Monday, December 28, 2009

Safety nets and whatnot

Over on Felix Salmon's blog, I made the following comment:

I think this is exactly right. If you want people to take more risks, you can either:

A. Increase the benefits they get from successful outcomes (which I view as the generally Republican view, such as reducing capital gains taxes or inheritance taxes)

B. Decrease the costs they bear from unsuccessful outcomes

C. Increase the probability of a successful outcome

I think all of these are plausible goals, but in my eyes if you want me to walk a tightrope, making the wire more stable and adding a safety net is going to jack up the probability much more than adding some gold to the pot on the other side.

As Greg Mankiw or Charlie Munger would say, incentives matter.  But there are often a variety of (changes in) incentives that would induce the same (changes in) behavior.  I left at least one alternative out:
D.  You can make the existing situation (e.g., current job, retirement system) more risky

In any event, it's easy to find examples of people arguing that bigger payoffs encourage more risk-taking.  Some interesting quotes from a 2002 article that does it (not sure why the Hawaii Reporter was the first google result, but who cares?):
President George W. Bush renewed his call for permanent repeal of the estate tax on March 19. "It is unfair, patently unfair, for any entrepreneur ... to develop her own business and have that business taxed twice as she tries to leave her assets to whomever she chooses," Bush told a Women's Entrepreneurship Summit in Washington, D.C. "We must make the repeal of the death tax permanent. I call upon Congress to do this immediately."
 "I do not believe the role of government is to create wealth," the president told last Tuesday's group at the Ronald Reagan Building and International Trade Center. "The role of government is to create an environment that encourages risk taking, an environment that facilitates the flow of capital, and an environment in which people can realize their dreams. ... And that's exactly what I intend to do as the President."

So why is it that I see so much push towards increasing payoffs to investment, but relatively little on enhancing the safety nets for failed outcomes?  I mean, it's understandable to think about the successes, but we can't ignore the "risk" in "risk-taking".  If we truly want to encourage people to take more risks, with the belief that risk-taking promotes economic growth, shouldn't we be using a full mix of incentives?  In other words, why so much "Incentive A" from above, but so little "Incentives B & C"?  Especially since, in my personal view, the likelihood that my future huge estate will be taxed upon my death is an infinitely minor reason for me not to strike out on my own.

One thing I find interesting is that "Incentive D" is in accord with Greg Mankiw's argument for negative real interest rates - make the status quo less desirable to push people into more investment.

Also, as I noted on Felix's blog, I recently saw Man On Wire, which I thought was fantastic.  Hat tip to Tyler Cowen for that.

Sunday, December 13, 2009

Can this possibly be true?

On the nytimes website, Randall Stross writes:
I LOVE my iPhone. I just wish it were matched with Verizon Wireless, the carrier with the most envied reputation as fast, ubiquitous, reliable, nigh perfect.
I find myself saying this about 8 times a day.  But it turns out that Randall and I could be directing our angst at the wrong target.  

Consumer Reports has just released its annual survey of cellphone service, and its respondents collectively agree with me about the rankings: AT&T occupies the bottom and Verizon, the top.
And the iPhone itself may not be so great after all. Its design is contributing to performance problems.

I don't have any particular commentary to add to this, other than the fact that I'm absolutely stunned.  A few consequences:

  1. I have an iphone now and had long ago decided that I was switching to Verizon as soon as they started offering the iphone.  Not so much now.
  2. I have to acknowledge the fact that I don't know jack about technology and I should perhaps stop having such strong opinions about technology-related products.  
  3. I already have a hard time thinking about what my next cell phone will be (I'm definitely upgrading - I've got a first generation iphone), and this confusion is going to make it harder for me.

So, I guess, sorry AT&T for my absolute-but-maybe-not-deserved hatred of you for the past few years?

Friday, December 11, 2009

Housing as an investment 2

The discussion on rortybomb continues, so I thought I’d add some more thoughts.

