Review: Misbehaving - The Making of Behavioral Economics

Misbehaving is Richard Thaler's memoir of how Behavioral Economics went from being a backwater of economics to becoming mainstream enough that he got to win the Nobel Prize. It's a great read and much deserving of your time.

First of all, you get all the references to Daniel Kahneman and Amos Tversky's work on psychology that revealed the fundamental short-cuts that human brains tend to use whenever it's confronted with complicated problems. The result is that humans don't resemble anything close to the "rational man" so frequently assumed in economic theory and analysis.

Thaler's a characteristically modest academic, not given to blow his own horn. This is great, and he discusses his difficulty in convincing the general community that the anomalies he discovered were of note and impacted policy that mainstream economists were prescribing. So for instance, retirement plan policy are largely focused on tax incentives, but not about how easy it is to sign up for a retirement plan and whether or not to prescribe a correct strategy.

Sometimes the invisible handwave is combined with the incentives argument to suggest that when the stakes are high and the choices are difficult, people will go out and hire experts to help them. The problem with this argument is that it can be hard to find a true expert who does not have a conflict of interest. It is illogical to think that someone who is not sophisticated enough to choose a good portfolio for her retirement saving will somehow be sophisticated about searching for a financial advisor, mortgage broker, or real estate agent. Many people have made money selling magic potions and Ponzi schemes, but few have gotten rich selling the advice, “Don’t buy that stuff.” --- Page 52

Furthermore, the  idea that the competitive marketplace would punish mismanagement of corporations or businesses and drive them out of business fails in that businesses have gotten very good at manipulating market structure and the political environment to preserve themselves:

In my lifetime, I cannot remember any time when experts thought General Motors was a well-run company. But GM stumbled along as a badly-run company for decades. For most of this period they were also the largest car company in the world. Perhaps they would have disappeared from the global economy in 2009 after the financial crisis, but with the aid of a government bailout, they are now the second largest automobile company in the world, a bit behind Toyota and just ahead of Volkswagen. Competitive forces apparently are slow-acting. (Pg. 52)

He notes that frequently, many company CEOs want to  increase risk-taking, while employees are risk averse. Thaler makes a great observation: if you tie compensation to results, rather than the reasoning that leads to funding the risky project, then managers would generally try to only fund projects that are guaranteed to make them look good.

Whenever there is a time lapse between the times when a decision is made and when the results come in, the boss may have trouble remembering that he originally thought it was a good idea too. The bottom line is that in many situations in which agents are making poor choices, the person who is misbehaving is often the principal, not the agent. The misbehavior is in failing to create an environment in which employees feel that they can take good risks and not be punished if the risks fail to pay off. I call these situations “dumb principal” problems. (Pg. 190)

I hope the above quotes give you an idea of how great a book this is. If you're involved in business in anyway,  you should read this book. If you want a good understanding of how much of a death-grip the Chicago school of economics and the rational expectations assumptions had on policy prescriptions and economics thinking, this book also provides a fantastic history of how hard it was to change the paradigm.

There are too many reasons to read this book. Go find a copy and read it. Highly recommended.

Review: Phishing for Phools

I'm a big fan of Robert J. Shiller, even before he won his Nobel. Phishing for Phools is his book (in collaboration with George Akerlof) about cheating in the capitalistic market economy.

Akerlof & Shiller point out that the traditional market economy treatise goes something like this: in a market economy, producers are incentivized to produce better goods in competition, innovating and therefore improving the general good of mankind. This isn't a complete story, however. The problem is, the producers are also incentivized to prey on every weakness you have, from your desire for sugary drinks, to your inability to plan ahead for busy times, whereupon you're hit by "surge pricing." The net result is that far from the idealized view of markets where improvements are driven by technical advances, we have markets where phishing is the common order of the day.

The authors provide about 6 chapters worth of examples, from politics to pharmaceuticals, from finance to tobacco. They point out that the recent "market fundamentalism" pushers are creating an economy with such weak regulation that pretty much any weakness or lack of sophistication on the part of consumers (or even existing regulatory agencies) will be taken advantage of.  By the time you're done with this book, I'm sure you can think of several other examples which the authors did not list.

If all voters read this book, we might end up living in a better world. But of course, that's not going to be true. However, even as an individual you have an incentive to read this book: once you get into the mindset of phishing as the normal operational mode of a market economy, you'll be much less subject to phishing yourself.

As such, for self-defense purposes if nothing else, this book comes highly recommended. Go find a copy and read it!

Review: The Fifth Discipline

The Fifth Discipline is Peter Senge's management book about building learning organizations. I first read it in the 1990s, and recently read the new edition again. Re-reading it again nearly 20 years later is definitely an experience that's different from the first time.

As a writer, The Fifth Discipline is verbose, meanders all over the place, repeats itself frequently, and name-drops obscure people that you'd never have heard of. These properties makes it a difficult and frequently frustrating read.

As a manager, however, the fifth discipline encodes some ideas about leadership that I've found nowhere else, and hammers home certain ideas in ways that not only make sense, but have you excited about putting them in place.

The central premise of the book is that human organizations are dynamic living systems which have non-linear behavior in response to events and change. This includes several properties that make leadership challenging:

• Many incentive systems improve performance in the short term but decrease performance over the long term.
• Many feedback cycles are extremely long, far beyond what humans were evolved to deal with, and exacerbate human tendencies to either blame individuals for poor performance or put in place patch after patch to try to solve problems rather than deal with an integrative approach to problem solving. In particular, who you hire, who you fire, and who you promote has performance impact on your organization measured in years, making it difficult to get better because the feedback cycle takes so long.
• Most long term solutions and systems approach to problem solving are counter-intuitive and difficult to sell to short-term oriented business cultures. 

The tool that the book uses to illustrate this is the Beer Game, developed at MIT's Sloan school of management. The structure of the game ensures that very similar outcome happens despite having  explained the rules to very smart people and having very smart people play them. The game illustrates that given a poorly structure system and organization in place, it doesn't matter who's playing the game---it's very difficult to do a good job. In fact, the wider economy exhibits this behavior in the form of bubbles of various forms.

You can see many examples of this kind of organizational pitfalls in many Silicon Valley tech companies:

• Conventional wisdom is that whenever you promote a great engineer into being a manager you lose a great engineer and get a lousy manager. Companies frequently therefore hire managers from the outside. In the short term this solves the above problem. In the long term, however, outside managers frequently dilute the culture, and more perniciously, by not having a culture of promoting from within, in the long term you get demoralized employees and end up with retention problems.
• I can think of one case where a great engineer was promoted into a lead. This person only worked at night and never met her team-mates. She was, however, very productive (since she never actually spent any time on leadership). This led to a promotion since leads weren't evaluated on leadership. Other leads in the department took note, however, and soon leadership was devalued as everyone followed her lead. The company would end up with a culture where leads would grab all the great work for themselves, since promotions depended not on ensuring that your team was successful, but on individual performance.

