Comments on economics, mystery fiction, drama, and art.

Wednesday, June 24, 2015

The Gambler's Fallacy

And getting the analysis wrong.

I recently read (somewhere) which used this example:  Suppose you are playing blackjack, and you have lost 20 consecutive hands.  Are you more or less likely to win the 21st hand?  Whoever wrote that post (and I can't remember who, or where, and I haven't been able to find it) argued that your odds of winning the next hand are unchanged.

Well, maybe not.  Consider a coin flip (of a fair coin).  The odds of a head on any flip are 50%--because the flips are independent of each other.  Or suppose you are doing the other old standby--picking a marble from an urn, and you are (reliably) told that of the 1,000 marbles in the urn, 500 are red and 500 are white.  You pluck out a red marble, than toss it back in, and the urns is shaken to re-mix it.  Your picks are, again, independent of each other.

Now, suppose you are playing blackjack at a Las Vegas casino.  According to this source, the most common games use 6 or 8 decks at a time.  But the play is without replacement of the cards used in the current hand.  It's as if you drew a red marble from the urn and, instead of replacing it, you threw it away.  The odds of winning in a blackjack hand are, in fact, dependent  on how the play has gone so far from those 6 or 8 decks.  It is precisely the fact that blackjack hands are not independent that makes card-counting a viable strategy (and why casinos try to identify and throw card-counters out).

Any card game in which play is without replacement is a game in which your odds can change as play progresses.  You just have to know what sort of game it is.  And be willing to do the work to figure out how the odds have changed.  And counting a 8-deck shoe in a casino is hard, even if you work very hard at it.

Monday, June 15, 2015

Where's the Skills Gap?

Tyler Cowen spotlights a blog post presenting some analysis suggesting that the US economy, and particularly the goods-producing part of it, is experiencing a skills gap--firms want to hire people with skills that are not available among the unemployed, or among discouraged workers.  The author reaches this conclusion "...the US has gutted its manufacturing base, creating a large deficit of skilled manufacturing workers. The skills gap therefore is likely to persist for years to come, creating a material drag on economic growth."    It's worth looking at the analysis, and the evidence presented there.

The evidence there is substantial, and has to be considered.  But I think there's some other evidence that should also be considered:  What's happening to average weekly hours, to overtime hours (among workers with overtime), and to real average hourly earnings.  Using BLS (monthly, not seasonally adjusted) data, here's what I find:

(Click each diagram to enlarge.)

All three show essentially the same pattern--declining weekly hours and weekly overtime during the recession; declining average hourly earnings during the recession, all followed by recovery and then plateauing around 2010 or 2011.

This is not, it seems to me, consistent with a skills shortage.  Firms would want to extend the hours of existing workers, offer more overtime, of offer higher pay.  Yet none of that seems to be (systematically) happening.  If there is a skills shortage, why is it not showing up in these data, in addition to the data in the post I've linked to above?

Friday, June 05, 2015

A comment on this: "Report: Social Security overpaid disability benefits by $17B": Context, folks, context

I don't mean to dismiss concerns like this:
Social Security overpaid disability beneficiaries by nearly $17 billion over the past decade, a government watchdog said Friday, raising alarms about the massive program just as it approaches the brink of insolvency.
Many payments went to people who earned too much money to qualify for benefits, or to those no longer disabled. Payments also went to people who had died or were in prison.  In all, nearly half of the 9 million people receiving disability payments were overpaid, according to the results of a 10-year study by the Social Security Administration's inspector general. 
Social Security was able to recoup about $8.1 billion, but it often took years to get the money back, the study said.
But let's look at it a little more closely.  After the recovery of $8.1 billion (and ignoring the administrative costs of that recovery), we're left with  $8.9 billion in excess payments, to 4.5 million people.  That's about $2,000 per over-payment case.  And disability benefits tend to be paid for multiple years; if the over-payments persisted for an average of 5 years per case, that's around $400 per year per case, or about $34 per month.  So it's pretty clear that no one was getting rich off of this, or even living all that well.

For context, in the 10-year period 2004-2013 (the most recent period for which I can find data), total disability payments were, um, $961 billion.  So the unrecovered overpayments amounted to, ah, 0.8% of the total disability payments made.*  (Note, as well, that this does not account for any under-payments that occurred.  And I'm sure there were some.)  A problem to address, to be sure.  But a significant cause of the financing problem faced by the disability system?  Probably not.

