People sometimes seem to talk about ‘saving’ or ‘indebtedness’ as if somehow people from the past or future could make a claim on things produced in the present. The world as a whole (a ‘closed economy’ in econ-speak) cannot be ‘lent’ money from future generations to create more goods and services, because goods and services are made in the present, with materials available in the present, manipulated by people actually working in the present. Debt (for example) redistributes claims to real resources amongst presently existing people, not between presently existing people and future people.
This has important implications, as the flipside of debt ‘taking’ from future generations is that by saving, future generations could ‘take’ from the present. Thinking about economic problems in terms of money or other financial assets can often obscure our thinking about what’s going on with the actual production and distribution of, you know, actual stuff. Once we think about things being made and sold/provided, the problem of the world getting older becomes incredibly clear.
Simply put, if our ability to make stuff is a function of how many people are making stuff, then as the ratio of people making stuff to people wanting stuff declines, in order to maintain the same distribution of consumption between makers of stuff and wanters who aren’t makers, then a greater proportion of what the former make must be consumed by the latter.
This will be a problem.
There’s a kind of mini-spat going on at the moment between Matt Yglesias, a liberal blogger who emphasises the importance of monetary policy from a progressive perspective and Henry Farrell and Doug Henwood at the other end arguing that the correct progressive response to the recession is more government spending and reforms which tilt bargaining power away from capital and back towards labour.
Now, for the record I am 100% in agreement with Yglesias on this point. In particular, I also agree with pretty much everything in this Will Wilkinson post. What I’d like to add to their responses is that it is impossible to have a coherent view of government policy, and in particular the appropriate fiscal response to a recession, without having a view as to what monetary policy ought to be conducted by the central bank. For example, if a central bank is doing inflation targeting properly, then government spending (at least at the margin) is going to have a negligible impact on overall economic activity. For by hypothesis, if the central bank is aiming for 3% inflation, and has taken steps sufficient to generate 3% expected inflation, any additional fiscal stimulus by the government would just be offset monetarily by the central bank in order to maintain that expectation*.
Farrell objects to this kind of ‘neoliberal’ master-plan on how to combat recessions on a number of unconvincing bases (read Wilkinson in particular), but for me the problem is that there isn’t any account in there of what the central bank should do. As inflation is largely a product of expectations, it is prudent for the central bank to have some kind of official policy – which in the era of mature market economies has usually been either a) maintaining an exchange rate (see China, People’s Bank of) or b) explicit or implicit inflation targeting, with maybe a smattering of c) steady growth of the money supply. All of these policies have implications for the ability of the government to influence the economy through fiscal stimulus. A) usually fails eventually, or the costs of it vastly outweigh the benefits (see Euro, the). C) has traditionally been the preferred position of the right, and while it would ironically be more accommodating of opportunities for fiscal stimulus there would still be effects through changes to the velocity of circulation. And besides, I just don’t see any liberals coming out for old-school monetarism.
Whether you have a fiat or a commodity based currency, you have to have a view on monetary policy. There is no escaping it, and it matters a lot. If you think we should go back to the gold standard, you therefore think that the government should fix the price of gold (why the right-wing of the Republican party is just so keen for the government to fix the price of a commodity I will never understand). At the moment the central bank effectively fixes the price of a certain type of credit, with the price determined by its conduciveness to fulfilling a policy goal. If you don’t think the central bank should inflation-target, you had better have a better idea of what it should do.
Monetary policy really isn’t a threat to progressive or conservative politics – it says nothing about what the size of the state should be, but simply that in what are probably the optimal monetary policy regimes the government can’t affect GDP through aggregate demand. In fact, given how cheap it is for the US government to borrow right it is almost silly not to invest in all the capital maintenance in infrastructure that needs to take place. Plus it would bring back some construction jobs. Not only is good monetary policy not a threat to progressives, it advances the progressive goal of tipping the balance of power back towards labour by helping achieve full employment.
So come on people way to the left of people like me, there’s plenty of room for people to support sensible monetary policy whilst having diverse ideological commitments in other respects.