The book not only illustrates the approach (called "Systems Thinking"), but in one of the appendices has a complete catalog of corporate dysfunction patterns, with diagrams of feedback cycles, diagnoses, and solutions. So if you're in a hurry, just read "The Beer Game" chapter, the section on "Systems Thinking", and then flip straight over to Appendix 2. Everything else can be treated as fluff.

Recommended.

Exploitation

Google, Intel and Apple are appealing Lucy Koh's rejection of their settlement about the anti-poaching case. It's very hard to get sides that don't want to sue each other to sue each other, so my expectations are that the court of appeals will reject Koh's decision.

Many of my former colleagues have said something like "I wasn't really exploited. I'm going to donate my money from the settlement anyway, so it doesn't matter how much it is." This tears me up.  It tears me up especially since the kind of people who say that tend to be white, privileged, and have never really had to struggle to make a living.

When I was 20 and a struggling student (yes, I actually did receive Pell grants), I had to work 2 jobs simultaneously while carrying a full time load to avoid having to take out crushing amounts of student loans. I had a deep aversion to carrying debt at that time and I still do now. I worked for a tiny company in Berkeley called Geoworks over the summer full time as an intern. Geoworks was your prototypical technology startup, and had lots of cool projects, including the idea that you could work on whatever you want and no manager would stop you provided you got your main job time. Of course, that meant that many of us worked 80-100 hour weeks for fun. (Google called this 20% time, Geoworks called it "anarchy time") In fact, the predecessor for gtags was a tool I wrote during anarchy time for Geoworks to browse and navigate the multi-million lines of assembly that encompassed GEOS. For all that, I was getting paid a nominal $15 an hour, but working way more than the 40 hours a week. I think I might have clocked 80 hours a week normally.

At the end of the summer, I was due to go back to school. The management team at Geoworks took me aside and said, "You'll be working fewer hours, and so as a result, we're going to cut your hourly rate because you will not be as focused on your work as you were when you were full time." They proposed to cut my pay to $12 an hour, in addition to giving me only 20 hours a week. I was by no means someone they were trying to get rid of, since they would try to hire me again next year as a full time engineer after I graduated. I was hopping mad. I quit and worked as an undergraduate TA at school instead, reasoning that if I was going to be exploited (Berkeley only paid $10/hour), I'd rather be exploited by a non-profit and help my fellow students and avoid the walk to downtown Berkeley and stay on campus instead.

Years later, other former interns from Geoworks would thank me for my actions, because after seeing someone they thought was loyal walk out over that 20% hourly rate cut, management at Geoworks backed off on that policy.

What relevance does this have today? Back then, tech workers were plentiful and companies didn't need as many. There wasn't as much competition back then as there are now for workers. You'd think that, but you'd be wrong. Just a few years back, one of Google's early SREs left Google and joined Facebook, based on something very similar to my story above. After that event, Google gave everyone on his team a raise. Was that competition helping out? Or was it simply because Facebook refused to join the cartel that Google, Intel, Apple, Adobe, and several others put together? Regardless of how you feel about Facebook as an employer or product, engineers in the valley owe a huge favor to Facebook walking in and breaking the cartel and raising wages as a result.

Here's the thing: Google and Apple have engineers that are the strongest in the industry. You would think that it would be impossible to exploit such an incredibly valued bunch of folks, yet these large corporations got together and did it, and successfully got away with it, getting a slap-on-the-wrist settlement from the government. If these companies get away with murder when it comes to Google-class engineers, what do you think happens to the women and minority in the profession who aren't in the top tier? That marginal worker on average discovers that the low pay and long hours common in the profession does not pay enough to keep him or her working in software development. As a result, the average software career is much shorter than careers in other engineering professions, allowing the industry to claim a shortage.

I don't care if you personally don't need the money from the settlement (I don't, either). But when exploitation of workers happen, call it out. Don't sit back and behave like a spectator: let everyone knows how unfair it is, and how it shouldn't be allowed to happen. By doing so you're not just helping yourself, you're also helping engineers that aren't working at your tier. Otherwise, all the noise about trying to get more women and minorities into the profession is just noise; until you can get fairness in the workplace for the top tier workers, you don't have a prayer of making it attractive for the marginal tech worker or helping those who aren't in the 1%.

Review: Capital in the Twenty-First Century

Capital in the Twenty-First Century is Thomas Piketty's magnum opus about the future of capitalism and the implications thereof. It is by far and away the best book I've read this year, and I doubt if I'll read a better book in this decade. It's a combination of economics, political economy, history, literature analysis (of Jane Austen and Honore Balzac no less) and big-data analysis that had me getting up early to read it. In my younger days, I would have devoured this book non-stop in a matter of days, ignoring food, sleep, and work. It is more exciting than any combination of science fiction novels, and in many ways fulfills the idea of economics as psychohistory.

The central premise of the book is the inequality r > g. Through human history, while growth rates have usually been around 1%, the return on capital has usually been around 5% (in real terms, not nominal terms). You might question this 5% number as contradicting Bernstein's 2% number. Note that Bernstein's numbers includes major catastrophes, such as the world wars wiping out most assets in Europe. From a personal finance point of view, such events usually mean that you care a lot more about staying alive than your portfolio! The implications on wealth accumulation is fairly straightforward: if you can accumulate capital such that you can live on less than 5% over a long period of time, you can reinvest the remainder of your capital income and grow well above the growth rate of the economy, leaving you not only with increasing assets, but also freeing you and your heirs from ever having to work for an income ever again. In the extreme case (let's say you're Bill Gates), you can live on 0.01% of your income from capital and essentially reinvest all the proceeds, creating dynastic level wealth. The Hiltons, Kennedys, Rockefellers, and Kochs are of course in this category.

Wait a minute, you say, isn't the world GDP growth more than 3%? Isn't China growing at 7-8%? This is where historical data comes in. Piketty provides convincing evidence that these numbers can only occur because of (1) population growth, and (2) catchup with the modern economies. In other words, Europe could only grow at 6-8% a year until it caught up with the USA at the frontier of technology and infrastructure, at which point it devolved down to 1-1.5% growth. The same happened to Japan, and will happen to China. It's reasonable to expect the world to degenerate to that case eventually, but the developed world is already there.

Even more impressively, Piketty has current data. This data in particular, shows that the top 1% in Europe and USA already own more than 70% of the capital assets in their respective economic arenas. Even worse, there's reasonable evidence that because of the existence of tax havens, these estimates are low. Piketty analyzes total capital known to be in existence, and reveals that the world owes more money than exists in developed country accounts. The remainder of the dark capital exists in tax havens and is likely to be around 10% of global wealth.

How bad can things get? Here, Piketty turns to history for data and to literature to make it real. This section of the book is impressive and amazing to read. During the Gilded Age (called Belle Epoque in the book), the wealthy commanded 90% of the capital in their respective countries. Fully half of the population (then and now) owned essentially nothing or had a negative net-worth, and there was no middle class. There was effectively no inflation, which explained why Austen and Balzac would provide numbers in terms of income for the characters in their novels and expect readers to understand what situations each character was in. Worse, there was no way for anyone to get ahead by hard work or education: even judges could at most make 5 to 7 times the average income, compared to the wealthy heirs and heiresses who would have 30 to 60 times the average income from the capital they inherited. Hence, the plots of those novels always involved marrying someone so wealthy that they could provide a dignified existence (meaning that they could hire enough servants to take care of the needs of daily living, given the non-existence of refrigeration, cars, etc).

