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.)