Mary Matlin’s Economics

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By Barry Ritholtz - March 31st, 2012, 2:30PM

Paul Kasriel will be retiring from The Northern Trust Company on April 30. In the last month of his tenure, he plans to share some of his parting thoughts on economics.

He begins with this humdinger:

“Now, on to Mary Matalin. I saw her on one of the cable news shows on Wednesday defending Republican presidential candidate Mitt Romney’s planned car “elevator” in his new La Jolla home in terms of job creation. Ms. Matalin argued that by installing this elevator, Romney would be creating new jobs for the economy. How might Bastiat, the 19th century French political economist, have reacted to Ms. Matalin’s argument? My suspicion is that he would have made a distinction between what Ms. Matalin “sees” and what is “unseen.” Ms. Matalin sees the additional workers manufacturing and installing the elevator. What she apparently does not see are the workers who otherwise would have been hired for some other unrelated project had Mr. Romney forgone the installation of the elevator and rather invested, or saved, these “elevator” funds. Ms. Matalin, a Republican partisan, appears to have bought into the Keynesian fallacy often trumpeted by Democratic (or is it Democrat?) partisans that an increase in saving implies less total spending in the economy and diminished job creation. If Mr. Romney chooses to forgo the installation of a car elevator in favor of, say, purchasing some additional financial assets, in effect, he is transferring some of his purchasing power to another entity – a business, another household or a governmental body – that has a greater urgency to spend currently than does Mr. Romney. So, although Mr. Romney would be hiring fewer workers to manufacture and install a car elevator, the recipient of Mr. Romney’s investment funds would be hiring additional workers to produce whatever they were purchasing. (This concept of transfer credit comes from the Austrian school of economics, whose pupils greatly admire Bastiat.)The only way Mr. Romney’s decision to forgo the installation of a car elevator would not lead to a creation of jobs is if Mr. Romney chose to increase his saving by holding more bank deposits and/or currency, in which case would result in a decline in the velocity of money.

So, boys and girls, like Bastiat, keep your eyes open. Try to see everything when analyzing economic issues. Ms. Matalin was not incorrect to argue that Mr. Romney’s decision to install a car elevator in his new abode would create new jobs. But what she apparently failed to see is that new jobs would have also been created if Mr. Romney had chosen to forgo the purchase of the car elevator and instead invested those funds. Increased saving in general does not result in decreased aggregate spending. Rather, it merely changes the composition of who is engaging in the new spending.”

Rather intriquing . . .

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Source:
Kasriel’s Parting Thoughts – Mary Matlin’s Economics
Paul Kasriel
The Northern Trust Company March 29, 2012
http://bit.ly/H49XEs

Complexity, Context, Probability & Bias

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By Barry Ritholtz - March 27th, 2012, 7:27AM

No one seems to remember the second part of Occam’s razor as rumored1 to be stated by Albert Einstein: “Everything should be made as simple as possible, but not simpler.”

That is an issue I am encountering quite frequently these days. We see it in discussions about markets, politics, sports, economics, indeed, just about any field where questions of an unknown future drive debate. This morning, I want to briefly discuss the issue, pointing out a few recent examples. My advice is to be wary whenever you see this approach.

First, let’s understand what Occam’s Razor actually means: When we select among competing explanations for any given unknown, we prefer that which offers the simplest explanation of any effect. This includes that which makes the fewest assumptions, and requires the least logical contortions. However, one should proceed to simpler theories until simplicity can be traded for greater explanatory power. This is especially true when it comes to explaining complex events with lots of moving parts.

Consider the following statements:

Politics: No modern president has ever won a second term when the unemployment figure was 7.3% or more.2

Markets: The average Bull Market lasts 31 months.3

Sports: The new line up of (Choose: NY Knicks Jeremy Lin/Carmelo Anthony or NY Jets Mark Sanchez/Tim Tebow) locker room disruption.

Credit Crisis: High levels of leverage existed prior to the crisis without incident.4

Apple (2004-10): Has a very high P/E.