Lest you think that this state of affairs could only occur because of a stagnant technology, Piketty reminds the reader that automobiles, steam engines, etc. were all invented during this period. It was hardly a period of stagnation. Yet because all new technology required capital, the inventors didn't make off with the lion's share of the profits.

So how did the situation change? Was it the progressive income tax? Was it the introduction of inflation? The answer was that it took 2 world wars to essentially destroy most of the existing capital stock in Europe in order for a more egalitarian post-war generation to exist. This essentially created a middle class that owned about 40% of the wealth and consisted of 40% of the population. 50% of the population continued to own no property, while the top 10% owns 60% of the wealth. In the U.S., punitive taxation levels of 90% kept inequality low, essentially keeping the American middle class from suffering the same fate. Piketty points out that the 90% tax rate was hardly ever paid. Instead, what it did was to keep executives (who essentially set their own pay) from asking for compensation at that level. When those tax rates were dismantled in the 1980s, CEO and other executive compensation sky-rocketed in response.

So how does the world look going forward? It looks grim. We are currently in a situation where in the US and Europe, capital from inheritances and capital from savings through work average about 50%. By 2050, if things don't change, we could easily see a return to inequality levels seen during the Gilded Age: most high net-worth households will be those who are inherited, and once again, your path to success would lie mostly in marrying rich rather than hard work and entrepreneurship. The dystopia of Blade Runner or Elysium never looked more likely than through Piketty's statistics. To balance that out a bit, Piketty points out that the European and US welfare states do cushion the blow somewhat: elderly poverty is down substantially since social security was introduced, and the European safety nets are even more generous. Of course, there's no shortage of the usual suspects wanting to tear that down...

Is there any possibility of change? Piketty proposes a global tax on capital, essentially a wealth tax. This is by far the most disappointing section of the book, not because such an idea wouldn't work, but because the political climate just wouldn't allow it. Furthermore, he works in lots of other issues that have very little with inequality and other topics covered by the book. For instance, he covers ways to pay down the national debts of various countries with a one-time exceptional tax. Since Piketty is French, he spends a lot of time discussing the Euro and the need for Eurozone cooperation and sanctions against tax havens, which is an international problem.

But seriously, that's a small nit on the book. I haven't even covered many of the side-topics that Piketty covers in the book. For instance, there's a huge discussion of slavery in the US in the antebellum South. This was a tour de force, as Piketty shows how much wealth slaveholders had: essentially, the northern US states were poor compared with old Europe, but the southern US states were wealthier, and of course, with a correspondingly higher wealth inequality. There cannot be more impoverishment than the inability to own even your own labor, and Piketty's statistics and graphs show the benefit of being on the other side of that equation in stark relief.

Piketty also discusses the American education system in contrast with the European systems, and how elite American colleges perpetuate the inequality that already exist in society: the majority of their incoming students come from the top quartile of society. He does point out the advantages of charging insanely high tuition, so you do get something for your money. Nevertheless, this goes a long way towards understanding why elite American colleges' acceptance tests seem very similar to the old-school European finishing school, complete with piano-playing and other tests of altruism and "leadership." They essentially have not drifted too far from those original prototypical elite institutions.

Finally, is there anything practical you can learn about personal finance in this economics book? The answer is yes. The first of which is that real-estate is a mug's game. Today's real-estate yields about 3-4%. Why so low when all other capital earns 4-5% real returns? The answer: real-estate is the only capital today subject to Piketty's wealth-tax. That wealth tax seems small: 1-1.5% of property value per year. But since it's levied every year, it imposes a drag on performance that's much higher than the capital gains tax, which are the subject of inter-state competition and hence tends towards zero over the long term. Piketty points out that the higher up the wealth ladder you go, the lower the proportion of real estate owned in the portfolio because of these characteristics. In other words, it's better to be equity-heavy and house poor than equity-light and house rich. The other lessons are fairly obvious: you want to have the lowest costs possible (both in investment costs and living expenses) so that your capital has the highest chance to compound. The bigger your portfolio, the faster the money will grow: Piketty points out that there's no difference in performance between Bill Gate's portfolio and Liliane Bettencourt's portfolio, even though one was a brilliant entrepreneur and the other is the heiress of the L'Oreal fortune. Capital is indifferent as to how you came by it. Furthermore, the largest portfolios grow the fastest. The elite university endowments for instance, grow at 8-10% a year, since once you get past a certain size you can take advantage not only of relatively expensive wealth managers through economies of scale, but you also have the ability to buy illiquid assets that cannot be easily sold and hence command a risk premium.

In the writing of this review, my biggest fear is that I haven't convinced you that you must read this book. Not only does it give you tools with which to analyze the world (and Jane Austen's novels --- you might even be able to avoid having to read them at all, since Piketty does such a great job of picking out the essentials), it also gives you the context of why we are still feeling the effects of world war 2, 70 years after the event.

Highly recommended. Pay whatever price you have to, ignore whatever pressing assignments you have to, read this book. It is that good, and whether or not you disagree with the politics, there's plenty in here for you to exercise your intellectual muscle on. Go to it.

Review: New York Times Web + Tablet Subscription

After not having a great time on the Kindle subscription to the New York Times, I tried the web + tablet subscription on the $1 trial plan. I tried using the subscription on both Windows and Android tablets.

The Android app was frustrating. For instance, occasionally while reading an article the app would refresh. That's OK. But it would refresh back to "Top Stories", losing your place in the article and your entire context. Navigation was slow, and the app was slow to load data. Using the web browser on my Nexus 7 to visit nytimes.com was also slow, and the website continuously forgot my login, forcing me to login multiple times. The plus was the the android app made it extremely easy to share to Google+, Facebook, etc. The minus was that the android app made it impossible to copy and paste quotes from the article I was reading, which was also frustrating.

The Windows metro app was much less frustrating as a reading experience. It never refreshed randomly, always loaded quickly. Navigation was a bit unintuitive as you had to swiped down from the bottom or top to switch sections, but that's apparently a new UI gesture unique to Windows tablets, so I just had to get used to it. The minus, however, was severe. You absolutely couldn't share articles from the Windows app to Google+ or Facebook. What a crock.

Ultimately, however, the biggest problem with the New York Times is that you always feel like you're paying for yesterday's news. I almost always got better news faster from other sources (usually blogs or topic-specific websites), and for analysis, blogs seem to provide more intelligent and cogent analysis written by people smarter than English majors.

As a result, I've canceled my subscription and switch to getting news on the internet.

Review: If You Can: How Millenials Can Get Rich Slowly

If You Can is William Bernstein's financial planning booklet for people starting out in their careers. It is normally $0.99 at the Kindle Store (free today), but you can download it for free from Bernstein's website. At 27 pages long, it is short and can be read in a couple of hours. However, if you actually do do the homework in the book (which only of reading other financial books), the claim is that you will know more than most financial professionals about investing.

