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Saturday, April 15, 2006

The Ownership Society is not a good deal

Republicans like to talk a lot about the ownership society, one in which every person is responsiible for his fate and his ultimate outcomes. What most of them really mean is that they think they're smarter than everyone else and won't get hit by bad luck, poor choice of parents, or a lying, cheating CEO who took all the money and ran. What they forget is that we live in a country where most of the folks can barely be trusted to drive like a decent human being, and trusting those sorts of people to make financial decisions is like trusting me to know how to dress for a wedding: the outcome will not be good.

Now, the New York Times has reported a study that shows even top-achieving students in MBA programs cannot be trusted to make good decisions when it comes to allocating money to a selection of index funds! They chose on average, higher fee funds (i.e., got themselves cheated), and were easily fooled by carefully selected data. This is why privatizing social security is a bad idea, and why typical investors do extremely badly in their 401(k) plans, even assuming that they aren't just getting the shaft by their plan administrator.

The rational response, the professors argue, would have been to allocate all the money to the fund with the lowest fees. Yet fewer than 20 percent of either group of students did so. As a result, the hypothetical portfolios built by most of the students paid much higher fees than were necessary: 1.22 percentage points more, on average, among the undergraduates and 1.12 points higher among the M.B.A. students...

...if a sampling of elite students can't separate the wheat from the chaff in assessing mutual fund reports, most investors probably can't do so, either. (All the study participants were high academic achievers who had scored above average on a financial literacy test administered by the professors.)

In the other additional test, another group of 114 students was given a one-page sheet that, instead of reporting returns since inception, specifically compared the funds' fees. Students in this final group did, on average, construct portfolios with lower fees. Nevertheless, even this group came nowhere close to allocating its entire portfolio to the low-cost fund. More than half of these students, in fact, continued to allocate some money to the higher-cost index funds.

WHAT conclusions emerge from all these tests? Over all, the study said, the results do "not inspire optimism about the financial choices made by most households."

22 comments:

Scarlet said...

I assume the lowest-fee funds were otherwise fairly equal in performance to the other funds? I can see how you would pick a fund with 10% returns and 1% fees over a fund with 5% returns and only .25% fees.

Though I was looking at a Vanguard prospectus last week, and noticed that they calculate the expense ratio based on the total amount in the fund. So with the $1 billion VGINX, yeah, it's only a 0.25% ratio, but it seems like on an absolute basis, the actual amount you pay in expenses might be lower for another fund with a higher expense ratio but considerably less assets?

Piaw Na said...

Yes, they were all indexed funds. If you read the source article, it's even worse. The funds had different incept dates, so their performance were apparently different, but over the same time period they had identical performance. The MBAs apparently couldn't tell the difference.

Expense ratios are all calculated on the basis of the amount invested. In other words, for each $1000 in the fund, an expense ratio of 0.18% you would be paying the fund manager $1.80. For a fund with a 1% expense ratio, you'd be paying $10 per $1000 invested with the investor. The expenses usually come off the fund returns. The stock market is expected to return about 6% per year (according to Warren Buffett and a few others more savvy than I am). With inflation taking 3% a year on average, the difference between a fund that's soaking up expenses of 1% (and most funds do worse than that) and one that's soaking up 0.1% (the Vanguard Admiral shares of funds) is significant.

I know people who are paying 0.5% wrap fees on top of whatever expenses of the stocks/funds their investment advisor has them in. On a $500,000 investement, that's a hefty $2500 a year they're paying for nothing other than "which funds should I invest in?"

md said...

I'd just like to add that John C. Bogle lays it all out in Common Sense on Mutual Funds that low fee index funds beat out managed funds historically. Anyone investing their money should have read this book cover to cover, at the very least. Bogle's and similar research is based on historical data, and there are always exceptions like Warren Buffet, but everyone should at least be aware of the research before making an investment against the odds.

The idea that everyone is capable of planning for their retirement seems absurd; many people seem to be incapable of planning for tomorrow's lunch, even. If the safety net of social security is tossed, I truly expect a rather nasty dystopian future for the US, with more homeless and starving elderly than ever before.

Piaw Na said...

I doubt if social security will get tossed. Even Bush isn't asking for it. What I fear is that the "privatization" part will be badly managed with high expenses and confusing choices. The British experiment with privatization of pensions showed how badly most individuals did when faced with long term financial decisions. The result was a massive bailout and a desire to return to a private model, according to Paul Krugman.

md said...

I guess this is true; it's unlikely that social security will get completely tossed; I expect it will be increasingly reduced though.

