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A Land of Magical Thinking: Becoming a Millionaire

November 15th, 2008 3 comments

I saw mention of this statistic in a blog comment last week, and went looking. Here is the central faith-based delusion regarding The American Dream:

Belief: 45% of Americans think it is somewhat or very likely that they will become wealthy in their lifetimes.*

Fact: in 2005, 5.7% of households were worth a million dollars or more. (Source PDF. See Table 3.)

Understand: A million dollars isn’t even close to “wealthy.” It represents, say, $40K to $60K a year in income.

So:

Chance of being wealthy: One in twenty. At best. Only 1% of households had more than $5 mil.

Perceived chance of being wealthy: One in two.

This explains Joe the Plumber. He made $40K in 2006, but in 2008 he was big-talking to Barack Obama about how we was gonna buy the business he works for — for a quarter of a million dollars! (Don’t even get me started on understanding the difference between owning a business that’s worth a quarter of a million dollars, owning a businesses with a quarter mil in annual revenues, and owning a business that delivers a cool quater mil a year in profits. Joe clearly doesn’t understand this.)

This also explains how Joe and his co-delusionists could believe, for thirty years, that we could increase tax revenues by cutting taxes. Or that prayer would have any effect on any of this.

* NYT/CBS poll, March 3-14, 2005, question 24: Looking ahead, how likely is it that you will ever be financially wealthy? Would you say it is very likely [11%], somewhat likely [34%], not very likely [30%] or not at all likely [22%]?

Bring Back the Philosopher Kings

November 13th, 2008 Comments off

Paul Light’s proposal in yesterday’s NYT should be receiving enthusiastic support from Fareed Zakaria and Bryan Caplan.

Light’s proposal: Congress should create a federal commission to draw up reorg/efficiency plans for the U.S. government. The key rule that legislators need to include: those plans would be submitted to congress for an up-or-down vote, with no amendments allowed. (This is how Congress decided which military bases to shut down.)

To understand why this is A Good Idea, consider the concept of “political slack” that Bryan explores in The Myth of the Rational Voter. In my words: politicians have some amount of slack to ignore their constituents’ wishes without being punished at the ballot box. (Many things can affect the amount of slack a politician has.)

They can use that slack in two primary ways:

1) To engage in corruption, malfeasance, cronyism, etc.

2) To implement sensible policies that their constituents aren’t sensible enough to support.

Zakariah doesn’t use the term “slack,” but in The Future of Freedom he makes a very similar argument to Caplan’s: democracy (a.k.a. majority rule) often results in outcomes that are decidedly less than sensible–that are in fact often directly contrary to the ideal of constitutional liberalism. (Think: Hitler. Hamas.) And he suggests the very type of commissions-with-up-or-down-votes that Light is proposing. It is a means of giving politicians the right kind of slack: the kind that tends to result in sensible decisions.

Since the tools of malfeasance and corruption are not in the legislator’s hands, but rather in those of their assigned commissioners, legislators have less opportunity for special dealing. And they can go along with a commission’s sensible-but-unpopular policies with limited backlash, because they can point their fingers at the commission. But–this is a democracy–they still have ultimate yea-or-nay authority, and responsibility to their electors for that choice.

Light points to the Department of Homeland Security as the kind of mess that results when legislatures attempt to actually craft re-orgs themselves. It’s like trying to write a novel via amendments and voice votes.

I for one see Light’s proposal as a potential way out of the eternal conundrum: do we trust the vote of the people and the wisdom of the masses (or their elected representatives)–despite their frequently demonstrated lack of wisdom? Or do we assign philosopher kings and subvert ourselves to them?

How about: trust the people to select the representatives, who then assign philosopher kings (temporary duty only)? The representatives then vote on whether those philosophers’ proposals are so wise after all.

And let the people decide whether their representatives are good judges of the philosophers’ wisdom.

“Cheering Germans Will Not Send More Troops to Afghanistan”

November 12th, 2008 Comments off

The Economist gets this one utterly wrong—explaining, perhaps, why that august newspaper tragically endorsed the war in Iraq (and has yet to acknowledge the tragedy of that endorsement).

They don't understand true power.

True power–its sine qua non–is the ability to get people to do what you want them to do (with the least possible effort on your part).

If people in other countries respect, admire, and want to emulate and support the United States, they will elect people who feel likewise. And those elected officials are far more likely to cooperate with us–to do what we want them to do.