The prescriptions in the book are fairly straightforward: save money (at least 15% of your income), pay off all debt, invest in a diversified portfolio (the suggested 33% even splits between domestic stocks, international stocks, and bonds is a fairly good one), learn a bit about finance and financial history, rebalance your portfolio about once a year, steer away from financial professionals who will try to steal your money and only buy indexed funds (preferably Vanguard ones).

Of course, straightforward doesn't mean easy.  Being able to do all of these would qualify you to manage money not just for yourself, but for any one and any institution. Similarly, doing all of the homework assignments isn't easy, since it's actually substantial reading. Here's the reading list:

• The Millionaire Next Door
• Common Sense on Mutual Funds
• Devil Take The Hindmost
• The Great Depression A Diary
• Your Money And Your Brain
• How A Second Grader Beasts Wall Street
• All About Asset Allocation

Bernstein carefully steers away from promoting his own books (which are very good), and leaves out several classics such as A Random Walk Down Wall Street , which are useful but also not as much fun reading as the above list.

In any case, the irony of all teaching is that the people who need it the most won't show up in class, hence the people who need this booklet the most probably won't read this book. But if you're the kind of person who gets asked for financial advice, in the interest of saving your time and your breath (since sadly, this type of advice is more frequently ignored than followed), this is a great little free booklet to point people at so you can talk about more interesting things.

Recommended.

Why I can't help PMs, Sales People, or Marketing folks negotiate

Occasionally, I'll get a sales person, product manager or program manager, or even a marketing person ask me to help negotiate their compensation package. With one exception, I invariably turn all of them down. The reason is this: negotiate is a core skill for product managers, program managers or sales people, while the core skill for engineers is being able to design and code, with negotiation being secondary. In fact, one of the ways an engineering manager adds value to an engineering team is negotiating on their behalf with other engineers and with product management and/or UI designers.

If you look at how we train engineers, it's pretty clear that negotiation is out of the picture. Engineering exams aren't graded on style, readability, or collaboration. They're graded on correctness of solution, ability to apply principles and data structures to new areas, and of course, whether or not your project works. What negotiation there is in the engineering curriculum is informal: you might be asked to work in teams to turn in your homework (as a former instructor, I can say with confidence that this is usually so that we only have CLASS_SIZE/N papers/projects to grade, rather than CLASS_SIZE). As a result, engineers are singularly unprepared to negotiate their compensation in a way that sales people, PMs, or marketing types are not.

There's also a fairly subtle effect going on when engineers negotiate their compensation package. Most engineers are in a position to find a new job only because they're unhappy with their old one. Why are they unhappy? Usually it's because the old position did not make full use of their abilities: either they've been stuck in a junior position for years (I've heard horror stories about engineers at Google being stuck at SWE 3 for 5 years, despite performing way better than their grade), or because they've not been given raises, or both. In these cases, usually the managers have consciously or unconsciously beaten down their egos and repeated told the engineers that they're not worth much in the market. One of the things I do is to get such engineers to interview and receive multiple offers. The change is almost immediately visible in such candidates: they gain confidence as they realize that they are valuable employees, and this has an effect when they negotiate. The extra confidence enables them to negotiate and get better deals from their employers. Sales people, product managers or program managers, for whatever reason, seem to be immune to such beat-downs, retaining a healthy ego even when consistently denied promotions.

My negotiation service is unique because it's an irrational thing to do. The real money in compensation negotiation is on the other side of the table. Recruiters and head hunters get 30% of your salary (i.e., your entire engineering salary for a year * 0.3) for getting you to join their client companies. That's why there's no competition for what I do. There's no engineer who'd be willing to match what corporations pay in order to get a better deal.

Review: Aggressive Tax Avoidance For Real Estate Investors, 19th Edition

While I'm not quite an accidental landlord, since we got married we've had a rental property to manage. There are all sorts of issues with landlording, and I've covered many of the short-term solutions in a previous post. Aggressive Tax Avoidance for Real Estate Investors deals with longer term issues. Logistically, you can buy this version of the book from John T Reed's website, or you can buy a used 18th edition from Amazon. While there's unlikely to be much difference in content between the two editions, if you're running a rental business properly, there's no reason to cheap out since the book is tax deductible for your business.

A good measure of a specialist non-fiction book like this is the ROI. Within the first 3rd of the book I'd discovered that there was a certain approach that I'd not used because I'd succumbed to an old-wives tale and it would have saved 10X the price of the book. Live and learn.

The most useful part of the book is John T Reed's aggressiveness in approaching IRS issues. Basically, he tells you not to be afraid of tax courts, how to do research on tax issues, and how to fight the IRS in tax court if it comes down to it. This sounds really aggressive and it is. If you're renting out a room in your house, you're probably better off not being this aggressive, but if you have significant income from rental or run a multi-family rental property unit you want to take this approach as more conservative approaches would cost you significant amounts of money. John T Reed doesn't just assume this, but walks you through the Net Present Value/Expected Value Decision Tree for most of the approaches he espouses in this book. This is a very rational (one might say hyper-rational) approach to tax strategy and decision making as a landlord (or any other business owner), but you have to be capable of taking the mindset that Reed espouses. If you're easily stressed by the thought of an IRS audit, this is not the book for you, though you might want the managers you hire to read it and use it!

Reed not only walks through all the different types of tax courts, and the probability of the tax payer succeeding in winning the cases at the various courts, he also provides the probability of an audit, depending on the type of rental property you have and how much revenue and income you're generating. If you own any rental property, this type of information is invaluable and is worth the price of admission alone.

As a stalwart member of the 1%, Reed is definitely anti-Obama and anti-Democratic, and doesn't hesitate to write political comments throughout the book. I found this irritating, but tolerable given the usefulness of the information he provides.Then at the end of the book I came across something which just made me chuckle:

When you work at a job, you earn taxable income. Part of which, the government is entitled to confiscate. But if you work at increasing net worth---and refrain from selling the asset whose value you are increasing---the government has no right to confiscate any of the gain... It seems to me that if the taxes on work are too high---and they are---then you ought not to work for a living... (Page 180)

Sounds like a prescription for raising capital gains taxes and dividend taxes and reducing income taxes to me!

Anyway, if you own rental property that's more than just a room in your house, you need to buy this book. It will save you multiple times the cost of the book. If you run a business, you need this book just to understand the approach to taxes and how to do the NPV decision tree. Highly Recommended.

The Oculus Rift "Sellout"

Yesterday's announcement of the Oculus Rift acquisition by Facebook has already garnered negative reactions amongst gamers and game developers. If you're a bystander, you might wonder why they got such a hugely negative reaction by people who should be their biggest supporters. Introducing a new technology requires high volume and in gaming, usually requires loss-leading hardware sales in order to drive that volume. Who better than Facebook with its deep pockets and huge profits is well-suited to such an endeavor? Google and Apple have deep pockets but both would restrict such technology to their favored platforms rather than more open systems, while Facebook would be more platform agnostic than just about anyone.