As humans, we are effectively short food and shelter for the rest of our lives, and you could probably add in insurance/medical care.  (I think Mike at Rortybomb made this point a while ago, but I couldn’t easily google it.)  That means that we need to somehow structure our earnings, consumption, and investment to satisfy those expected needs (future payments), bearing in mind that in our later years we’ll be doing very little earning and investing, and lots of consumption.

However, we have a choice on how we satisfy those needs.  One way is to prepay them while we are working, which is what one commenter suggests for our housing needs:

My view of the housing market, and why I think a lot of this anti-housing as an investment is silly, is that it’s a consumption good you will always need to consume. You’re not going to suddenly decide in 2027 that you might do without housing for a while. On that basis alone then it’s quite sensible to store it up for when you have no income, ie in retirement. It’s an almost perfect hedge of a large chunk of your consumption needs.

The commenter is right in one regard – we certainly do need to store up for our future consumption, when we’ll have no income.  However, the choice is not whether to save for the future, but in what vehicle.  Specifically, the above comment seems to argue that we should be prepaying for our housing needs.  Paraphrasing:  “Buy a house now so that you’ll have one when you’re not employed.” 

While I certainly agree with the need to save for future consumption, I don't see any reason that we should prepay our housing needs in the form of a single, non-diversified asset with large transactions costs.  Similarly, I think we can effectively save for our future food needs without filling our basements with cans of vegetables, soup, and spam.  (And beer!  Don’t forget the beer.  Some, especially stouts and barleywines age very well.)

So the choice isn’t save or don’t save for future housing consumption.  But rather, in what form.  Putting aside some very important factors (differences of housing types available for rent or sale, other payments like property taxes, maintenance, possible rent increases), it's an economic tradeoff between two different-looking cash flow streams.  In the same way that annuities can be easily converted into lump sums (and vice versa), it's straightforward to compare renting (effectively a negative annuity) with buying (a one-time lump sum).  It's inappropriate (in my opinion) to imply that buying is somehow different (and better) than renting because of the timing of the payments.

My impression of this debate is that most people arguing for housing as an investment view the purchase of a home as qualitatively better than renting a home (for reasons that are often poorly articulated), while the other side views it as more of a straightforward evaluation of the timing and magnitude of the cash flows.

Thursday, December 10, 2009

Housing as an investment

Over on the fantastic rortyblog, Mike gets involved in a conversation on housing.  Specifically, he discusses the notion that housing is a good investment decision, as argued by Adam Ozimek.

I largely agree with Mike's broad point - too often people overvalue the notion that housing is an investment.  My particular bete noir is the idea that "rent is throwing money away" while mortgage payments are building up equity.  I think it's pretty intuitive that the decision to rent versus buy any asset hinges upon the relative cost of doing each.  Historically, it's been a very good idea to buy in most markets, especially considering that labor mobility wasn't as important as it is today and people were able to stay in one place for longer periods of time, avoiding the significant transaction costs associated with moving.

In any event, I fall in Mike's and Felix Salmon's camp of thinking that housing as an investment is generally a bad idea.  But I actually disagree (I think) with one of Mike's comments:

Felix notes: “DanHess and Matt Turner make the point that buying a house is a great way of forcing people to save over the long term.” There are no free lunches of course, and the reason it is a great way of forcing people to save over the long term is that it is incredibly expensive and difficult to get any money out of it.
I think the more straightforward reason is behavioral.  You've gotten people to commit to saving in a way that isn't transparent, so they're not actually aware they're doing it.  It's just that, 30 years later, they get to put a mortgage document on their grill and have a party when they realize how much equity they've built up.

It doesn't seem terribly different (to me, of course) from:
- withholding social security payments involuntarily
- automatic 401(k) enrollment
- the new programs where employees can commit that future raises will go toward retirement contributions (are these just hypothetical?  I feel like I've read about the idea many times, but haven't seen any actual examples)

In all of these cases, it strikes me that saving is made easier because there was something automated about the process, where the individual doesn't feel the "pain" of foregone consumption. 