*Of course, in the ideal world the central bank wouldjust target 5% NGDP growth. But hey, I’d definitely take 2-3% inflation which the US Fed woefully failed to produce in market expectations
According to some economists, apparently the monetary value of a statistical live year (VSLY) is somewhere in the six to seven figure range (see the appendix to this paper). A closely related statistic to the value of a statistical life (VSL), both are a near inevitable part of bureaucratic cost-benefit analysis. For example, there was a big hooplah a couple of years ago when the EPA changed its VSL from $7.8m to $6.9m – effectively decreasing the environmental regulatory burden on business. For example, if a regulation came with an annual cost of $500m to the economy, the old system suggests it would have to save at least 65 lives a year to be worth implementing, compared to 75 now*.
I would like to submit the thesis that these figures are bullshit. This may not be a controversial position, but I hope to quickly demonstrate that these statistics are pretty much inconsistent with the very premises that economists use to generate them (or at least have wildly implausible implications). The idea is this: people are rational, and their actual decisions ‘reveal’ their underlying preferences. Suppose I am at a grocery store that sells apples and oranges at the same price, if I buy an orange then that ‘reveals’ my preference for oranges to apples. In the case of the VSL and VSLY, economists look at people’s decisions concerning how much we are willing to pay for mortality risk mitigation. Now, if these dollar values of these ‘revealed’ preferences are to mean anything of interest, then they should imply that if I have value x at $100, then I should accept $110 in exchange for x. The key assumption is that people are rational, and by looking at the actual decisions people make, we can figure out how much they implicitly value things in a common currency.
For the sake of argument, let’s assume the VSLY is $300,000. The number doesn’t matter very much, but rather the order of magnitude. For my example, let us suppose smoking decreases the number of those statistical life years a smoker would live by 10 (again, order of magnitude is what matters). Now, whilst smoking may not be the activity would one want to point to as a paradigmatic example of rational economic thinking, but it strikes me the decision to try and quit smoking (and how hard to try) is as good a candidate as any. It’s certainly as good as the kinds of decisions economists put into VSL(Y) models. Now, since lots of people today don’t either think of quitting or trying that hard to quit smoking despite being quite aware of all the risks, if they are rational economic actors then the revealed value to them of smoking/not trying hard to quit must at least be something in the region of $3m ($300,000 VSLY times 10, for the years they are likely to lose). That is to say, if they are rational then if the value of smoking less than the value of the life-years they lose due to smoking, then they will at least try and quit (even if this proves impossible). Given that there are people who don’t try, then the value of not trying must be at least equal to the value of the lost life-years.
Now, there was a time when people didn’t know the health risks of smoking, and indeed even believed it to be healthy. I am going to make the assumption that at that time we have no reason to think the value of smoking/not trying to quit would be less than it is today. I actually suspect we have reason to think it would be higher, given the social stigma currently attached to smoking compared to its former glorification. The significance of this is that revealed preference theory predicts that if you paid some young fellow (whose body could recover) back then the equivalent of $1m on the condition he successfully stopped smoking, he wouldn’t necessarily even try.
Think about it. If he is rational and and is one of those who value smoking somewhere to the tune of $3m – well, that number is a lot bigger than $1m. It’s a no-brainer for Homo economicus! I submit that this result is overwhelmingly implausible. It is, however, an implication of revealed preference theory with the additional premise that the implicit value of not having to try and quit cigarettes is about the same sixty years ago as it is today. It is at least extremely plausible for it to be in the same order of magnitude.
So, it seems you have to either believe that your average Joe Schmo wouldn’t immediately leap at such a chance for $1m, believe the value of smoking has sky-rocketed since the time it was cool and trendy, or reject revealed preference theory. At this point, it might be complained that since decisions as to whether a costly regulation is worthwhile have to be made, we cannot but utilize these kinds of statistics in bureaucratic decision-making. This may or may not be true, but that doesn’t mean we should pretend these numbers are remotely scientific, or that they really reflect what it is we actually value.
*This is, strictly speaking, only correct in highly specific circumstances coupled with some even more highly dubious moral theory. I, however, cannot attest to the EPA’s actual decision making process and the way in which these figures are in fact used.