The negative reaction can be explained by the principle of reciprocity. The initial kickstarter backers of Oculus Rift and game developers thereof provided a gift to Oculus Rift. The gift was intended to bring about an independent hardware platform that would be (rightly or wrongly) dominated by the requirements driven by gamers. The backers did not intend to provide venture capital for Oculus to make a quick exit, and certainly not to sell out to a big company with a history of indifference towards games, and has a platform that has historically supported games like Farmville, anathema to the hardcore gamers that comprise Oculus' demographic.

As for Facebook, this acquisition is an counter to the usual industry trends. The amount of compute power required to drive something like the Oculus Rift is enormous and power hungry. It is unlikely that the Oculus Rift can be tethered to anything less powerful than a Playstation 4 any time soon, and certainly won't be able to run on any of the laptops typically distributed to a Facebook employee, let alone the smartphones favored by the trendy. It looks geeky, is unfashionable, and looks ridiculous when worn. The only possible good it could do Facebook in the medium term is if it got them into the living room.

Corporate head-honchos at Google, Amazon, and Apple have long looked at the living room game console as the entry point to taking over the entertainment center of the home. The numbers look tempting to the corporate types. Hardcore game consoles from Sony, Microsoft, and Nintendo have only penetrated 56% of US households. The other 44% looks ripe for disruption. However, these corporate types tend to have zero passion for gaming, and most have never so much as held a gaming controller in their hands. They tend to envision something like the Ouya or the Chromecast, neither of which provide sufficient power or quality content to get 6 year-olds excited about them, let alone the hard core gamers. They fail to understand that the quality of content (whether it be a video game or high quality blu-ray viewing or streaming) is the reason why so far, the game consoles have had a huge market share for living room usage.

The Facebook acquisition of Oculus Rift runs counter to that type of corporate thinking, and might actually succeed, if it doesn't start off by pissing off so many hard core supporters that it has poisoned the well. That disadvantage is possible to overcome, but only by Facebook doing a thorough job of winning over gamers and the developers through the kind of largesse that so far, only Sony has proven to be capable of doing. Since Sony's morpheus platform would presumably be tied to Sony's platforms, the Oculus Rift is still the best hope for mass market adoption of VR technology.

My prediction is that Facebook will screw it up with gamers (it's very unlikely given its corporate culture that it would do otherwise), and 5 years from now will look at Oculus as a poor acquisition, while Sony's morpheus project will see a very small niche similar to that the Playstation Move has been. Sony simply does not have the financial ability to take big losses in order to drive market adoption, while Facebook lacks the cultural understanding of gaming to be able to do much other than to poison the well with its ideal early adopters.

First Impressions: Nokia 521 Smartphone

Microsoft can't seem to do anything right, so when they paired up with Nokia (who can't seem to make a fashionable smart phone) to make phones, I expected the results to be irrelevant. In the past, whenever I've made a trip to Europe, I've carried an unlocked phone, and bought SIM cards in every country I visited in order to make phone calls or surf the internet. There were several problems with this approach:

• Cyclists tend to visit small towns and rural areas. It's frequently difficult to buy SIM cards in those areas. In 2011, it took multiple days in France before we could buy more than 1 SIM card.
• Pre-paid SIM cards with internet plans aren't always cheap or easy to get.
• You end up with this big collection of SIM cards and swapping them around as well as keeping track of how much money was on each card became problematic.

T-mobile's International Roaming plan changes this dynamic in a big way. Not only do you get unlimited text and data while traveling, you also get calls for about $0.20 per minute in nearly every European country. Now let's couple this with some very specific features of the Nokia 521:

• Off-line navigation and maps. Prior to travel, or any time you have WiFi, you can download maps of any and all countries onto the device. If you're familiar with Google Map's off-line modes you're probably thinking that this is useless. But this is Nokia's maps we're talking about. Nokia owns Navteq, and and it's maps are actually designed to operate off-line. What this means is that routing, address search, etc all works without access to online mode. This is FAR more useful than Google Map's off-line mode. This not only reduces your data use while traveling, it enables you to find destination even in places with no data connection. Yes, the device has a real GPS unit, so navigation while offline is accurate and reasonable.
• FM Radio. This is a very unusual feature, in that it's implemented by using your headphone's wires as an antenna. This means no need to worry about paying for Spotify, etc. Of course, in some countries, FM radio might not get you any English songs or programs, but if you're a cyclist on an independent cycle tour, getting in part of the culture is a plus, not a minus.

The Nokia 521 is available on Amazon for about $68, which means that for a trip to Europe, it's less than 5% of the cost of a typical plane ticket during high season. You might imagine that for that price, you're getting a slow, old phone. And you'd be wrong. The phone is fast! It's faster than my 2 year old Galaxy Nexus, and that $248 phone even now at loading e-mail, and browsing the web. It's the same speed as my wife's Galaxy Note 2, which is a $400+ phone. It's hard to imagine that the same company that produced the slow, bloated Windows Vista produced Windows Phone 8.

The phone has an SD card slot, so you can load up with videos, music, and a replaceable battery, if you're not going to be able to charge it for a while. It has a rear camera which is lackluster, and interestingly enough, is missing a front camera, so you can't easily video-Skype with it. The battery life is incredible, easily going a couple of days without charging (though expect that battery life to fade quickly if you're navigating).

The lack of apps is a problem. Fortunately, the only apps I care about when traveling in addition to the above listed ones are Facebook and Amazon Kindle, both of which are available in the appstore. I don't expect Google+, Blogger, etc to be available any time soon, but the web browser on the phone is perfectly functional for those websites. The phone even comes with WiFi calling, which disconcertingly uses your T-mobile phone limits, but does come in useful for those of you who (like me) live in houses with poor T-mobile connectivity.

All in all, this is going to be my approach for the 2014 edition of the Tour of the Alps, and I'll report back on how useful everything is at the end of the trip. In any case, if you're running T-mobile, I highly recommend this phone as a backup phone or even for general use. It is as fully featured a phone as you can imagine, and much faster than other phones that cost double or triple what this one costs.

Are you surprised by the success of the game consoles?

If you read reviews in general interest newspapers or magazines like the New York Times, you should be surprised to learn that the PS4 has been out of stock nearly everywhere. This is surprising since not only do the consoles face competition from tablets and PCs, but also a range of devices ranging from Roku to Chromecast. One would think that those cheaper devices would out-rank expensive and "difficult to use" game consoles for Netflix streaming, but NPD reports that 39% of Netflix users who watch movies on a TV watch it on a game console! This figure is even more amazing when you consider that only 56% of US households have a game console, meaning that those game console owners are much more loyal to their devices than Roku or Chromecast owners. By the way, this unexpected use of the game console as a media device explains why the Wii U had such low adoption rates: the Wii U cannot double as a blue ray player, nor can it play movies from an external device.