The plan to privatize social security looks to me like a scam to transfer wealth from the poor to wealthy fund management companies. The suggested portion to be privatized is so small (was it suggested as 4%?) that it seems it could hardly make a difference in overall performance of funds in social security. But for the managing companies, skimming their fees off of that amount, it would be quite a windfall.

There are certain universities with large, well-managed endowments that have performed consistently well over the long-term (I'm thinking Yale). If the US could transfer the funds in the social security system over to those managers, I suppose it could work. I guess the question is, would those endowment managers be able to get the same performance managing the much larger sums of money in the social security system?

Piaw Na said...

Privatizing social security is a scam for many reasons, mostly having to deal with the fact that social security has always been a pay-and-you-go system, and transitioning to private accounts would create a short-fall. Paul Krugman has an article that explains this quite well, but I can't find it at the moment.

It's not clear to me that anyone managing something as large as social security can do a better job. When you're so big that you're effectively the size of the market you can't do better than average, by definition. However, it's quite obvious to me that the costs can be siginficantly reduced, which will make Warren Buffett and me very happy.

Scott Burns points out that the life-cycle funds available to federal employees have an expense ratio of 0.06 percent a year. By comparison, Vanguard's Target Retirment 2045 Fund has an expense ratio 3X as high, at 0.21%. (If they had an admiral class for the shares it would have an expense ratio around 0.12%, still twice as high!) Not having to pay for corporate jets and plush offices is an amazing advantage, if it's handled properly. Of course, my confidence that anything the Bush administration does will be handled properly is zero.

md said...

I've read many of the Krugman's articles, and I generally agree with him.

Still, don't you think that the "pay-as-you go" system is nothing more than a pyramid scheme? Also, if I wind up paying for someone else's retirement, will they be as inclined to be thrifty with my money? I think I'd feel more comfortable if everyone were "coerced" into paying for their own retirement.

The pay-as-you-go system also encourages unbridled growth. There is a lot of talk about encouraging and increasing immigration in order to support our aging population. What happened to sustainable growth? I like the wide open spaces and parkland here. I don't want to see the US turn into one huge development. And it's rapidly going that way. Eventually, the population will be saturated as it is in Europe. Oh well, that's branching off into a whole other topic.

Piaw Na said...

Pay as you go is not a pyramid scheme. It's an inter-generational transfer, and is something that happens in traditional societies. If you think about it, it's not unusual in traditional societies for the young members of society to support the elderly members of their family. In fact, one of the traditional reasons for having lots of children is that in traditional societies, your children are effectively your pension plan. Social security formalizes this, so effectively everybody else's children are supporting you when you're old, but you also had to support everybody else's parents when you were young.

A formal defined-contribution plan will work as well, provided it is implemented well. However, the transition from a social security plan to a defined contribution plan has lots of headaches, mainly because the first receipients of social security (who effectively got a free lunch because they drew all the benefits of social security without paying into the system) are now long gone, so you can't go back to them and say, "Pay up!" What that would mean would be that everyone else would have to pay up twice, once for the existing receipients of social security, and once for their own defined contribution plan. It is the denial of this necessity that makes the Bush privatization plan (and most privatization plans I've read about) so mendacious. Krugman explains all this here.

By the way, despite all protests to the contrary, Social Security is in fine shape! If growth doesn't solve Social Security's solvency problem, then all that would happen would be that social security could only pay out 75% of existing benefits. That's hardly "bankruptcy" as many right-wingers so love to talk about. I'd be happy to get 75% of the social security payout. Even those without savings would still be better off than if social security did not exist.

I don't think having immigration is a bad thing in and of itself. I was a legal immigrant, so I'm definitely biased here, and I've definitely paid back in taxes far more than this country spent on me! Every generation of Americans have always complained about the current generation of immigrants (the "I've got mine, pull the ladder up!" attitude seems timeless). If it wasn't complaining about the Polish, it was complaining about the Irish. Then they were complaining about the Chinese, now they complain about the Hispanics. America has proven itself very capable of assimilating lots of diverse people and turning them into Americans, and I have no doubt that the next generation of immigrants too, will be fully assimilated into MacDonald's and American Football as opposed to eating Burritos and playing Soccer.

md said...

Thanks for posting the Krugman link.

The business about intergenerational transfer is fine, but I'm not sure how well it applies to the current day. What about people like me? I have no children (and will not). I am going to attempt to support myself in my old age, building up the wealth to do so now. Many people are quite capable of doing this, in our society. I think we should strongly encourage people to do this... though I don't know exactly how that can be done; most people seem to give no thought to the future. We don't need to burden our kids with supporting us as a general rule.