Affordable Housing Policies: Allowed lower income people to purchase homes they could not afford.

Note that I did not include any conclusion based upon these single variable analyses. But these are the simple, recognizable memes circulating the intertubes. They lay traps for the unwary. The conclusions the authors of these draw are:

1. The incumbent will lose in November
2.Sell your stocks
3. The Knicks and Jets cannot win a playoff
4. Leverage was not a factor in the credit crisis
5. Don’t Buy Apple
6. It was all Barney Frank’s fault

These are all probability questions. When doing these analyses, we do not know what the future outcome will be. Certitude in the face of probable outcomes is discouraged, as is gross over-simplification.

I have addressed many of these over the years (I want to get to the leverage issue soon).

Some people work backwards: They start with their conclusion, than set about hunting for any data that supports it. This is the worst form of confirmation bias. The preferred method is to research all of the relevant data, and see what conclusion that leads you to.

Bottom line: When it comes to investing, the errors of single variable analyses, oversimplification and bias all can be very expensive. Recognize these flaws when you encounter them in any sort of commentary, and adjust your expectations accordingly.

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Previously:
Single vs. Multiple Variable Analysis in Market Forecasts (May 4th, 2005)

Hume, Causation & Science (January 14th, 2012)

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1. Provenance: There is some question as to the whether Einstein actually said this, according to (Quote Investigator)

2. Unemployment rate by year (BLS)

3. This Bull Market Is Hard to Pin Down (NYT)

4. Bethany McLean: The meltdown explanation that melts away (Reuters)

Jim Grant Does His Best John Galt Impression

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By Barry Ritholtz - March 8th, 2012, 11:15AM


Founding Fathers’ Intelligent Design

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By Barry Ritholtz - February 26th, 2012, 5:22PM

Source Wuerker, Politico

Pleasure Principles

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By Cassandra Does Tokyo - February 23rd, 2012, 8:00PM

“What will fill the vacuum formerly occupied by religion?”

The most thoughtful, as well as the most memorable wedding gift my spouse and I received in 1993, the year of my first (and only) marriage, was neither the most expensive, nor an object. Rather it was a “Brunch” – that uniquely American invention deplored by Anthony Bourdain in Kitchen Confidential as a reliable though odious route for restaurants to recycle anything and everything left over in their refrigerator and pantry. I learned other useful pointers from Boudrain, (who since parlayed that success into a TV Celebrity status that sufficiently provides for his habits), such as never eat restaurant fish on a Monday, and if you’re a foodie and looking for best execution, avoid Fri and Sat evenings like the plague., etc. But I digress. This ‘Brunch‘ was a simple but special affair in that it included the company of [the late] acclaimed author, Chaim Potok, and his lovely wife Adena.

Who is Chaim Potok, you might ask? I’d read several of his novels, independently, following on the heels of those by Nobelists Saul Bellow and Isaac Bashevis Singer, though before I’d been introduced to works of Philip Roth. All their voices rang true. All chewed upon the clash of the traditional with the modern. All seemingly lamented the loss(es) of what was, even when (reluctantly) accepting the victory of modernity’s “progress”. And they all struck some chord within me, each ruminating in their own perspectives and style upon issues still-raw-and-contentious (in my own family), growing up as I did on the generational cusp, and witnessing my parents wrestling with theirs over the same.

I think Potok stands out as his breadth of thought was more encompassing. He was first a Rabbi, then a writer, also a theological academic and philosopher (PhD Penn, Philosophy) as well as a graphic artist, and playwrite, though the arts were his first love and a source of conflict with his own (traditional) parents. His timeline reflected this same struggle: from indoctrination and orthodox study sliding towards the increasingly secular graphical artist and thinker. He may not have been the superior novelist of the genre shared by the four eminent writers, but he probably was the most eclectic and adept thinker. His experiences were varied: an army Chaplain, a rabbi, a teacher, an editor, writer, an artist). Bellow’s and Roth’s characters and dialogue might have been more realistic, Potok stretched the boundaries of thought further than the others. Like the great Jewish minds (unlike those of current-day Likud), Potok ruminated thoroughly and saw things not categorically, but nuanced – context within context within context.