*I'd be interested in knowing the error rates for things like private health insurance plans.

Tuesday, June 02, 2015

Genrating Wilderness

This is one of the most important things I have read lately, and the diagram below is one reason why--we can return land--physical space--to wilderness without necessarily sacrificing our material standard of living.

(Click to enlarge.)

(Props to The Growth Economics Blog.)

Thursday, March 26, 2015

Part 3

I keep thinking about what state legal regulations might "substantially burden" my life as a business owner (keeping in mind, as I try to remind people, it is illegal, under federal law, to discriminate against potential customers on the basis of age, sex, national origin, or religion).  And I read stupid stuff, like a comment about how an Islamic (or, presumably, Jewish) business owner could get in trouble for not serving ham, that's not what the law are perfectly at liberty not to sell ham sandwiches (or to sell ONLY ham sandwiches)...but should you be at liberty, in operating your catering business, to sell sandwiches to mixed-sex wedding receptions and not to same-sex wedding receptions?


Here's an *existing* state regulation that arguably does burden a business owner's exercise of religion. In Indiana, sale of alcoholic beverages is prohibited on Sunday. Suppose I am an orthodox Jewish owner of a liquor store (or a chain of liquor stores), and my religion pretty much says I must be closed on the Sabbath--Saturday. Other liquor stores get to be open 6 days a week; I can only be open 5 days a week, if I "exercise" my religion. Sounds like a substantial burden to me. (One can do the same thing for almost any business owned by orthodox Jews, or Seventh Day Adventists, and so on. The liquor store example is telling, because it requires store closings on the Sabbath of a *particular set of religions.*)

Feel free to propose other plausible examples that do not include discrimination against a *class of customers* in comments. I will delete any comment that proposes discrimination against a class of customers.

More screwing the pooch


I continue to be amazed by the willingness of legislators to put the burden of figuring out where they will be able to shop. or find professional services, on the people we are allowing business owners to discriminate against. Talk about placing "substantial burdens" on people...Maybe the laws should require business owners who plan to discriminate to put BIG signs on their storefronts, websites, etc., saying "We refuse service to ..." That'll make it easier for the rest of us to say "We refuse to patronize businesses that discriminate."

Wednesday, March 25, 2015

Indiana screws the pooch

Begin rant.

Well, the Indiana State Legislature has passed, and our governor has signed into law, an abomination titled formally the Religious Freedom Restoration Act (you can read it here, if you are so minded:…).

The two key sections appear to be Section 8 and Section 9 (what precedes those is mostly definitional). They read as follows:

Sec. 8. (a) Except as provided in subsection (b), a governmental entity may not substantially burden a person's exercise of religion, even if the burden results from a rule of general applicability. (b) A governmental entity may substantially burden a person's exercise of religion only if the governmental entity demonstrates that application of the burden to the person: (1) is in furtherance of a compelling governmental interest; and (2) is the least restrictive means of furthering that compelling governmental interest.

 Sec. 9. A person whose exercise of religion has been substantially burdened, or is likely to be substantially burdened, by a violation of this chapter may assert the violation or impending violation as a claim or defense in a judicial or administrative proceeding, regardless of whether the state or any other governmental entity is a party to the proceeding. If the relevant governmental entity is not a party to the proceeding, the governmental entity has an unconditional right to intervene in order to respond to the person's invocation of this chapter.

 There is no definition in the law of "substantially burdened," although that may be a term of common meaning to lawyers. There is no attempt to identify what constitutes a substantial burden. These is no indication of what constitutes proof of a substantial burden. I think it's possible to make a coherent argument either (a) that almost any government regulation could "substantially burden" someone because of their religious beliefs or (b) that no regulation could possibly create a substantial burden.

This will also put the courts directly in the business of determining whether someone's professed religious beliefs are sincerely held or not--and isn't that a can of worms? The relief provided by the law is against a government entity that has burdened someone's exercise of religion. 
Incidentally, don't think YOU, as a job applicant, employee, or former employee, have any rights here. If a protected entity (i.e., a private organization r business) behaves in a way that burdens YOUR exercise of your rights, you are SOL (Section 11).