What bothers me about immigration policy is not the influx of foreigners. It's the assumption that we must grow our population. Rather than replacing people one for one, we are constantly increasing the population. I lived in Europe for two years and I was dismayed at the lack of park land and open space in many countries there, compared with the US. I have seen growth and sprawl take over trails in my area even during the last few years. I guess not enough people care about that - and for sure those open spaces don't generate any money if they're simply occupied by wildlife. I find it quite sad.

At some point you simply can't squeeze any more people into the same patch of ground - why not face this now and learn how to deal with a flat population change?

I also think we (the world) need to readjust our idea that the US is the land of opportunity and everyone should come here. If everyone likes our style so much, they should try to model their societies on ours (hopefully avoiding all of our ridiculous mistakes). I'd like to see the rest of the world as peaceful and filled with opportunity as the US - more so, even. With zero pop growth, lots of open space for recreation, and lots of free time for everyone to have fun. That's how I'd like to see things go.

Piaw Na said...

I'm pretty sure the intergenerational transfer is still relevant today. There are those who can't save (if you're making minimum wage, it'll be very difficult to put away savings if you're single, and impossible if you have children), and those who are unlucky with their investments. Even for relatively sophisticated investors, it's possible to get unlucky --- some of us who survived the dot com crashes saw our networth drop 60% over a period of 2 years. And then there's the disability insurance portion of social security, which one in three adults will use in their lifetime. I've used it myself, when a car hit me on my way home one day several years ago --- social security disability made up about 40% of my total disability payments!

I don't think that immigration is a matter of us wanting to grow our population (certainly, the Republican government seems to believe that all new immigrants will vote Democrat, and are actively working to make sure that they will). It's a matter of life in other countries being bad enough that it's attractive to come here under adverse circumstances and start over. There's also a matter of the same person being worth as much as ten times more just by being in the U.S. (An IT Technician, for instance, is worth a lot more in the U.S. because he's supporting more productive and more valuable people) I grew up in Singapore, with 3 million (now 5 million) people in a twenty by twenty island, and your sense of space is definitely quite different. I'm not saying that the U.S. should become as dense as Singapore or Hong Kong, but our present rates of immigration are quite manageable.

I'm not convinced that open spaces don't generate money. Certainly here in the Bay Area we have several organizations (POST being one of several) that have raised hundreds of millions of dollars to buy conservation easements to restrict development in the area around here. If private individuals and organizations are willing to pay that much to preserve open space to the point where the San Francisco Bay Area has more open space under protection than all of Costa Rica (source: Bay Area Wild), then the answer to the problem of preserving parkland and open space must lie with increasing economic growth --- open space and parkland becomes a concern when people are rich enough that putting food on the table isn't a question any more.

I've been to Europe a couple of times, and each time I've definitely visited a lot of very beautiful open space and parks. It certainly didn't seem that crowded to me. Certainly, as a cyclist and hiker, Europe's infrastructure for getting people to the wilderness without a car is much much better than the U.S., where any visit to a National Park requires a car, like it or not, with few exceptions.

The rest of the world would like to be as peaceful and opportunity-filled as the U.S. Some of them have gotten there (like Switzerland, Singapore, Norway, Sweden, Japan and Taiwan). China and India are also well on their way. One interesting thing about those that have gotten there is that most of them got there through an aggressive export program to the US! So to a large extent a lot of the talk of protectionism that our recent trade deficits have generated will be exactly the kind of policy that would make it tougher for other countries to climb the economic ladder. Yet a lot of that trade deficit directly hurts the poorest American workers, and Americans have the weakest safety net of all the industrialized nations, so it's hard for me not to sympathize with the Americans who want a bit of protection, regardless of what economic theory says. Of course, if the rest of the world became as energy-intensive as polluting as America is, then we're going to have a global climate crisis that'll make most of the world a terrible place to live.

As you can see, making the rest of the world a better place is easier said than done, and regardless it will take time. In the mean time, our immigration policies don't make a lot of sense (we import labor that directly competes with the poorest of Americans, while denying our Computer Science PhD and brilliant software engineers the chance to participate in the American economy where they can create much more wealth for the rest of America), and create a lot of harm without helping American citizens. We have to rationalize the system. Also, don't forget that NAFTA created a lot of the current influx of immigration because it depressed the prices Mexican farmers could get for their goods, generating a lot of desperate people who have every incentive to move North in an attempt to feed themselves and their families.

I don't have any answers, but I do know that a simple "stop the growth" policy isn't the solution.

md said...

"It's a matter of life in other countries being bad enough that it's attractive to come here under adverse circumstances and start over."

There are at least two perspectives on immigration: that of the immigrant who wants to come here, and that of the people who live here already. No doubt, many people are trying to escape harsh economic conditions, or worse, persecution and restriction of their human rights. Are we, in this privileged country, obliged to let everyone in who wants to come here, for any reason whatsoever? What do you think about this?