I’m writing this blog post from my iPod, whilst watching a football match (in HD) on a television screen roughly the size of a dining room table, and I’m thinking about how pretty damn awesome ‘stuff’ has become. I still remember my first mobile phone, which I got at what then seemed the relatively early age of 13… and it was awful. Indeed, I am reminded of it’s sheer uselessness by the fact I currently use the cheapest phone you can buy (more on that in a minute) from Carphone Warehouse, and that phone kicks my ancient Motorola’s ass.
Not only has stuff gotten way better, but it has done so in quite unexpected ways. I was talking a couple of years ago with a friend who works in the communications industry, who observed that very few people actually saw the wireless revolution coming. No one thought fifteen years ago that something like my iPod could possibly do what it does. Indeed, the portable mp3 player only made its first appearance on the shelves in 1997.
But anyway, I write not to exalt the wonders of modern technology but to complain about our constant need to get the upgrade or the new piece of kit. This strikes me as completely the wrong focus, and we are all the poorer for it. Apple, for instance, tend to upgrade each line of product more than once a year. My complaint is not that the upgrades don’t represent a genuine technological achievement, which they often do, but that by the time we get round to buying the next big thing we still haven’t figured out all the incredible uses to which we can put the stuff we already have. I would contend that the awesome potential for SMS messaging has still not come close to being realised. The services are often there – e.g. Texting for train times and the like, but before it ever could (at least to my knowledge) become widely used we had this new amazing thing called the App. I am also constantly discovering new things I can do with my computer and new programs that can make my computing experience feel like, well, having a brand new machine.
Don’t get me wrong, I am as prone as anyone to the lure of new technology and general gadgetery. I came surprisingly close to getting an iPad – which given I possess both an iPod Touch and an expensive ultra-portable laptop is a bloody ridiculous waste of money. The latest thing to catch my attention is the MiFi, which basically acts as a mobile broadband hotspot for all your wireless capable kit*. But I also can’t help thinking that if I spent as much time figuring out new ways of using the stuff I’ve got as browsing for new stuff I could get, then I would probably be better off even if I ended up buying all of it. I also feel a kind offence that technology which has not yet even come remotely close to meeting its potential is discarded for something that is often just a slight upgrade.
So I’ve decided to make a resolution: for the next year, every time I feel like looking at new gadgets, or upgrading my laptop or iPod, I shall first find something cool that I can do with the stuff I already have that I never knew I could do. I find this assuages my desire for acquiring new ‘stuff’. One thing I already do to make my computer feel new is give the chassis a good clean every few months, and restore everything to factory settings. I’ll reinstall a lot of the programs I already had, but use the opportunity to inventory what I actually use as well as have a look around for new free software. Plus, since windows has an incredible ability to become clogged up with various errors and problems, I am always genuinely surprised at just how well my laptop performs when it has been totally de-cluttered. If you have a PC or laptop with Vista, you could do a whole lot worse than restoring it to factory settings and upgrading to Windows 7. I love the latest Microsoft OS, because the premise of the whole upgrade was to make the same basic concept work better, and to their credit it really does.
Which brings me to my final point: the mobile phone. The regular upgrade has made us far too obsessed with new features (like the ever increasing megapixels on the camera) and blind to the uses to which those features could be put. Sadly, it also seems that the vast majority of phones are now Internet and email capable, and that such services are now standard in pay monthly contracts (which, outrageously, are now almost all 24 months). I say sadly because I have no interest in having email on my phone. Why, you ask? Because when I start my job, I don’t want to be paying for the privilege of being reachable by email 24/7 – and if it has to happen, I don’t want to be the one to pick up the tab. What I’d really like is a phone that just does texts, calls and contacts really well, but sadly this product does not seem to exist. I still want to find out all the cool things I can do with just a text message.
I suppose this is all by way of saying: I’d take train times by SMS over emails from the boss anyday. I cannot help but feel that our incredible technological achievements are often matched by the poverty of our imagination in putting it to work in interesting and exciting ways.
Actually, I think that may be a bit unfair. The apps are out there, and the SMS services are available, but we as consumers spend far too much time thinking about the hardware. To this end, I would be more than glad if the precious few readers that grace my humble blog could tell me about some of their favourite iPod/iPhone apps, or freeware for the PC. I can say with confidence that such information has the potential to enrich me far more than if you decided to buy me a new phone.