(By the way, this is the definition of "exercise of religion:"
"As used in this chapter, "exercise of religion" includes any exercise of religion, whether or not compelled by, or central to, a system of religious belief." Of course, it subsequently says that a "person" as meant by the act, includes (a an individual; (b) an organization, a religious society, a church, a body of communicants, or a group organized primarily and operated for religious purposes; and (c) a business "that exercises practices that are compelled or limited by a system of religious belief held by an individual or the individuals who control and substantial ownership of the entity." So I'm not clear whether your belief does or does not have to be a part of a system of religious belief.)

Lawyers should love this.

Of course, I think it's unconstitutional on its face. Whether one references the Indiana State Constitution or the U.S. Constitution..

And, of course, my (and your) tax dollars will be spent defending this travesty as the whole thing wends its way through the judicial system. (But, then, that's one of Indiana's largest budget items these days--defending insane laws and actions of state officials--specifically, the state attorney general--on federal court.)

End rant.

Thinking about mortgage lending with Timothy Taylor

Timothy Taylor does a fine job of thinking about mortgage lending, and how changes in the mortgage market have affected our economy.  I would disagree (slightly) on one point, and make one additional comment.

First, the additional comment.  Taylor comments on the difference between a mortgage lending rule mortgage payments that are 30% of the borrower's income, and 25%.  Back in the dim past (1976), when I first bought a house, the rule of thumb was that the amount of the mortgage should not exceed twice one's annual income.  Not quite the same thing.

Taylor's conclusions are these:

Let me offer a speculation: Say that the rules for taking our a mortgage had been tighter over time. Imagine the standard was that banks would decide what you can afford based on 25% of your income, not 30%, or that mortgages were typically available for 15 or 20 years, not 30. My guess is that bank lending for mortgages would be smaller. The size of homes might well have increased, but not as quickly. Less of US capital investment would be allocated to housing, which would make it possible for more to be allocated to investments that can raise the long-term standard of living. The US economy would be less vulnerable to recession. People who were less stretched in making their mortgage payments would be less likely to face default or foreclosure. And my guess is that many of us would have adapted perfectly well to living in smaller homes, because the smaller size would be usual and typical and what we expect. The money we weren't spending on housing would easily be spent on other forms of consumption.
My disagreement comes from his conclusion that less home ownership would likely mean that "Less of US capital investment would be allocated to housing, which would make it possible for more to be allocated to investments that can raise the long-term standard of living."   Two points.  (1) Owner-occupied or not, there needs to be "enough" housing; in a world with less owner-occupied housing, this would suggest more rental housing.  And it's not clear that the additional rental housing would be multi-family.  So the shift from investment in housing to investment in other forms of capital might not be al that significant.  (2) I think it's incorrect (or at least speculative) to say that investment in housing does not contribute (as much as other forms of capital accumulation) to increasing the standard of living over time.  More housing is a good that people value.  The real question is to determine the value of more (larger, etc.) housing relative to other forms of new capital.

But do read his piece.  It's extraordinarily interesting.

Sunday, March 15, 2015

College costs, student debt, and other things

This is very preliminary, and is only one chart.  What this chart shows is the number of hours someone would have to have worked at the minimum wage to earn (before taxes or any spending) enough to pay tuition & fees (the black line) or tuition & fees plus room & board (the red line) at the average U.S. public university, from 1965 to 2007.  Note that both lines are essentially flat until the early 1980s...then, the deluge.

(Click to enlarge)

I'm still working on this and expect to have something substantive to say in a bit.

A related point, especially relevant for private universities.  As an example, the school I attended had a listed tuition of $1,500 per year in 1965/66 (my first year), and it's now $42,500--or about quadrupled after adjusting for (CPI) inflation.  But the list price is not the real price.  In 2013/14, the school received, not $42,500 per student in tuition, but about $19,000 (according to the institution's audited financials).  My guess is that in 1965/66, the actual tuition revenues were not $1,500 per student, but maybe $1,000.  So the actual increase in (inflation-adjusted) per-student tuition revenue is not a quadrupling of revenue, but perhaps more like 2.5 times as much...tuition revenue has increased a lot faster than prices in general, but not, perhaps, as much as the "sticker price" makes it appear.