Beyond these spartan observations, there is little I can add. We drank coffee, and chatted about our experiences, and about faith. I made no effort to hide my lack thereof, though I couched it in the agnosticism of the empiricist versus certitude of the militant aetheist, which was more useful for friendly discussion than Dawkin’s axe-wielding approach. More coffee and cakes, and the conversation drifted from the first to third person, and modernity’s impacts upon religion. I noted that religion was useful historically as a means control. Fear of God, his wrath (for the Jews) or Hell (for Christians) were powerful tools. And whether a tool for purposes of control, or more recently as panaceas for the spirit, there is in modernity, I suggested, a gaping hole in the psyche and in one’s preoccupation that was previously occupied by religion. “What”, I continued, did he “think might or will replace it???!!?”

He pulled on his whiskers for a long time, looked upwards towards the heavens, and then stared deep into the depths of his half-filled cup before meeting my eyes and saying more categorically than he had about anything to that moment ……”Hedonism”. “Hedonism will fill the void…”, and for the first time, I saw resignation on the face of this otherwise thoughtful optimist. It is the same resignation floor traders must have felt as transactions went “upstairs”, or that which strikes value-oriented reversion traders horse-whipped by seemingly less-than-explicable momentum, or an allocator feels when assessing the new normal of what used to be the risk-free rate. It is a distinct feeling that the sense one previously made of the world has been palpably altered, leaving it a less-hospitable place as a result.

Conversation rebounded from the after-effects of this pronouncement, for it was clear he knew that however depressing the prognostication, there was nothing he could do. He could analyse this wave, indeed, he could explain it. But he knew it will be as it inevitably will be. Efforts to change the direction of such a tide would be futile. I understood he was not whining. Nor was he living in the past. As was the case with his literature, he sought first and foremost to understand what was going on around him, and make sense of it, rather than tell us how it should be.

In 2012, it seems ironic, that mired in debt with unemployment rife, that our Grasshopper-like spirits’ gaze is, as Potok forecast nearly two decades ago, firmly fixed (and growing) upon hedonism. Not spiritualism or New Age-ism, but full, unbridled “Whatever!” I see it manifested in demagogues pandering “7-Minute Abs” solutions, to problems of marathon proportions. I see it in my eldest’s seeming addiction to fatuous social networking, or under the spell of inane traditional media at the cost of reading or doing. I see it in the increasingly stylized beach or ski holidays. I see it in the untempered expectations still being conjured and polished by companies and their Madison Ave agents. I see it in the politicians’ promises to restore what Americans’ believe is owed to them.

But is this not natural? Should hedonism be a pejorative? To the extent it plays a part in fueling expectations and pursuit of a lifestyle for the individual that is unsustainable for the group, then yes. To the extent that it prevents sober or pragmatic evaluation of what needs or might be done to pursue even weak-form sustainability, then yes. To the extent it discounts the longer run policy pursuits, for the short-run, then indeed, yes. To the extent it encourages anti-social behaviour to finance parochial hedonism, then yes. To the extent it fuels near-unprecendented greed at the expense charity yielding a coarser way of life for the benefit of parochial pleasure and the privilege of the yet unborn, then yes, it is a pejorative, and we should lament its expansion in filling the vacuum.

Unlike the Apocalyptors and Tin-Foil Hat Brigade, I do not believe 2012 will be the year of the Return of Barter or Oblivion For Mankind, and while it may even surprise to the upside given the hugely bearish expectations of the market and anti-European shills, I do think it will be an interesting year for observing what happens when hedonistic rubber meets the austere reality of the road ahead of us [all].