Since we are currently reliant on finite natural resources for making all the new crap we buy, it strikes me that we cannot afford but to change our attitude. Stop worrying about that extra .3Ghz of processing power, and think about what you use it for. It may not be an exaggeration to say that future progress depends on it.
*How cool is that?!
UPDATE 3/9/2010: I just bought an iPhone 4… so sue me.
UPDATE 2: …and now I have an iPad, too. Bloody marvellous machine.
Warning: This is an attempt to apply back-of-the-envelope calculations to answer one of the more controversial questions in English football – why does a striker who rarely scores goals start for England? It features the use of extremely dodgy guessing and dubious statistical techniques. You have been warned.
My understanding is that the main reason Heskey starts alongside Wayne Rooney is that he helps other players score goals. Indeed, given that Heskey himself scores less than one goal for every eight appearances, I can’t think of any other reason for him to even be in the squad (let alone the first choice team). So, the question is: does Heskey’s ability to hold up the ball, occupy defenders and release other players make up for the fact that he himself is not a goalscorer?
We can at least get a crude idea as to whether this is even likely to be true. Let’s say the players that are most likely to benefit from having Heskey in the team are Rooney, Lampard and Gerrard. We know Rooney likes playing with Heskey, and Lampard and Gerrard (as evidenced by the USA goal) are known to make runs from midfield. Rooney’s scores about .4 goals per appearances, Lampard .25 and Gerrard .21 (this is simply based on goals divided by caps). Let’s assume that Heskey increases their chances of scoring by 50%, which I suspect is extremely generous. Now, if we simply add these three players scoring rates together we get .86 – 50% of which is .43.
Heskey scores approximately .12 goals per cap. So, if we add Heskey’s goal scoring to the extra goals he creates for other players, we get .55. Incidentally, that is almost exactly the number of goals Peter Crouch scores per game (.54). So, even if we assume Heskey increases the chance that Rooney, Lampard and Gerrard score by 50% – which is an extremely large increase – he isn’t obviously increasing the total number of goals scored by the team when we compare putting Crouch in his place.
Now, in order to be a better candidate than Jermaine Defoe, many of whose appearances are as a late substitute, then the Heskey effect needs to be at least 20% – which when you remember is 20% over and above Defoe’s ability to create chances or others is still a massive difference. This kind of back-of-the-envelope thinking suggests to me that any ability Heskey has to create goals for others is unlikely to make up for his low goalscoring.
Obviously, this is no way to go about picking a football team, otherwise Crouch starts looking like one of the best international strikers in the world. Furthermore, I have not separated the ‘ Heskey effect’ from the past stats, which I could have a stab at if I bothered to make a few assumptions, and maybe at some point I will. Everything I have said needs to be taken with a huge grain of salt (or is it many grains of salt? I’m not sure). All I am suggesting is that Heskey needs to be very significantly better than either Defoe or Crouch at helping create chances for other players in order to make up for his own lack of goalscoring. Furthermore, one way that Heskey might create chances for other players is by neglecting to take one that any other striker would, hence not affecting the total number of goalscoring opportunities anyway. I therefore remain as unconvinced as everyone else in the country that Heskey should be starting, but at least I have some questionable maths to back it up…
WARNING: I have completely changed my view on this topic, and intend to write more on in in he future. Below I suggest you can’t perform a fundamental value analysis on Berkshire stock, when of course you can on all its underlying income streams. I leave it up as a shining example of how applying a useful framework inexpertly (in this case, the distinction between value-investing and speculation) can lead to bad results
A bit of a bold title for a first post, but I was absolutely astounded to find out today that Warren Buffett’s phenomenally successful company Berkshire Hathaway – a single share of which would currently set you back $115,325* – hasn’t paid out a dividend to shareholders since 1967.
Think about this for a second.