I don't know a lot about our immigration policy. I understand that we currently have a quota system, so not everyone gets in who would like to. I have no idea, actually, how easy it is for someone to get in who claims to be a refugee. I've a suspicion that it's not easy for them, and it makes me wonder about our immigration policy. I suspect that our policy is to let in the people who will do "us" the most good, not to help the persecuted. And by "us" I mean the lobbyist with the most money.

"your sense of space is definitely quite different. I'm not saying that the U.S. should become as dense as Singapore or Hong Kong, but our present rates of immigration are quite manageable."

It's clear we just disagree on this. I think, if anything, the US is already too dense, but you think we're doing fine and can afford to become much more dense. How dense do you think the US should become? At what point should we stop paving over land? All that I know is that living in my state, I've pretty much hiked and re-hiked the trails within reasonable driving distance. And I see trails being overrun with developments. Every year I lose pieces of some trails.

"I'm not convinced that open spaces don't generate money."

This is how it looks to me: those wealthy people who are so inclined will pay to preserve parkland - the parkland is not so much generating money; it is costing money for the people who would preserve it. Those people are competing with developers who would be just as happy to put up a mall and a golf course on the same land; the developers in contrast would generate money from their investment in the land.

Think about it this way: if I have a piece of land and let it just sit there with the deer and the birds roaming on it, I have to pay taxes on it - it costs me money. It may be an investment if I decide to sell it later and real estate prices have increased. But it is a cost to me over my lifetime if I never sell it. In contrast if I plow it under, plant a few condos on it and rent them out, then I'm generating money. It seems no question to me that fallow land costs money, financially. I'm leaving out of the equation whatever enjoyment it generates for me :-)

"the answer to the problem of preserving parkland and open space must lie with increasing economic growth"

Economic growth is fine with me; I don't equate that with population growth, though. I don't think there's a direct equivalence. Maybe there's even an inverse relationship (the wealthy reproduce less). I like the idea that increasing economic growth will lead to the world becoming more park-like, with more free time for everyone, and all people become more valued in general. This is in opposition to the practice of producing 12 kids so that maybe 3 survive to support you in your old age (plus they don't even like you...).

"[Europe] certainly didn't seem that crowded to me."

It may be that your perspective is different, coming from Singapore. And certainly I've been to areas of France and Switzerland, in the Alps, where there is lots of open space (mountainous regions tend to be difficult to pave over). But I lived in the Netherlands for two years. Don't get me wrong, it's a beautiful country, but practically every square inch of land is occupied: for agriculture, residence, roads. Yes, there are tame little parks in the cities. This is not what I mean by open space, though. I got the same impression in the UK and Germany.

"open space and parkland becomes a concern when people are rich enough that putting food on the table isn't a question any more."

That's precisely right. I'd like to see the world grow in a direction where all people have the luxury of worrying about that. Overall, I think that we are going in that direction.

Just to be argumentative: "Some of them have gotten there (like Switzerland, Singapore, Norway, Sweden, Japan and Taiwan)... those that have gotten there is that most of them got there through an aggressive export program to the US!" Are you suggesting that Switzerland, Norway, and Sweden are among those who have become peaceful and opportunity-filled via exporting to the US? There are other ways to make a go of it.

"if the rest of the world became as energy-intensive as polluting as America is"

Yes! This is an area where we seem to be going in the wrong direction.

"making the rest of the world a better place is easier said than done"

Of course; I am not claiming otherwise.

"In the mean time, our immigration policies don't make a lot of sense"

I completely agree! It would appear to me that we are essentially trying to circumvent our own labor laws that were put into effect to prevent the extraordinary abuses of workers that occurred during the Industrial Revolution, and which currently occur in third-world countries. US companies pay people 10 cents an hour to work 17 hour days in factories with no health care, no safety equipment, etc. But local manufacturers pay 5 cents. So - it's all ok?
But there I'm talking about exporting labor. What about importing labor? It's ok to let in immigrants who will work at minimum wage or less; they live 10 people in an apartment meant to house 2. But we can feel good about it because their living conditions would be even worse in their home country? I think it's shameful. Yet, these people are grateful to be here. And as you say, they compete with those citizens on the lowest rungs of the economic ladder.

No, I don't have answers either. It is all interesting food for thought, though. Maybe a bit much to address in a blog comment :-)

md said...

I realized I forgot to address a couple of the points you made. One of those was social security.

There are those who cannot save enough to retire on, and there are people who would be in deep trouble without disability benefits. I feel that our society is wealthy enough that we should offer support for these people when they can no longer work to support themselves.

I just wish that more people would think of social security as an emergency fallback, and prepare better for their future when they can.

