits at a rate that is slightly lower than the standard CPI (Consumer price index). [President Obama actually proposed this if the GOP would give him something he wants in return.]

Paul Ryan's proposal: GOP Congressman Paul Ryan also proposes to raise payroll taxes (without changing the rate) as a side-effect of making employer-provided health-care benefits a part of income for social-security calculations. He will also lower promised benefits for those 55 and below today, particularly higher-earners. He proposes raising the retirement age. In addition, there is a minimum payout for those at the lowest end, somewhat analogous to the minimum wage.

Free-market proposal: Paul Ryan's proposal also contains something that Republicans might see as a free-market component. It allows retirees under 55 to save one third of their social-security taxes in a savings account. This would be something like an IRA, but Ryan adds a government guarantee that the account will not lose money! The only way the government can make such a guarantee is if it limits the types of investments in such an account. This is definitely not a free-market solution. The government should not be ensuring that people save. Further, the government should not be choosing where we can invest our savings. The danger is that investment vehicles vie for whatever government certification is required. We've seen what a poor job the FDIC has done ensuring the safety of bank deposits. We've also seen how poorly the government-approved credit-rating agencies performed. Given this history, a pseudo free-market system versus a fully and honestly government-run system is a poor choice of options.

Rand Paul's proposal: Representative Rand Paul, who positions himself as a libertarian-leaning GOP politician has a proposal too. He would increase the retirement age and means-test the benefits. "Means-testing" is a Republican-approved way of taxing the rich. This tells us that the final law will tax "the rich".

The context of the Federal budget: Entitlements are the really serious threat to the U.S. Federal budget. However, within entitlements -- believe it or not -- Social Security is the easy problem to tackle. Mathematically, Medicare -- with its sky-rocketing costs -- is the bigger problem by far. That'll have to wait for another post.

What will become law? Currently, no concrete plan has substantial support, but the proposals above give us some idea of how things will transpire. Simpson-Bowles was a bi-partisan commission. Paul Ryan and Rand Paul are seen as more pro "free-market" than the average Republican. All three of these proposals have two common themes:

Cut benefits in some "progressive"/means-tested way
Raise the retirement age

Also likely:

High-earners will pay more social-security tax (by raising the cap)
Slower cost-of-living increases

The ideal: I would like to see Social Security wound up. People can save for themselves, without government "help". Politically, this will not happen in my lifetime.

Fix social-security today, and forever: If we absolutely must have social security, I propose a simple rule.

"Every year, the social security administration
will pay out

only the amount it takes as payroll tax."

This would solve social security's funding problem overnight and permanently. It is not rocket science to stick to the basic principle of never, ever running a deficit in the social security program.

No more deficits: Such a scheme would be infinitely more honest than what we have today. For example, recently the government has cut payroll tax from 15.3% to 13.3% for two years to "help" get through the recession. Meanwhile, payouts to retirees remained unchanged. Sorry folks, there is no free lunch. Either cut the payouts too, or let the tax be.

Want to pay out more to seniors? I'm not happy about it, but at least do not borrow. Man up... pay for your desires. Raise the payroll tax if you want to raise the pay-outs.

Want to help the poorer among the retired, particularly when the economy turns down and we started screwing them with minuscule interest rates on the small nest egg they put into CDs? I'm not happy about it, but if you must do not borrow more. Man up... pay for your desires. Or man up and sock it to the richer retirees. Or, raise payroll taxes on people who still have jobs.

If voters want a statist safety-net with income redistribution, let us at least not have it open-ended and hanging over the heads of our children. Pay up now like honest folk would.

(Published Sept 2012. Updated May 2013.)