(You could also point out that the mechanism of withholding income taxes accomplishes the same thing - reducing the public's understanding of how much in tax they actually pay.)

So overall, I actually do think it's a free lunch, in much the same way that a lot of valuable internet content is a free lunch.  Of course there's a cost - individuals truly are foregoing consumption, and internet contributors truly are laboring to create content without compensation.  It's just that in those cases, the people bearing the cost don't seem to mind as much as they probably should.

Wednesday, December 9, 2009

That didn't go as planned

So Jennifer left Top Chef last week, but I think my predictions had some merit.  First, I think the time off did Jennifer well - she seemed to be much stronger (both in attitude and in hair) than she did at the end of the regular season.  She performed well in the quickfire and seemed* to do well in the elimination challenge.

Mike V. also lived up to my expectations, in terms of making ostensibly risky decisions (the 63 degree egg, which led to the awesome "it's up to the egg at this point" statement).

The big disappointment for me was in the show's editing.  Leading up to the final announcement, it seemed that Michael's dish was not strong (i.e., the risky egg decision had backfired AS I PREDICTED LAST WEEK) and Jennifer seemed to have done well.  When they announced that Jennifer would be packing her knives, I was a bit surprised.  Then, reading Tom's blog I read:

"It may not make sense to you but it was clear to us immediately that it would be Jen who would be going home. What it came down to was that both of her dishes were way too salty. Jen’s overseasoning of both her dishes stood out to the judges like a sore thumb. We had our conversation at Judges' Table about whom to send home, but it was pro forma; we already knew and were in complete accord."


Meh.  I still vote Kevin for the win, as does apparently ever other person on the internet.

Other notes:
This is a relative statement, but Padma didn't look nearly as attractive as she historically has.  The bangs looked somewhat ridiculous.

I had the Daisy Cutter Pale Ale, which gets insanely high ratings on, higher than Alpha King even.  I don't get it.  It smelled fantastic, like a thick and rich double IPA, but it tasted very, very thin.  I didn't care for the disconnect at all - for that taste, I wanted something much richer and velvety.

Wednesday, December 2, 2009

Tonight I'm looking forward to ...

Watching Top Chef, where the final 4 cheftestants have been fairly obvious for several weeks. I don't believe there's a weak link among them, so I expect tonight's loser will fall because of some type of mistake, rather than by simply being outclassed.

For reasons I can't articulate, I'm rooting for
Jennifer Carroll. Toward the end of the regular season, she seemed to clearly hit a wall and begin to wilt under the pressure. While that's a bad sign, I think it makes the break and change in locale especially valuable for her.

So if Jennifer stays, who goes? I think that it's one of the 2 Voltaggio brothers. My take is that Michael is the more talented, but also the more adventurous, of the two. I think at this point in the competition, the day-to-day variance is more important than the chef-specific talent, so I'm predicting that Michael V. takes a risk that doesn't pan(!) out. (I think Chris at
Procrastiblog has it wrong, specifically undervaluing the time off for Jennifer.)

I'm looking forward to drinking something new tonight, and I have several choices:

Lagunitas Brown Shugga', which is apparently a new version of their barleywine.

Another Barleywine - Avery Hog Heaven

Daily Cutter Pale Ale, which is fairly new and apparently battling with 3 Floyd's Alpha King for Pale Ale supremacy in the greater Chicago area.

Lagunitas Lucky 13. Lagunitas doesn't make the best beers in the craft world, but it's really hard to beat the quality/value combo they offer.

The Brown Shugga is in 12 oz. bottles, while the remaining beers are in 22 oz. bottles. I think the Hog Heaven is too strong to drink a bomber on a weeknight, so I'll probably go with the Brown Shugga or the Daisy Cutter.

[I'm just going to pretend that there's nothing unusual about updating a blog I haven't touched in about 8 months. I'd like to write some things about financial literacy, but I'll believe it when I see it.]