Now it's true that if your moral standing with potential partners–your legitimacy–is low, "soft" power isn't going get you much. That's when you have to unclip the holster. Hardly the easy or inexpensive way to wield power.

And that's the point we came to under BushCo, after witnessing the most precipitous decline in American power since…well, it's actually hard to think of any decline in power that even vaguely compares, in all of American history.

Think Hamas: would it have won the Palestinian election absent Bush and Iraq? You can never know, but it's not crazy to suggest it might not have.

Think Chavez: would he have pulled off the election he did in 2006 (with the Venezualan economy plummetting) absent a visceral anti-Bush groundswell in the country and the region?

Think Turkey: would its leaders be in a stronger position to support U.S. initiatives–or even be pressured to do so–if their electorate hated us less?

With 200,000 Germans in the street celebrating a not-even-elected-yet American president, does it seem likely that that electorate will choose leaders who support that president's policies and positions—and give those leaders the political slack to do so?

Will those leaders be willing and able to support us by sending troops Afghanistan? It's not crazy to suggest that they will.

The Man Who Shorted Subprime (Must Read)

November 12th, 2008 Comments off

The End of Wall Street's Boom – National Business News – Print – Portfolio.com.

Run don't walk to read this. It's gripping. About Steve Eisman, who started shorting every subprime play in sight back in 2005, while simultaneously proclaiming market insanity to anyone who would listen–in decidedly not-fit-to-print language.

It's long, but you won't be able to put it down.

The most amazing new insight I got from the piece: even the people who were shorting the insanity were feeding the insanity.

That’s when Eisman finally got it. Here he’d been making these side
bets with Goldman Sachs and Deutsche Bank on the fate of the BBB
tranche without fully understanding why those firms were so eager to
make the bets. Now he saw. There weren’t enough Americans with shitty
credit taking out loans to satisfy investors’ appetite for the end
product. The firms used Eisman’s bet to synthesize more of them.
Here,
then, was the difference between fantasy finance and fantasy football:
When a fantasy player drafts Peyton Manning, he doesn’t create a second
Peyton Manning to inflate the league’s stats. But when Eisman bought a
credit-default swap, he enabled Deutsche Bank to create another bond
identical in every respect but one to the original. The only difference
was that there was no actual homebuyer or borrower. The only assets
backing the bonds were the side bets Eisman and others made with firms
like Goldman Sachs. Eisman, in effect, was paying to Goldman the
interest on a subprime mortgage.
In fact, there was no mortgage at all.
“They weren’t satisfied getting lots of unqualified borrowers to borrow
money to buy a house they couldn’t afford,” Eisman says. “They were
creating them out of whole cloth.
One hundred times over! That’s why
the losses are so much greater than the loans. But that’s when I
realized they needed us to keep the machine running. I was like, This
is allowed?”

‘By shorting this market we’re creating the liquidity to keep the market going.’

“It was like feeding the monster,” Eisman says of the market for
subprime bonds. “We fed the monster until it blew up.”

Extreme Thinking: Dangerous? Or Just Irrelevant?

November 11th, 2008 Comments off

A recent Bryan Caplan post finally crystallized for me why I find so much libertarian thinking and commentary to be irrelevant:

The philosophically insightful breakdown, rather, is the "statist-libertarian" spectrum.

Here's the best way to sum up my outlook: The endpoints of the political spectrum are not the "far left" Michael Moore and the "far right" Rush Limbaugh, but the totalitarian Josef Stalin and the anarcho-capitalist Murray Rothbard.

There is no real prospect of our society or government going anywhere near either of those extremes. (The same cannot be said for the Moore/Limbaugh endpoints.) So discussions that invoke those extremes as arguments for particular policy positions are decidedly unconvincing. They constitute idle theorizing, unengaged with the messy democratic business of policy-making within the margins of real political possibility.

It's that messy policy-making that actually affects people's lives.

Conservative “Intellectual” “Ascendancy”

November 11th, 2008 Comments off

Brad DeLong appropriately derides a WSJ piece by Mark Lilla, who bemoans the decline of conservative intellect.

The key Lilla line:

For the past 40 years American conservatism has been politically ascendant, in no small part because it was also intellectually ascendant.

Wrong. It has been ascendant because it promised and delivered lower taxes.