The mystery becomes much less of one when you consider recent computer ownership trends. Most laptops simply do not have the GPU capable of running modern games. For instance, the highest end Apple Macbooks and iMacs have an Nvidia GT 750M inside them. This is a 722 GFlop GPU with 384 stream units. That sounds very impressive, until you consider the PS3 and PS4 each have more than 2 TFlops of performance, with the PS4 running 1152 shader units. But that's not all, the high end Apple machines are driving 2880x1800 displays or 2650x1440 displays, while the PS3 is only driving 720p output and the PS4 is only going to drive 1080p output. In other words, the game consoles have more than 3X the GPU power but are driving 1/4 the pixels of the laptops.

Tablets are even worse, as they frequently have the same resolution as the above, but have to be optimized for battery life of 10 hours or more. The iPad Air has 76 GFlops (1/10th the power of the high end Mac), while driving the same number of pixels. For reference, the PS Vita has 38.4 GFlops, but is driving a display that's 1/6th the resolution of the iPad Air, so it's got 3X the equivalent power of the iPad in terms of pushing pixels around. Note that the Vita has a battery life of 3-5 hours, as opposed to the 10 hours that you would expect from an iPad.

Gaming PCs are a different story, since they don't have to run at low power, but if you look at a typical PS4-alike PC, not only do you not manage to hit the $400 price point and end up with a much larger case and lower memory bandwidth than the PS4, you also run out of budget to buy a blu-ray drive or controller. You could buy an Alienware PC, but now you're looking at a budget well over $400, and you're locked out of Sony's exclusive games for the PS4, which judging from the track record on the PS3, would be a fairly substantial loss. This explains why my PC gamer friends were disappointed with the PS4 and XBox One announcements, while the market has proven that those consoles are selling very well. The typical PC gamer will have a $1,000+ PC that will outperform any of the consoles, but will also be an increasingly small percentage of the population compared to the number of folks toting Macbook Airs.

The problem with PC gaming recently has been the focus on lower power rather than higher performance. Intel has simply chosen to use its real estate on the chips to increase performance/watt by delivering more cores rather than deliver more GPU. While most consumers couldn't care less about reduced power consumption on their machines (most PC users still turn on and off their machines, and don't run their machines at full capacity often enough for the power bills to matter),
Intel's primary customers for high end processors are the companies running high end data centers like Google and Facebook, rather than the individual consumer looking for maximum single-threaded performance. In addition, it's hard enough for you to get others in your household to use the controller for movie streaming, let alone a mouse and keyboard that's required to manipulate a PC UI.

The net result of this set of trends is that unlike many other pundits, not only do I not think that console gaming is dead, I expect to see a console-like device in about 50% of homes for the foreseeable future. There will be a 9th generation of console, and beyond. The typical household doesn't consider PCs/Laptops anything other than work devices, and will continue to buy separate game consoles both for streaming video and for playing high-end games.

Review: Neptune's Brood

Neptune's Brood is set in the same world as Saturn's Children, but is not a direct sequel in style, tone, or humor. This is a feature, since Saturn's Children, as much as I enjoyed it, was a Heinlein Pastische, and you don't need too many of those.

Science Fiction is often called the literature of ideas because it's frequently lacking in other areas like character, plot, and pacing. As a hard science fiction writer, Stross demonstrates this in this book, which frequently reads more like a treatise in interstellar commerce than a novel. There are long expositions abound in which the reader is lectured to (shades of Asimov) about Fast Money (cash), Medium Money (investments), and Slow Money (interstellar bitcoinage), and how Spanish Prisoner and other fraud schemes would occur in the absence of FTL travel and only lightspeed communications.

Now, all this works only because the characters are all post-human, including the narrator/protagonist (Krina), a historian/accountant who specializes in audits and has a sideline/interest in investigating slow money fraud. As a result, she can "beam" to various locations and travel via starship to places without a beacon. The plot revolves around Krina's visit to her sister Ana. When Ana disappears before she gets there, Krina investigates and gets dropped into a web of intrigue when everyone she talks to, works for, or is arrested by wants a piece of whatever Ana seems to have found before she disappeared.

Like you would expect in a science fiction novel where all the fun happens in the exposition, Krina isn't much of an active entity in the story. She gets dragged and dropped by other forces outside her control pretty much throughout the novel, and never really initiates anything herself. This allows her to exposit on topics that Stross considers important for the reader to know.

The ending, much like with Saturn's Children, comes together in a hurry after the great reveal (which isn't terribly exciting), and leaves the reader with most of the loose ends tied up and a deeper understanding of how Charles Stross feels the entire financial system is. There are lots of snide remarks about investment banking, bankers, accountants, and bank branches (one of them is a pirate outfit), but in the end, the reader isn't likely to gain any more expertise in economics as a result of reading this book than he already had. (On the other hand, Nobel prize winner Paul Krugman liked the book, but of course he would)

Now it sounds like I didn't enjoy this book, but I did. It's just that the audience for this book is likely to be incredibly narrow (geeks who enjoy Economics). To that audience, I'd highly recommend this novel. It explores many ideas that few other science fiction novels do. For anyone else, I'm afraid you're going to have to enjoy lectures or the novel just won't work.

Review: The Fine Print

The Fine Print is David Cay Johnston's book about how corporations rip off the American people. The book starts with a great science fiction story: imagine a world where after a strange event happens, some people are discovered to be immortal. They can still be killed and die through accidents, but they will not age and will not die of old age. Further, the strange event has changed them so that they are now solely motivated by money. The answer of course, is that this science fiction story is not science fiction at all, but the "people" involved are called corporations.

In chapter after chapter, Johnston takes on one aspect after another of corporate malfeasance. Whether it's AT&T/Verizon/Comcast ripping you off on your phone bill and charging you insane amounts of money for service that would cost one third what citizens of other developing countries pay, or PG&E neglecting maintenance of gas pipelines leading to massive explosions and people dead, there's even grist here to get your blood boiling and hopefully you mad enough.

Johnston knows all of these topics well, and leverages his facility with numbers and his strong sense of journalism to bring the stories to life. Some chapters are short (like the ones on Hollywood tax breaks), and some are long, but they all go a long way to debunk the myth that there is such a thing as a virtuous, successful capitalist in modern American society. Neither Google nor Warren Buffett come off as the heroes they are portrayed as in popular press.

Despite all that Johnston shrinks back from the obvious conclusion: the modern limited liability corporation is a terrible legal construct and a lousy way to run society --- there are no circumstances under which a society with such entities wouldn't end up corrupt and undemocratic. Yes, there are other developed countries that do a good job of keeping such entities under control (Western Europe, for instance), but they're also societies that come under frequent pressure to follow the Washington consensus.

This is a book that won't get read by enough people to make a difference, but you know what, you should read it anyway. Highly recommended.

Review: Grand Pursuit - The Story of Economic Genius

I'll admit it. I'm an economics junkie, and enjoy even reading books like Minsky's Stabilizing an Unstable Economy. So I was excited when Sylvia Nasar of "A Beautiful Mind" tackled the history of great economic minds in Grand Pursuit.

By far the biggest disappointment is that with only limited space and spanning this much time, Nasar could only grant superficial coverage of many of the ideas. I was even more annoyed when she insisted on wasting precious pages on boring genealogy details rather than the big ideas of the man.