There's an argument that the middle class only supports social security because they receive some benefit from it, and maybe that's why we must continue to give benefits to people who truly have no need for them.

I suppose one can also argue that people are simply not going to plan for their future, whether or not there's a safety net. So if we remove the net, they will just fall through the cracks. We have no choice but to force people to save via programs like social security. But, I think that with better education, people can learn the importance of saving and become more self-reliant. Then we'd have less need for programs like social security.

This is what I'd like to believe... who knows.

md said...

I also wanted to address this comment: "the Republican government seems to believe that all new immigrants will vote Democrat, and are actively working to make sure that they will".

I think there's a bit of schizophrenia on this one in the Republican party. Bush himself seems intent on giving something "like" amnesty to illegal immigrants, and then you get others like Tancredo who are in complete and puzzling opposition.

I cynically think of Bush's position as being a pro-business move. Over Fifty percent of illegal immigrants in the US come from Central and South America. There has been a lot of discussion about how we "need" these economically depressed people to do jobs that our own citizens simply won't do. This makes me very uncomfortable - I read it as "we don't want to pay people a living wage for these jobs, so we're importing people who are so desperate that they'll take anything we can throw at them, who will take jobs without health care benefits, etc". It is very convenient to import low-wage workers to be exploited by American business. This is how I see the Bush position.

For the rest, I think the anti-immigrant move in the Republican party is a sort of nationalist backlash. These are probably the same people who want to maintain American economic and military superiority at the expense of the rest of the world.

Both of these are rather ugly and short-sighted positions to take. If we are going to allow in the economically depressed, I think we should insist on an increase in the minimum wage, and institute national health care, so that these new workers will receive some minimum standard of living instead of falling straight to the bottom of the barrel.

Piaw Na said...

About space: let's put some hard facts behind our various perceptions of space. Here's the Population Density by Country, and Population density by state. Where you live, Connecticut, is at 271 people per square km. That's denser than Vietnam, the UK, Germany, Lichtenstein, and Switzerland! No wonder you feel crowded!

California, by contrast, is at 84 people per square km. That's on par with Cyprus, Costa Rica, Spain, and Greece. There's a world of difference there. Connecticut is more than 3 times denser than California. Now I'll admit that once you admit an immigrant, you don't have any control over where they choose to live, so there might indeed be a flood of immigrants going to where you are. But if you look at the U.S. as a whole, at 30 people per square km, it's less dense than most countries out there. Note that New Zealand, at 15 people per square km, is misleading because it gets about 3 times its population in tourists, so when you travel through New Zealand it actually feels more crowded than most of the U.S. Australia has a lot of desert, which also affects its overal density. A lot of the northern countries (Sweden, Norway, Finland) also can't support much population and so are less dense. I guess the answer is: if you want less density, move north! Your example of high density, the Netherlands, has 395 people per square km, several notches above Switzerland, Austria, and other European countries, so I'm guessing I wouldn't want the U.S. to become that crowded either! (Note that I grew up in Singapore, at 6389 people per square km, so I know what it's like to be packed like a sardine) I can't help but feel that our current border enforcement policy isn't working, and is leading to a lot of needless suffering, and isn't very good for the U.S. as a whole.

Your point about improving conditions everywhere else is a good one. I don't have any answers, but when you've got a spare hour, take that time and watch the Gapminder.org video on Google. I saw their presentation live and they bring up many many good points about poverty, inequality, and how life is lived in most places in the world at $1 a day. Also, here's a pointer at Greg Mankiw's blog about why Walmart has generally been a force of progressiveness, in a way that most people don't give it credit for. It is important to realize that in many ways, economics and poverty is counter-intuitive, and the parade of speakers coming to Google to discuss these issues have convinced me that the proper approach is with humility and an understanding that big obvious solutions involving lots of money don't work.

Piaw Na said...

About social security: If you compare the U.S. social security network with the social security network in other developed countries in the world, you will realize that we are sadly lacking. In no other developed country do you lose medical insurance when you lose your job. In no other developed countries are the unemployment benefits so meagre. When one in three of workers will use the social security disability benefits in their lifetime, I think you cannot argue that we do not need social security, and I definitely don't see an easy way to reduce the need for it.

It is a maxim that "a program only for the poor will be a poor program", since the poor do not generally have the organization or the ability to monitor such programs. Hence the reason for social security to have as broad a reach as possible, so that most of society will support it and continue to see reasons to support it. I do not think the current structure is that bad, and like I said before, the worst case for social security isn't very bad either, so I see no urgency to fix it before its time, especially since the payroll tax is so regressive!

md said...

On population: I've seen those population density figures, and they're good for rough comparisons, but it doesn't necessarily make sense to compare population density of one country directly with another.