Socrates’ Advice to Greece Today

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By Kent Thune - February 22nd, 2012, 9:35AM

This post was originally published at The Financial Philosopher, by Kent Thune.

“I do nothing but go about persuading you all, old and young alike, not to take thought for your persons or your properties, but and chiefly to care about the greatest improvement of the soul. I tell you that virtue is not given by money, but that from virtue comes money and every other good of man, public as well as private. This is my teaching, and if this is the doctrine which corrupts the youth, I am a mischievous person.” ~ Socrates

Every time I see news coverage of street protests in today’s Greece or of political leaders discussing Greek Austerity, I imagine, if Socrates were living today, if he would be there among the protestors and, if so, what he might say or do. Would he support the protestors? What might he say to the government leaders? Would he approve of Greek Austerity measures?

Luxury is Artificial Poverty

Socrates never recorded any of his thoughts or ideas on paper and all that is known about him comes from the writings of his contemporaries, such as Plato. However, it is clear from these writings that Socrates cared little about money and materiality and he certainly shared no affection with the ruling Aristocrats. Many accounts of Socrates describe him as something of a poor, unattractive hermit wandering the streets of Athens, teaching his philosophies to anyone who would listen. In a time when men labored for a living and spent much of their free time working for the affairs of the city aspiring to political power, Socrates did neither.

In today’s Greece, I believe Socrates would still find himself in the unique position of standing in a corner completely his own–neither with the protestors, nor with the government. While he might sympathize for the struggle of the Greek people against the governing leaders, he would remind the people that money is the corrupting force at the root of all of their troubles and that they would find contentment to let go of their material desires and to end their reliance on government to cure their ills.

Socrates to Greece: Die But Don’t Forget to Pay ‘Debt’

The featured quote at the beginning of this post comes from Plato’s account of the trial of Socrates, where Socrates was accused of “corrupting the youth of Athens” and was given the choice to either denounce his philosophies or die by drinking the poison hemlock. Socrates chose death.

His last words were reportedly spoken to Crito, where Socrates said, “We owe a rooster to Asclepius. Please, don’t forget to pay the debt.” Asclepius was the Greek god for curing illness. Therefore these words are interpreted to mean that death is a cure and a means to freedom.

I would never expect a political body to take the path of a wise philosopher, but Socrates would likely say today that Greece must metaphorically die–to split from the European Union–to be cured of its ills… And, yes, don’t forget to pay your debt to Asclepius…

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Follow Kent Thune on Twitter or subscribe to his blog at The Financial Philosopher.

Is America Becoming More Conservative? Why?

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By Barry Ritholtz - February 16th, 2012, 9:00PM

Why has the economic crisis deepened America’s conservative drift? The trend towards the hard right is most pronounced in the least well off, least educated, most blue collar, most economically hard-hit states.

Why?

It is a fascinating glimpse into the Human (or is it American?) Psyche — and I am very curious about it:

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Consider these fascinating bullet points from Gallup:

• Conservative states are considerably more religious than liberal-leaning states. And, this correlation between religion is increasing

• Conservative states are also less educated than liberal ones; This correlation between conservative affiliation and education (percent of adults who are college graduates) is also substantially higher than before.

• States with more conservatives are less diverse.

• Conservative political affiliation is highly negatively correlated with the percent of the population that are immigrants or gay and lesbian.

• There is no correlation to race or ethnicity, however, whether measured as percent white, percent black, or percent Hispanic (Fascinating).

• Conservative political affiliation is strongly correlated with percentage of a state’s workforce in blue-collar occupations;

• Conservative political affiliation is highly negatively correlated with proportion of workforce engaged in knowledge-based professional and creative work.

• States with more conservatives are considerably less affluent than those with more liberals.

• Conservative political affiliation is highly negatively correlated with state income levels and even more so with average hourly earnings.

I don’t know about you, but I find these datapoints amazing. Can anyone explain the thought process under this? It is not what I was expecting . . .