Buffett is famous not only for being an incredibly skilled allocator of capital, but for his philosophy of investing for expected future returns rather than on speculation. You find a company whose future returns are undervalued, buy that company and hold it. Maybe you’ll have to rejig it a little to get those expected future returns, but as I recall Buffett saying himself on the BBC special he was the subject of last year: he bought a company once that required turning around and making some tough decisions, and it wasn’t much fun. So he made sure he never had to do it again.
Would Warren Buffett invest in Berkshire Hathaway, if he was following his own philosophy? I can hardly see how. What is the value of owning an expensive piece of stock unless you expect it to pay dividends, or unless you plan to sell it at a higher price in the future? The former is nonsensical if the dividends are zero, and the latter goes entirely against the letter (let alone the spirit!) of Buffett’s investment philosophy.
Consider the following, from CNNMoney.com in 2004:
“A shareholder asked what it would take for Berkshire to change its longstanding opposition to paying a dividend or conducting share repurchases. Buffett used the question to teach a mini-clinic on corporate finance, pointing out that the managers of a company have a fiduciary duty to put the company’s cash to optimal use…
Later, Buffett made a striking observation. Imagine that Berkshire decided that it could no longer wisely invest its $30 billion-plus worth of cash and decided to distribute all that cash to shareholders in a special dividend. Buffett himself, as the largest shareholder, would get more than $7 billion.
Then, he pointed out, he would have to try to find good investment opportunities to put all that money to work for his own account. “I would be in competition with Berkshire’s shareholders, and I don’t think that would be good for them,” Buffett said.”
This response doesn’t make any sense, because the whole point of a fiduciary duty is that management act in the interest of the shareholders. But I can’t see what the interest of the shareholders is here, unless it is simply to increase the share price (and Lord knows that in many cases such a policy can have terrible consequences for shareholders). They never actually get any of the money!
And furthermore, the shareholders might not want to use the dividends to find good investment opportunities. Maybe – and this might come as a shock to the famously frugal Buffett – they might want to spend the money. Money doesn’t just exist for its own sake – it is a medium of exchange. It exists so we can get stuff. Why on earth would anyone invest except to have more money to spend?
Something doesn’t add up. I’m not going so far as to brand one of the richest men in the world a hypocrite.. or maybe I am, I’m not sure. The annual shareholder meeting for Berkshire Hathaway is often referred to as ‘Woodstock for Capitalists’. And that’s the only possible rational reason you could have for owning stock in Berkshire Hathaway – to be part of an elite club that get to go hang with a bunch of cool kids every year (or, at least, with a bunch of kids who all think another kid is really cool). Perhaps this is the way that Berkshire shareholders see themselves. We can test this hypothesis. If it is the case – as I strongly suspect – that one gets as much benefit from holding one share as any other number if we think about it as a private club, then we should expect almost all the shareholders to own one share. If this is correct, anyone who has more than one share is either a) incompetent at calculating the value of a simple investment (in this case, the marginal utility of a second share in Berkshire Hathaway) or b) engaging in speculation. Either way, they can hardly be said to be following the philosophy of the man they so admire. And Buffett’s justifications about not paying a dividend strike me as if it is supposed to be something more than an elite club.
Almost like its supposed to be a publicly traded business or something.
*UPDATE (3/5/10): This price reflects the ‘Class A’ shares – there are also ‘Class B’ shares which have 1/150th of the claim of Class A.
However, what this serves is to prove the point that Berkshire Hathaway stock holders are engaged in speculation. Class B shares trade at pretty much exactly 1/150th of the price of Class A shares, therefore the value is (unsurprisingly) based on the claim to the company, rather than the right to go to the meeting and be part of the club (which is exactly the same for both Class A and Class B). It remains, then, an utter mystery to me how one can consistently adhere to Buffett’s value-investing philosophy and be a Berkshire Hathaway shareholder.
To drive home this point once and for all: value-investing is based on the idea of a so-called ‘fundamental analysis’ – and essentially if the fundamental analysis churns out a number that is greater than the current market price, then you buy. But if Berkshire never pays dividends (and it never has while Buffett has been running it full time), you can’t carry out a fundamental analysis. Even the price-earnings ratio for Berkshire is pretty high already (about 22), despite the fact as a stockholder you get to see no more of those earnings than I do.