As you pointed out, Australia is very sparsely populated, presumably because large parts of that continent are desert land. But I was surprised to find that Sydney is about as densely populated as Amsterdam. So if you live in Sydney you might rightly object to increased immigration: you know that it will very likely result in more crowding in your neighborhood (unless you really like crowds).

The answer is not so much to move north, but to move to inhospitable areas. I could move to the Antarctic, to the Sahara, or the Gobi.

But I don't consider those to be real answers (anyone who doesn't like a crowd should go live in a desert). Nor does that address the question of "what is the right population density - are we too high, and if not, how high should we go - when should we put a stop to our growing population?". An increase in population seems to only lead to more urban and suburban sprawl, more energy and water consumption; more development means less room for other creatures, wildlife, plants.

I enjoy those things much more than I enjoy yet another condo in my neighborhood. I enjoy clean and plentiful water, and we've been getting more droughts every year. It appears that we are running out of resources to support the population that we have, where I live. If things are that different where you live, then perhaps I should move to CA; but it sounds horribly crowded to me there.

When you write about our "border enforcement policy" are you strictly speaking about entry through Mexico, or immigration in general?

If the US were to let in every person who would be considered in need, we would literally be swamped with human beings - I mean, it would be probably be a billion we could let in, just to begin to touch the people who are in such terrible need. We don't do that because, let's face it, we don't have to (and it would be a disaster if we did). If we let in a few million from across the border, are we helping the people most in need?

I think we just have to agree to disagree. I assume that if there were no masses of immigrants knocking at our door, you'd be happy with the current population density?

Then you only think we should increase immigration so that we can let in more poor people and/or more meritocrats (by this I mean the highly trained and educated).

I think that continuing to increase the population of the US is a palliative at best; it undoubtedly solves the problem for some few of the people in terrible need. But I don't believe for a second that has anything to do with our immigration policy, which I'd say is totally financially driven (cheap labor).

I'd prefer to put our efforts into helping other countries develop, correcting our economic imperialism, and so on. And let's encourage the highly trained and talented to stay in their own countries, helping to bring them to the level of justice and peace that exists in the US, Europe, and Australia. Even better, let's send abroad more of our talented people to help with this development process.

I'll have to take a look at the links you pointed to later. I don't really need to be made aware of poverty in the world, though; I am quite painfully aware of it and have been since I was a child. I'm always willing to torment myself a bit to learn more, though!

If "big obvious solutions don't work" then why did social security "work" in the US? It has worked pretty well, up until now.

My impression has been that most poverty is ongoing, more or less, because of the lack of rule of law in those areas. First must come rule of law, then prosperity follows. Maybe we should be spending much more effort focused on this. I think in more recent years, many people are coming to realize that throwing a few bags of flour at a starving person is not the answer. Easterly's book sounds like one of several voices saying this. I'll definitely take a look. I've also been meaning to read The Road To Hell by Michael Maren. Maybe this is a good excuse for me to put in an order at Amazon. But these books are dangerous; they give grasping, unthinking people an excuse to avoid charitable giving, the logic being that it's all for nought and "the poor will always be with us."

md said...

I just finished reading the paper by Jason Furman about Wal-Mart. The discussion is pretty convincing. Overall he makes Wal-Mart sound like an organism in symbiosis with the federal government. Government policies were instituted to get more poor workers off welfare, and Wal-Mart rose to the challenge of providing jobs for them.

Furman argues that Wal-Mart covers its employees' healthcare as well as other comparable businesses. Well, whether or not it's true, I'd agree with Furman that the problem is not Wal-Mart; the problem is our healthcare system. We should move "to a system in which every American has affordable, quality health insurance." Healthcare shouldn't be associated with one's employer at all.

Piaw Na said...

Indeed, you're right. If there wasn't a big mass of immigrants wanting in, I'd be happy with the current population density. I think that suburban sprawl itself varies. For instance, the urban sprawl in Seattle is much more distasteful to me than the suburban sprawl in Silicon Valley. While the Valley suburbs do sprawl, even those of us living in Mountain View and Sunnyvale are no more than a 10 minute bicycle ride from rural parklands and roads. It takes a good 20-30 miles of riding from Seattle out to its rural areas, and that's too much for me. San Francisco is dense, but it's closely packed, so an exit from San Francisco is quick (about 7 miles across), and its surrounds aren't as built up as population density figures might imply. This is mostly an accident of geography --- if the San Francisco Area didn't have a big mountain range along with the large Bay to prevent build-up, it would look like Los Angeles, with square kilometer after square kilometer of sprawl. But this sprawl isn't a function necessarily of the population density --- in fact, comparing density between San Francisco and Los Angeles, San Francisco has a much higher density! The real reason is that while San Francisco was built around tram-lines, bus-lines and foot travel, Los Angeles was built around the car. The minute you build a city around the car, you're going to get sprawl.