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Source:
Why America Keeps Getting More Conservative

Richard Florida
Reuters, Feb 13, 2012
http://m.theatlanticcities.com/politics/2012/02/why-america-keeps-getting-more-conservative/1162/

Rapture Ready: The Christians United for Israel Tour

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By Barry Ritholtz - February 12th, 2012, 12:00PM

Max Blumenthal’s latest takes us on a shocking and at times bizarre tour of right-wing Pastor John Hagee’s annual Washington-Israel Summit, blowing the cover off the Christian Zionist movement in the process. Starring Joe Lieberman, Tom DeLay, Pastor John Hagee, Ambassador Dore Gold and a host of rapture-ready evangelicals praying for Armaggedon.

Anecdotes Wanted . . .

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By Barry Ritholtz - January 30th, 2012, 8:40PM

“The reason capitalism has triumphed in the West and sputtered in the rest of the world is because most of the assets in Western nations have been integrated into one formal representational system . . . By transforming people with real property interests into accountable individuals, formal property created individuals from masses. People no longer needed to rely on neighborhood relationships or make local arrangements to protect their rights to assets. They were thus freed to explore how to generate surplus value from their own assets.”-Hernando de Soto, The Mystery of Capital

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In The Mystery of Capital, de Soto raised a fascinating thesis: That the West’s system of record keeping and property recording  is why Capitalism took hold here.

In other regions — namely, Asia, Africa and much of South America, the Peruvian born economist argued that the economic system was highly dependent on elders, neighbors, and recollections — rather than recorded deeds — for transferring property. This would, as you might imagine, stifle the willingness to invest in or lend against property.

Tonight, I want to ask you for actual anecdotes about this. What sort of stories or narratives is anyone familiar with that demonstrate the East’s problems with this, and why it may have stifled the spread of capitalism.

This is for a wicked cool project that I cannot talk about yet . . .

Most of the World Wants More Bank Regulation

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By Barry Ritholtz - January 28th, 2012, 7:29AM

More business regulations.

That is what survey after survey around the globe shows that the world’s populations wants. Despite a relentless propaganda campaign of misinformation, fabricated data and false narratives, the public has not been fooled by the 1%. The best efforts of a well funded group of ideologues — Free Market absolutists, anti-Democracy and Randians — these pro-corporate radicals has not yet succeeded in fooling all of the world’s population all of the time.

How do we know this? A 25 country survey last year by Edelman. They asked the question:  “When it comes to government regulation of business, do you think that your government regulates business too much, not enough or about the right amount?

Most of the world thinks there is insufficient regulation across all industries. The United States, where 31% there was too much regulation. Ironic considering we originated the global financial crisis. The next closest country was Germany at 28%.

Significant pluralities or outright majorities stated that more regulatory oversight was required, with four exceptions: Singapore, UAE and the USA. Singaporeans at 21% were the lowest, but that is no surprise in a nation where spitting gum on the sidewall may lead to a caning. Only 33% of the Emirate residents said more regs were needed. In Sweden, the number is 31%. In the US, more business regulation was requested by 37% of Americans.

As we can can be seen in the chart below, most of the world has a very different perspective.

One major caveat: I would imagine the major events of the past few years probably has people thinking of disasters in specific industries: Banking, Energy Exploration and Nuclear Power. If the questions were asked about those specific industries, I believe the response for more regs would be much higher. And if the question was asked, “outside of banking, deep water oil drilling and nuclear plants” I assume we would get lower numbers.

Hence, this survey may be less about the ideology of regulation and more pragmatic about reigning in dangerous and disaster prone sectors.Too bad that concept never entered the surveyors minds . . .

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UPDATE: January 28, 2012 1:22pm

Apparently, Finance Remains Least-Trusted Industry in Annual Edelman Survey

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click for large graphic

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Source:
How the Public Sees Business Rules
FLOYD NORRIS
NYT January 27, 2012   
http://www.nytimes.com/2012/01/28/business/survey-takes-publics-pulse-on-business-regulations.html

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