That said, Nasar does a passable job of describing economic history. Her description of Karl Marx as a person who'd never bothered to learn English despite writing his book there, and who never even visited a single factory to do his work. Several not very well known economists are covered, including Alfred Marshall, Beatrice Webb, and Joan Robinson. Strangely enough, she never talks about Adam Smith except in passing.

By the time we get to the greats like Schumpeter, Keynes, Friedman, and Samuelson, the repeated mini-biographies are starting to wear thin. However, this is where the action starts, so I was quite perked up. I learned quite a bit more about Keynes that I didn't know before. Nasar also "gets" Keynes, though she doesn't quite take the pains to explain why Keynes' General Theory was widely misunderstood, even more so than say, Einstein's.

The war years are covered in great detail, though big breakthroughs (like Irving Fisher's realization of the relationship between interest rate, the business cycle, and inflation) don't quite get the headline attention they deserve: sometimes you feel as though Nasar is more interested in Keynes' bi-sexuality than in his ideas.

What does come across to me as brand new information is the section on Hayek. For instance, he and Keynes were friends and supported each other's work. Hayek is definitely not the libertarian that his later followers make him out to be, and Nasar delights in pointing that out, especially when Republicans tried to court him and get his approval.

Ultimately, while the book was worth reading for me, I wonder how many non-economics junkies will be able to keep their eyes open during the long diversions. Not really recommended.

Review: The Price of Civilization

I will admit that I approached The Price of Civilization with a lot of skepticism. As an economist, Sachs was famous for being extremely optimistic books such as The End of Poverty---years later, there's still plenty of poverty to go around, thank you very much, Profesor Sachs.

The book itself does admit the large number of problems America faces: corporate corruption of the political system, mass media devoted to selling, a lack of social cohesion leading to inability to agree on even basic life-and-death matters such as healthcare reform, and of course, a failing educational system. All this is covered very well in books such as Republic, Lost, or even Krugman's The Conscience of a Liberal. All the evidence point in Sachs favor here, and if you're not a Fox-News conservative, there's enough data that might cause you to rethink your politics.

However, when it comes to prescription, Sachs is overly optimistic. I certainly don't think that the measures he proposes (such as trying to get poor children an education equal in quality to the kids of the rich) could possibly get passed in today's political climate. Not a chance. Zero. Sachs says he's optimistic mostly because of the Millenial generation, but I'm privy to mailing lists dominated by Millenial wealthy (or soon-to-be-wealthy), and I'm sorry, those guys are just as blinkered, over-privileged, and narrowly self-interested as the older wealthy types I've met in my life: the prevailing culture is very much IGMFU.

Ultimately, my thought is that while it's all nice and good that billionaires like Bill Gates are doing their best to eliminate malaria and all that, maybe the best thing they could actually do would be to counter-weight the Koch brothers. Otherwise, those saved from malaria could easily still find themselves stuck in a poor, unhappy world run by Fox News Conservatives.

My biggest problem with this book is that anyone who picks it up probably doesn't already need the persuasion. Unfortunately, there's zero chance that a Fox News Conservative will read the book, or even if he did, agree with any of the "liberal bias evidence." Check it out from the library if you're already evidence-minded, but I can't recommend paying more than $1 for it.

The "Tiger Mom" Parenting Controversy

The blogosphere and quora controversy over Amy Chua's "Tiger Mom" parenting article has reached a fever pitched in the part of the internet where I sit. As a non-parent I normally would try to stay out of this discussion, but since I grew up in Asia and had such a parenting regime, I feel qualified to make a few notes about this.

But first, a note from the author of the article (via Christine Lu):

I did not choose the title of the WSJ excerpt, and I don't believe that there is only one good way of raising children. The actual book is more nuanced, and much of it is about my decision to retreat from the "strict Chinese immigrant" model.

Note that the Quora responses come from people brought up in America under the Asian model. There's a huge amount of negativity about this "hot house" environment for bringing up kids from Asian Americans. I can believe it. If I had been brought up in Asia like this, I would have been comparing myself to the non-Asian kids who had the freedom to do what they like, and then resented my parents for not being as cool as other people's parents. The truth is, many middle class kids in Asia were all brought up like this, and not knowing any different, there's no resentment. Note that this "hot house" environment is not unique to Asia. Plenty of non-Asians have used this method to develop high achievers. The book, Talent is Over-rated, for instance, describes a Hungarian couple which deliberately set out to raise 3 daughters to become grandmasters in Chess, just to prove a point about how education should be handled. They succeeded, and while their kids eventually gave up Chess, they were hardly scarred for life. Similarly, I know plenty of non-Asian parents who obsess about getting their kids into the right daycare, the right Montessori school, or the right prep school. My favorites are the ones who spend gobs of money on an expensive school district for their home, and then decide that even that expensive school district is not good enough and send their kids to private schools. And of course, in the field of sports, non-Asian parents seem to be exactly what Asian parents are as far as academics is concerned. I have no doubt to my mind which emphasis is most likely to lead to a productive member of society.

If the environment was solely responsible for such emotional/psychological scarring, then Asia should have an incredibly high crime rate/suicide rate. I think the real cause in this case is the huge contrast between that "hot house" environment and what the rest of America values. Certainly, myself and my two brothers are emotionally well-adjusted and our family doesn't show any of the psychological scars and resentment between ourselves and our parents that many of those who visit Quora describe.

It all depends on your goals as parents. One of my friends recently told me over lunch about his philosophy behind parenting: "Your kids will turn out fine, so my goal is to enjoy my time with them while they are kids." Many Asian parents would be horrified to hear that, since their goal is to raise high achievers. I remember having a conversation with a Netscape millionaire in the late 1990s. This was a man who'd arrived from Taiwan with just the clothes on his bags and a suitcase of cash, and was now successful by anybody's standards. He said to me, "My kid has a trust fund, so now I have to make sure she has a work ethic." My response to that was, "That's absolutely the wrong goal for her! She doesn't have to work if she doesn't want to, so what's going to make her life miserable is if she is a poor judge of people! If someone cons her out of her trust fund, then all the work ethic you inculcate in her will not keep her from being unhappy." (No, I don't know how to teach you how to be a good judge of character, but the point is: work ethics, etc aren't the most important things in life)

Ultimately, I don't think that the "hothouse environment" is something every parent should strive for, but it's clearly useful for some parents, and it works for some families in some environments. For me, it was more helpful than hurtful, and I'm sure for others the inverse was true, but it certainly doesn't merit the kind of hysteria one way or another that the internet forums appear to approach the subject.

Review: ECONned

ECONned was written by the founder of Naked Capitalism, Yves Smith, a well-known economics blogger. I read it every day, and those of you who've been following my reader or buzz stream probably have read one or two articles sourced from Yves.

This was a tough book to read, not just because the subject material is dense, but because frequently I got really mad at the institutions involved and had to put it down so that I could calm down a bit. Smith attacks the various institutions that led up to the massive financial debacle that we are still suffering from today.