One of my friends who was an early employee at Google returned to Singapore last year without a green card. Now this was easily the smartest guy I've ever met, and he'd be happy to pay capital gains taxes in the U.S., but since we refused to let very smart people immigrate into this country, he'll have to live with paying no taxes on his highly appreciated stock. Smart software engineers who are forced to return to their countries after getting a U.S. education frequently end up eventually building or joining companies that compete with U.S. operations, leading to reduced U.S. competitiveness (though as you point out, they do help their local economies quite a bit). I definitely think that we are hurting ourselves by denying people like that access to our shores --- remember that Albert Einstein was an immigrant as well!

Social Security works well (in contrast to big aid programs) because people who depend on social security vote. By contrast, receipients of foreign aid don't get to vote. The big donors and planners decide what they get and how they get it. Bill Easterly's book describe huge amounts of waste simply because humanitarian aid is mostly held accountable by big donors who are distant from the receipients, rather than voters who actually depend on the money from say, Social Security.

In the sense that books like this discourage blind giving, I think it's a good thing. All the donations from "Live Aid" did not do a bit of good. The micro-lending experiments, however, are doing very well, and deserve to be expanded --- that's worth giving money to, especially since the money given there has a multiplier effect.

The gapminder.org video is very much worth watching. It's not torturous or depressing --- their enthusiasm for numbers and statistics and visualization really comes through, and the tools on their site are really fun to play with. To give you an idea of how enthusiastic the reception was at Google --- they had to come back a second time to repeat their talk because the response was so overwhelming to their first talk.

md said...

On social security:

"I think you cannot argue that we do not need social security, and I definitely don't see an easy way to reduce the need for it."

Good grief, we are really miscommunicating if you have the idea that I think we should scrap social security. I just read through all my comments, and I can't find anything that would indicate I feel that way.

With pensions becoming less common, I believe the need for social security in the future will be even greater than it is now.

What I am arguing is that we need better financial education in the US, so that people who are capable of planning and saving for their future actually do so. I see and hear about loads of "live-for-today" activity, from people who could well afford to do otherwise. It sounds like you read a lot about finance yourself. I'm sure you've read lots of stories and seen the stats on all of the people who are well on their way to retirement, in well-paying jobs, who have barely saved a dime?

Oh heck, that's what started this discussion in the first place - there is an apparent extreme lack of financial knowledge in the US. Something should be really done about it. I think things are being done, in fact. I hear about high school students taking finance classes - there was no such thing when I was in school. Maybe kids today are being given better options in that respect.

We agree that the payroll tax is ridiculously regressive. As soon as you make so much money to be really in a position to be very little affected by this tax, you don't have to pay it anymore!? It's ludicrous. I think we'd be smart to reform social security starting now. The first thing we can do in that direction is to remove the earnings ceiling.

md said...

"The minute you build a city around the car, you're going to get sprawl."

Yes, I agree. So why don't city planners do something about this? So far as I can tell, there's not much will in this country to put money into mass transit. I would then compromise and say that I would not have a problem with continued or increased immigration if at the same time we could stop urban sprawl and add more reservoirs so we don't end up in a constant drought sitation. I'm not real keen on flooding open areas to build more reservoirs, but it's better than another mall.

"humanitarian aid is mostly held accountable by big donors who are distant from the receipients"

I don't exactly follow the logic there; distant shareholders are supposed to hold company management responsible... oh wait, that makes sense after all! ;-)

"All the donations from 'Live Aid' did not do a bit of good."

Really, do you have a reference for that handy?

"In the sense that books like this discourage blind giving"

That's a good point. I do know of one elderly woman who gives to anyone who makes a nice show of it on TV. It's pretty sad. She's wasting her money by giving to (IMHO) a bunch of con artists; she might as well save her money for all the good it does.

I've become much more careful myself in charitable giving, but it is still very hard to know what is best. I have one friend who asserts that all charities are a waste. And then there's Peter Singer, who argues that since we know about all the waste going on, we should feel obliged to give more.

I think I'll post a list of the charities to which I contribute on my blog. I'd welcome any comments. When I decide to give to a new charity, I'll do some investigation with organizations like The American Institute of Philanthropy. But then there's always the question: "Who's watching the watcher?" How do I know whether AIP is doing what they say they do, or whether they aren't being slipped some dough under the table?

How do you make these decisions yourself?

BTW, I found the circumstances of your friend from Singapore so odd. I think every single immigrant that I know who has come here for grad school got a green card; I can't think of one who was denied.

