First official comment call-out!

Perhaps it's not too hard to tell, but I spend a fair bit of time reading The Economist online and commenting on their blogs. So I was pleasantly discovered to see one of my notes pulled out in a 'most interesting comments' post. It's not my most serious work but it's always nice to be acknowledged.

Their recent business article reports that Gen Y has a voracious appetite for positive reinforcment, and as much as I hate to prove them right, I seem to be doing just that.

When economics meets sociology

There was a great post on The Economist awhile ago about an economics teacher that spent some time helping homeless single mothers improve their financial knowledge. It was a fabulous step out of normal social boundaries, the kind that is entirely too rare. Have a care to read the original.

"If there was one thing I learned from my experience, it was what a bad job the financial system does by people with low incomes."

Given the economic status implicit in pursuing an advanced degree, it is not surprising that virtually no economists have personal experience with living in the underclass. It is surprising though that more do not study this significant portion of the population.

A profession that seeks to benefit all portions of society should strive to understand all portions as well. No doubt many economists do not fully see the bubble of privilege they reside in. This lack of perspective damages the credibility of the profession and begs for unintended consequences in policy recommendations.

Perhaps it is too much for academic economists to step off campus, but they might at least get in touch with the Sociologists and Community Studies professors across the hall. This diary is a laudable example of the learning that can occur when we step into the shoes of the working poor.

Egads! Someone is wrong on the Internet..

Another interesting blog post found via stumbleupon. The basic argument is that energy efficiency won't save the environment. It's a good point and backed up by a valid economic argument, although it's missing some points, which leads to a somewhat *ahem* pessimistic conclusion. At least they're acknowledging economics as the correct starting point, albeit sort of in the same way creationists try to use evolution to disprove itself.
My reply:

A good article and worthy of attention, but I think you’re missing a few crucial points about the larger picture.
1. Efficiency is not the same as conservation. Conservation is the setting aside of resources based on the expectation of future value (usually economic value). Efficiency merely reduces the required inputs of an activity, allowing us to do more of what we want with the same amount of resources.
2. There is one very important class of product that does not necessitate the use of (significant) additional energy or resources. It’s called human capital or more commonly, knowledge. It is produced and replicated across all societies and cultures, everywhere that humans live. It has allowed us to escape the natural population cycles of other animals and prevented mass starvation, ever since Malthus earned economics the name of ‘”the dismal science”. I see no indication that people are running out of new scientific ideas. Quite the reverse, actually.3. We will use up a lot of certain resources but actually, that’s OK. When resources become scarce their price rises, creating an incentive to use less and substitute away. The higher the price, the greater the incentive. That’s precisely why the high oil prices of early 2008 jump-started so much activity in renewable energy, alternative transportation and non-fossil fuel versions of plastics etc. Non-energy products can be recycled and new materials can be invented.
In Conclusion: Have we used fossil fuels to bootstrap our economy in an unsustainable way? Yes. Will the environmental impacts cause more damage than we expect? Probably. Can we invent solutions to both of these problems? Absolutely. It won’t be easy, but what’s different about that?

A piece on how consumers are reacting to the recession got me thinking about fiscal stimulus and the Big Picture:

(...)this is a realignment of savings and borrowing to real income growth. The subsequent contraction is already causing a re-allocation of labor and capital and will continue to do so for awhile.

As for fiscal stimulus, I see this primarily as an efficiency/equality tradeoff. Company failures create an immediate and concentrated cost, offset by a long-term and diffuse gain. Allowing too many firms to fail would promote diminishing returns of efficiency at the cost of equality, which can be inefficient in of itself (Ref: income equality vs. GDP growth discussions). Debate and action with regards to this trade-off will be furthermore skewed by political incentives to favor the immediate and tangible outcomes.

Private individuals bear the cost of corporate failure at a rate equal to gap the between x, the speed of at which labor conditions change and y, the speed at which labor can re-allocate.

Government policy with regards to creative destruction in global business cycles (stimulus policy) and to industry-specific trends (trade policy) should strive to reduce this cost in order to maximize long-term growth. Most governments implicitly recognize this imperative, but often choose to try and retard the speed at which labor conditions change, rather than increasing the responsiveness of the workforce.

Conclusion: Fiscal stimulus is useful economically and very useful politically but not necessarily the best way minimize personal costs or promote long-term growth.

One possible (less dark) side to these losses

Maybe you didn't really need all of that money anyway! (Maybe?) On the other hand, it will still be very hard on those close to or in retirement now.