First, she attacks the economics profession, for in its search of beautiful mathematical models for the economy, ignored many basic problems as long as the mathematics looked good. For instance, when Mandlebrot showed that prices followed the Levy distribution, rather than the normal or log-normal distribution, the economics profession chose to disregard his results:

The problem with Mandelbrot's work, however, was it threatened the entire edifice of not simply financial economics, but the broader efforts to use formulas to describe economic phenomena. Levy distributions didn't merely have difficult math; that might have been an intriguing challenge. There wasn't even a way to calculate Levy's "alpha" reliably, although Fama's efforts with market data did show that it was less than two, which confirmed the fear that the distributions were not normal.

She then attacked deregulation and the accounting scams within the big wall street firms which allowed traders to book profits for in advance of when they were realized, leading to the predictable gaming of the system and results. Then you got to read about what Alan Greenspan did not do, and how keeping interest rates low really sparked the housing bubble. Lest you think Smith is a liberal, Obama's democratic administration doesn't fare any better: Geithner, in particular comes off looking mendacious and incompetent.

The writing is clear and competent. You'll read about CDOs, subprime, and how loans get securitized at a level far deeper than you'll see in The Big Short, for instance. Having said that, don't expect there to be human interest stories like the one in The Big Short. This is by far a dryer and more expansive book. If The Big Short is the Hollywood story with the happy ending, ECONned is the gritty independent documentary film determined to show you all the grimy details behind the story. Finishing the book is almost certain to leave you depressed about the future of finance in the USA, and with a deep distrust of the financial industry, mixed with a little bit of envy at the chutzpah it has displayed in thoroughly gaming the system and successfully bribing politicians and its regulators into going along with the best interests of the incredibly wealthy financiers.

If you have the stomach for this, this is a highly recommended read.

Review: Stabilizing an Unstable Economy

The recent financial crisis has been called a Minsky moment by many economists I respect. Minsky's 1984 work, Stabilizing an Unstable Economy was out of print for many years, and certainly not available at my local library, so I bought the Kindle edition and decided to read it over my vacation.

What the book encompasses is a re-engineering of existing orthodox economic theory. Fundamentally, Minsky believes that the lessons of John Maynard Keynes has been misunderstood and unincorporated into modern economic theory, which holds that a free market, capitalist economy is self-stabilizing at an equilibrium that approximates full employment. The typical argument then, is that government intervention is self-defeating and does not accomplish much.

The book covers several topics, the most important of which is an exposition of what Minsky considers the basic instability of our capitalist economy. He fundamentally divides financing schemes for projects into 3 types: hedge finance, where debts are paid for out of ongoing operations, speculative finance, where debts are paid for by a series of continual refinancing activities in the hopes that ongoing operations will eventually exceed the costs of refinancing, and finally ponzi finance, where even the interest on debt is paid for by a series of increasingly large refinancing activities, in the hopes of a future payoff. An economy consisting entirely of hedge projects is very stable, while an economy filled with speculative and ponzi projects runs the risk of a financial collapse. The post-war economy from 1946 to 1966 looked very much like the former, while the economy post 1966 looked very much like the latter.

How then, does our current economy not collapse into a depression despite having had several financial collapses? The answer, Minsky answers is Big Government, which is capable of running a deficit as well as organizing bailouts of bad financial bets when they reach a collapse. However, Minsky argues that this leads inexorably to the increasing instability of the economy, since each bail out legitimizes and validates the dodgy financial instruments that caused the financial collapse in the first place.

Acceptable financing techniques are not technologically constrained; they depend upon the subjective preferences and views of bankers and businessmen about prospects. With the financial structure that ruled in the 1950s, it was correct for businessmen and bankers to increase short-term indebtedness. However, success breeds a disregard of the possibility of failure; the absence of serious financial difficulties over a substantial period leads to the development of a euphoric economy in which increasing short-term financing of long positions becomes a normal way of life.16 As a previous financial crisis recedes in time, it is quite natural for central bankers, government officials, bankers, businessmen, and even economists to believe that a new era has arrived. Cassandra-like warnings that nothing basic has changed, that there is a financial breaking point that will lead to a deep depression, are naturally ignored in these circumstances. Since the doubters do not have fashionable printouts to prove the validity of their views, it is quite proper for established authority to ignore arguments drawn from unconventional theory, history, and institutional analysis. Nevertheless, in a world of uncertainty, given capital assets with a long gestation period, private ownership, and the sophisticated financial practices of Wall Street, the successful functioning of an economy within an initially robust financial structure will lead to a structure that becomes more fragile as time elapses. Endogenous forces make a situation dominated by hedge finance unstable, and endogenous disequilibrating forces will become greater as the weight of speculative and Ponzi finance increases.
The result of these continual series of bailouts is that inflation has become a persistent and endemic part of the economy, and each bail out has to be increasingly larger, while not solving the fundamental instability of the economy in the form of financial institutions which while under regulation very quickly take control of the regulators, no matter the intentions of the legislation behind such regulation.

Minsky then goes on to describe what he considers to be important measures that could stabilize an economy. These prescriptions seem guaranteed to piss off liberals and conservatives alike, but in the light of his theory seem very sensible. He proposes setting a desired target size for the government such that it is big enough to manage changes in the economy. He further proposes the elimination of welfare, and replacing it with a guaranteed jobs program much like Roosevelt's. Then, financial institutions can be allowed to fail, since a series of Ponzi schemes that fall apart would not automatically spread across the entire economy.

I think a lot of people wouldn't like the typical man on the street to read this book: the existing Economics establishment wouldn't want you to read it because it highlights the failings of conventional economic theory. Conservatives probably wouldn't like the prescription of a Big Government, and Liberals wouldn't like the destruction of transfer payments. Yet the book is relatively accessible: none of the math involves more than simple summation series and algebra, and the writing is relatively clear and lucid, though dense. More importantly, if we realized the major structural problems in the economy that Minsky describes, we can actually have a debate about how to fix the root causes, rather than indulging in one bailout after another which doesn't actually seem to solve any problems, and just sets us up for further economic collapse. Highly recommended at the full price.

One caveat about the Kindle version: It's not very well formatted for the Kindle, as footnotes are inline rather than hyper-linked. This makes the footnotes very jarring to read. Nevertheless, it was worth it to have the book available on vacation.

Tuition and Alumni Giving

Someone over at friendfeed pointed me at this New York Times article about Harvard students having a new and innovative loan for going to school. As far as whether supporting Harvard is a good thing or not, I'm going to side with Brad Delong. My Alma Mater has done an amazing job of educating the most students possible for the lowest price. When I went to school in the late 80s, I paid $3000 a semester. 17 years later, Berkeley's fee schedule has risen to a paltry $5000 a semester. This is an incredible bargain, and this despite the state continuing to short change higher education whenever it can find an excuse to do so. The administrators of the UC system definitely can hold their heads high when comparing themselves to other elite institutions.

Yet, whenever Berkeley has asked me for money over e-mail, they've always pointed me at an alumni page where I needed to remember my 17 year old student ID to be able to log on. With such stupidity, it's no wonder I haven't gotten to giving them any money at all.