In particular, companies where I have worked have been very willing to provide all the help they can give to get their immigrant employees green cards. I've never been intimately involved in any of the proceedings - although I've heard the complaints about all the hoops you're made to jump through, and how expensive the process is. The federal government works in mysterious ways (when and if it works).

Piaw Na said...

I agree that financial planning lessons will be good for most people to have in the curriculum. But unless it's mandatory, I suspect many students will skip it. And even if it was mandatory, think --- of your classmates, how many would get a C? And of the B students, how many would remember to apply it when they get their first credit card? If your classmates are anything like a representative of colleagues I've had over the years, the number will be depressingly low. Knowing that saving is good and having the discipline to do it is completely different. I'll write a blog post about this lately.

Live Aid: Despite all the money that went in, today Ethiopia is still desperately poor. Where did you think all that money went? Why didn't it help Ethiopia lift itself out of poverty? By contrast, the economies in Asia (Hong Kong, Taiwan, Singapore, and Korea) did not get huge amounts of foreign aid, and never got huge amounts of foreign aid, but are much richer today than in 1985.

For donations: I'll admit to being selfish. I give only directly to organizations that I monitor directly, the League of American Bicyclists, which I'm an active voting member of, the Peninsula Open Space Trust, whose conservation easements I ride my bike through every year constantly, which means that any development there will lead to my complaining to them about, the Silicon Valley Bicycle Coalition, whose achievements I am very aware of over the last 10 years or so, and who also are so local that I can't help but be exposed to.

I think if you want to donate to humanitarian organizations, you really have to spend a lot more time doing due deligence than just merely writing a check. I don't know how to go about doing it, so if you find out let me know!

My friend from Singapore did not come to the U.S. for graduate school. He went to school at Cal Berkeley with me (for undergraduate work), had to return to Singapore for military and government obligations. In early 2001, he flew to the U.S. on his own dime, and interviewed wih 5 or 6 companies, and got job offers from all of them. He chose to work at Google, and Google applied for a Green card for him. Then 9/11 happened and his application got stalled. In 2005, his application still had made no progress. Unlike say, New Zealand, where having a job offer (and a very nice college degree) from an employer automatically gave you points towards an automatic immigration visa, the U.S. basically did not seek to encourage people like him.

The two organizations in the U.S. you don't want to deal with in an adversarial role are the INS and the IRS. Most Americans are familiar with the IRS, but the INS is much worse, because its "customers" can't vote, and so aren't in a position to complain to a senator, for instance.

md said...

"And even if it was mandatory, think --- of your classmates, how many would get a C?"

Well, I have no classmates, I've been out of school for years. I do take your meaning, but I think that some education is better than nothing, and would probably lead to some improvement on average.

"Live Aid: Despite all the money that went in, today Ethiopia is still desperately poor."

This is true. But you said the aid "did not do a bit of good". Solving a country's economic problems is different from saving many thousands of people from starvation. Live Aid was not intended to lift Ethiopia into prosperity, but to address a famine of crisis proportions. Discussing the pros and cons of social security is somewhat less interesting when you haven't eaten for days.

I thought perhaps you had heard that the funds had not been used to help people. Indeed, Wikipedia says that "much of the funds were siphoned off by Mengistu Haile Mariam and his army." That's reprehensible, and if something better could be done it should be, but standing aside and not lifting a finger while many people die strikes me as worse. I think I lean toward Peter Singer's views on this point.

I should reiterate here that I do not think that the long-term solution to poverty is to throw money at the problem whenever a crisis occurs. We need to deal with the problem on a day-to-day basis, by helping countries with economic problems to build the rule of law, establish fair trade processes, etc. Microlending programs, as you mentioned, seem to be a successful part of the solution. All of this, of course, is easier said than done.

"I think if you want to donate to humanitarian organizations, you really have to spend a lot more time doing due deligence than just merely writing a check. I don't know how to go about doing it, so if you find out let me know!"

I did post about this on my blog. I've found a couple of organizations that audit charities: AIP and Charity Navigator. Browsing around their sites, I feel that Charity Navigator is more trustworthy, but the overlap helps. Of course, if you really want to get down and dirty you yourself can read the annual reports, auditor's report, and financial statements, just like you would for a regular investment.

I agree with you that doing some research is wise; even registered, tax-deductible charities can be fraudulent (just as public companies can be). I don't feel the need to "monitor" the charities to which I give, not to that extent, though. I also don't feel the need to monitor every company in which I invest. I read the info, and make a decision, and review that decision quarterly or yearly. I can't be in every board meeting of every charity or company. At some point I trust others to do their jobs. There will be failures, but so far I have not been disappointed too often.