It’s a simple strategy: Borrow abroad (or from future generations, same thing), and use the money to buy votes.

Yes, they wrapped that strategy in a bunch of intellectual-sounding glitter-tissue. But the window-dressing isn’t what achieved or maintained their ascendancy.

What’s With Arkansas (and Tennessee and Oklahoma)?

November 8th, 2008 Comments off

I was looking again at the maps of which way voters swung from 2004 to 2008, and noticed an odd anomaly: a hard line at Arkansas' northern, southern, and eastern borders (and to a lesser extent at Tennessee and Oklahoma borders).



At Arkansas' eastern border, well, there's a big river there. But elsewhere, wouldn't you expect a more gradual fade?

Aside from vague and hardly-convincing psychological surmises (strong conservatives prefer living in northern Arkansas to southern Missouri?), the only explanations I can imagine for this are election-related. Is there something about registration and/or voting in Arkansas and Tennesee that causes this abrupt statistical shift at the borders?

The “Patriotic Pugnacity” Platform

November 7th, 2008 Comments off

The most striking anomaly in the recent election, to my eyes, was the strong Red countermovement among Appalachians and Okies:

These areas swung even harder right this year, while almost every other part of the country went left (excepting McCain’s home state).

Steve Sailer (he of the quite convincing “affordable family formation” thesis), explains this in a comment to a post by Andrew Gelman (he of the equally convincing Red State, Blue State, Rich State, Poor State):

John McCain did best relative to Bush in 2004 in Scots-Irish states like Tennessee, Arkansas, and Oklahoma. McCain is Scots-Irish himself and is very much in the Andy Jackson Scots-Irish tradition of patriotic pugnacity.

Is that, essentially, the only ammo left in the Republican shot-locker?

It’s worth noting that Appalachia also reared its geographic head in the primaries, with a decidedly racial implication. Counties voting >60% for Clinton over Obama (Kentucky and Illinois hadn’t voted when this map was made):

Put aside the New York home-state effect and the heavy pro-Clinton hispanic vote in southern Texas (and the huge post-Katrina population move affecting Louisiana), and you’re looking at a very similar map.

Update: I see that Sailer discusses this a bit more on his blog.

Yes We Did. Yes We Will.

November 4th, 2008 Comments off
A government of the people, by the people and for the people has not perished from this Earth.

Making Voters Rational: Mail ‘Em a Ballot

November 4th, 2008 3 comments

I can’t believe I haven’t posted about Bryan Caplan‘s The Myth of the Rational Voter, a book that I spend a lot of time thinking about (and frequently disagreeing with). You can get the gist of it over on Amazon; I’ll just say that it greatly advances the discussion regarding the (de)merits of democracy. Cf. also Zakaria’s The Future of Freedom on the distinction between democracy (a.k.a. majority rule) and constitutional liberalism. (They’re not the same thing, and the former can seriously interfere with or even destroy the latter.)  And check out Greg Mankiw’s long-ago post pointing out that people who don’t vote (or don’t vote every item on a ballot) are probably “rationally delegating the decision to their better educated neighbors.”

But as a Washington State resident I can unequivocally endorse a method to make all voters more rational: voting by mail.

For more than a decade, you’ve been able to sign up here to have a ballot and voter pamphlet automatically mailed to you for every election. They simply arrive at your door, every time, a couple of weeks in advance.

Then when you have a free hour you sit at your kitchen table with your ballot (and your spouse/children/friends) and go through the pamphlet, reading the positions, pros, cons, and state auditor reports. You can jump on the web to see what people are saying, call or email friends who might have considered an issue more than you, and generally take the time to make reasoned, rational decisions.

You might still skip some items on the ballot, because you don’t feel you have a cogent opinion. I always do. (King County Superior Court judges?? Why are we electing them?)

But the votes that you do make are grounded much more firmly in the front brain, because you have time to actually use the damn thing. (Since I’m spending a large portion of my bodily resources supporting it, I like to take it out for a spin every now and then.)

Finally, it’s just a damned pleasant way to vote.

Update: I note that Greg Mankiw has linked to an alternate view by Tim Fedderson, suggesting that the masses are indeed wise (in aggregate). Bryan Caplan’s co-blogger Arnold Kling points out that this is a “most un-Bryanesque column.” In any case I still think that voting by mail can make voters wiser.