The article's idea is that people have been encouraged to over-save and take excessive risk. My thoughts:

This reminds me of a book review I read approximately 1 month ago, where the book's author argues the financial sector is built on 'pimping risk'
Seems like a very credible argument to me, given a few direct and indirect glimpses I've had into the industry. Their incentives are aligned to make money off two sources: new vehicles that have not been competed down to commoditization (such as hedge funds) and expensive vehicles that charge high commissions based on sector hype or recent performance. Both things are the continual attempt to achieve superior returns (at superior costs of course) and this chase often leads to superior risk. All of which is not to say that the industry does not add value, but who do you think the bulk of that value goes to? Call it tragedy or call it farce, finance is the grown-up version of 'Telephone'.

Saving money

I have to admit, I have developed a very strong interest in finances over the last two years, i.e. since I started working for my money. My interest originated in my thrifty upbringing, but lately its become something of a race to save up a down payment by the time the housing market bottoms out. I figure I have 9-12 months at this point, but prices probably won't rebound sharply either..

So I have been exploring possible avenues of savings. The easiest so far have been opening a high yield savings account and finding better credit cards. Since we just use them to buy things we would get anyway, it's a straightforward savings of 1-3%+. My favorite usages are Chase Freedom (3% utilities/restaurants/dept stores) and Citi Dividend Platinum Select (5% gas, groceries and drugstores for 6 mo, 2% after).

I recently discovered a very interesting site by CapitalOne allowing you to design your own card.
You enter your approximate credit rating and then pick from a range of features. Two options in particular seemed notable; With a credit rating of good or excellent you could get 2% cashback on everything for the first 12 months and 0% on purchases for the first 9 or 12 months respectively, for the arbitragers out there. Also, an intriguing alternative of 1% cashback and a flat bonus of $.10 (or 10 points). This is really only worthwhile for purchases of $10 (2% return) or less, but if anyone can think of consistently worthwhile purchases for $1, I'd love to hear it. 11% seems awfully tempting, but its hard to justify a daily trip to the Dollar Store for 11 cents when it only nets $40/year.
In sum, while it's interesting to see what what they're willing to put out there, the 2% option is the only one I have seen that really surpasses any regularly mailed offers.

How the world works

Philosophies of Traffic and World Politics

The other day as I sat in traffic I Figured Out How the World Works.
It came to me as I lingered in another pocket of classic Silicon Valley congestion. I realized that I knew a better way. Pulling to the right, I rode an almost empty lane to next off-ramp and proceeded along various side streets until I had passed the majority of the slowdown. I came out with an extra ten minutes and an inflated sense of self-esteem.
However, the important thing is that I had become a long-term actor. By this I mean a few things:

• I knew where to get current information and how long it would stay relevant. Before leaving work I had checked a traffic site, beatthetraffic.com. I knew where the slowdowns had been half an hour ago and could approximate from experience where they might be now. Also I had another backup source of information, a rival site sigalert.com
• I knew what the options were. Having been traveling to the same location everyday for months now, I had investigated side streets around places where traffic backed up, using both maps and trial and error.
• I had detailed knowledge of my options such as their risks, rewards and chances of success. I knew where the lanes often slowed down, which lights were long and what time the traffic got heavy.
• I was able to synthesize the information rapidly by recognizing patterns I had observed before and remembering successful or failed responses. Taking into account the newest information, this allowed me to take an informed risk and change course.
  

Why does all this matter? Because people by nature are long-term actors.
This may seem obvious to those of you who are already long-term actors yourselves, but I think many young people do not yet understand it. Yet it is critically important because it determines how the majority of the decisions in the world are made.

The characteristics of long-term actors show up perhaps the most in the realm of politics. This makes sense because politics is, at its essence, the process of allocating resources.
Any organization, be it a nation, state or even a local club has a certain amount of resources at its disposal. (Time and money are the primary ones. We can ignore knowledge because we assume that long-term actors have it.) Furthermore, the larger an organization is, the more slowly its set of resources will change. A club might double in size overnight, but the same magnitude of change in an entire nation takes decades. Therefore politics has inherent potential for conflict because today's resources are finite and their uses are not.

The goal in politics, business and most other facets in life is generally to do a little better today than you did yesterday. More importantly, you want to be doing as well (or better) next week as you were today. Leaving aside discussion on whether or not this is a good goal, it is indeed how most people operate.

Coming back around, a fresh-faced youngster will not immediately understand the current state of things, i.e. how the world works today because they do not have knowledge of how things
used to be. All the people making decisions today view their choices through the lens of their own unique past. Experience forms opinion and opinion forms action. People seek to protect what they have. The only real incentive to change falls on those who have nothing and those who are losing what they do have. More than anything, this explains why young people are known for idealism and old people are known for conservatism.

So, next time you are baffled by how the world works just remember that everyone else has already done this before. Your job is to learn the rules of the game. Do that first, and then we can talk about how to change them.