In his epic book about heavy metal in the 80’s, Chuck Klosterman writes:

When Open Up and Say Ahh… was released, I remember reading a bunch of reviews where writers claimed it lacked the “rollicking fun” of Poison’s first album, Look What the Cat Dragged In. This confused me, because those same writers had all hated the first record, too.

This phenomenon has recently been transferred to politics. During the course of the debt limit debate, I’ve heard a growing number of liberal voices favorably discuss Reagan, and a smaller (but still significant) number of conservative voices long for the days of Bill Clinton. But partisans hated Reagan and Clinton with a passion that at the time was considered pretty remarkable, even in the context of Nixon and Carter. So it’s sort of rich (but mostly funny) to hear all these cross-party odes to the Gipper and the First Man of Foggy Bottom lately.

As for Poison, it is true that Open Up And Say Ahh… didn’t quite match Look What the Cat Dragged In on the “rollicking fun” meter. But that’s like saying Kobe Bryant isn’t quite as good as Michael Jordan. Continue reading →

There’s an interesting passage in Michael Lewis’ The Big Short, in which he describes how a couple of amateur wanna-be hedge-fund managers made their fortune by identifying (what they saw as) an anomaly in options pricing. Basically, they observed that companies suffering from cataclysmic events (ex: a serious SEC investigation into company leadership) tended to see their option prices drop by a significant amount, often by 30% or more.

But in the long-term, that’s peculiar for many cases: the decreased option price is building in an estimate of the short-term volatility, but the situation isn’t a bell curve; the true value of the stock is probably discrete, either zero if the company crashes,  or not fundamentally affected if it survives. Therefore, there is a lot of money to be made in identifying whether companies will survive their exogenous shock.

I feel like this same thing is playing out with the debt limit. Continue reading →

How do you get a series of related policies through a legislative body when there are large factions with intense preferences against each of the individual policies? Continue reading →

Trivia question: most fans of baseball history know that Indians legend Bob Feller struck out 17 batters in a game his rookie year (1935), when he was only 17 years old.  What most people don’t know is that someone else has also struck out as many batters in a game as they were years old. Who is it? Continue reading →

Too many smart people make the mistake of saying that politicians “lack courage.”  Usually when they say this, they mean something like the following:

1) There’s a significant public policy problem on the agenda; and

2) The politician has to choose between policy X, which is normatively desirable but unpopular, and policy Y, which is normatively sub-optimal but popular; and

3) The politician chooses Y over X.

There are several variations on this, the most common being the rather famous J-curve  I’ve written about before, in which X is a good long-term policy that incurs short term pain, and Y is good short-term policy which produces long-term problems.

In any case, the usual “smart” takeaway is that politicians are risk-averse, care more about re-election than good public policy, and are unlikely to “do the right thing” when “the right thing” conflicts with the perceived results of the next election. Other euphemisms (singular and collective) include “lacks leadership,” “failure of the political class,” and any variation of “hack.” As suggested, this can be applied to individual politicians, or Congress/Washington as a whole.

I think the above is basically the conventional wisdom. But I think it is quite a bit off. I’ve got five point to make. Continue reading →

Number One – I generally subscribe to the line of thinking that says the surest way to reduce the public and politician appetite for governments spending is to raise taxes and balance the books. Deficit spending — either in the short-term or over the long haul — allows people to get $1 worth of government services for less than a $1 worth of taxes. That’s a strong incentive fore everyone to think positively about spending programs, even ones that are probably not neutrally worth the money. I don’t think any government program is good or bad per se; but I do think that they should be judged neutrally, and that includes judging them based on their true present cost.

This is kind of the opposite of the “starve the beast” strategy that some opponents of governments pending try to employ; instead of refusing to increase taxes, you require an increase in taxes to cover obligations. However, this remedy is sensitive to progressions in the tax code. That is, it works better if the tax burden is shared equally among all, or at least proportionally flat. For example, if the current budget deficit is reconciled by raising taxes only on billionaires, that doesn’t do much to make the average recipient of government spending feel the true cost of the services being received. And so there’s a connection between the cheap cost of government services and the progressiveness of the tax code. My hunch is that’s a secondary reason many people in politics get so worried about raising taxes on the middle-class; not just because it’s, well, raising taxes on the middle class, but also in part because it intellectually exposes the middle class to the true costs.

Number Two – I’m about two press conference mentions of “loopholes” away from kicking in my television. Somehow people in DC seem to have gotten the idea that all tax breaks are “loopholes,” which is pure nonsense. A “loophole” in the tax code is a situation in which someone has cleverly figured out how to save money on their taxes by exploiting an unintentional consequence of the tax structure.  These exists, for sure, and there are many people who make a lot of money by finding them for clients. But the vast, vast majority of things that people are calling “loopholes” are actually intentional tax break carve outs. The child tax credit is not a loophole. The mortgage interest deduction is not a loophole. The untaxed employer-side health care benefits is not a loophole. Oil and gas subsidies are not a loophole. These are intentional pieces of tax legislation, designed for specific purposes (some good, some not so good) and operating exactly as intending. The upshot, of course, is that “fixing the loopholes” isn’t the politics of cleaning up a unintended error that some individuals/companies are exploiting; it’s the politics of reversing an intentional carve-out. And the latter is a lot harder to accomplish than the former.

Question: When you see on the stock ticker that the price of a barrel of oil has gone up (or down), is that a good thing or a bad thing?

Answer:  I think this question is a whole lot more complicated than it first appears.

I bring this up because I’m watching one of the cable news channels and the talking head just said that the price of oil dropped $2 on the bad jobs report released this morning. Now normally, when the framing is gas prices, oil going down is a good thing. But in this case, the framing is “demand in the American economy,” which means that oil going down is bad because it’s an indicator that economic demand is stagnating.

But this is problematic, of course, because it means that no matter what direction oil goes — up or down — we can theoretically be pessimistic (or happy) about it.

Still, there are other angles too. Higher oil prices are good for oil companies, almost all of which are public entities, and most of which are blue-chip stocks that are owned significantly by public and private pension funds, and comprise significant portions of mainstream mutual funds.  So increased oil prices are probably good for your retirement portfolio, and your state governments balance sheet. Higher oil prices are also associated with a decrease in driving (hedged by a marginal decrease in government gas tax revenue ).

On the other hand, increases in oil prices tend to have systematic inflationary effects, since oil underpins the costs of all goods. Inflation is not great for anyone (except maybe the self-employed who have high capital debt, like farmers), and definitely not good for your pension fund. So that’s a factor. My sense is that there are also trade imbalance effects of oil, although I don’t know enough about international finance to say.

But I do think it’s safe to say that an increase (or decrease) in oil prices is not inherently good or bad for the average American. It fundamentally depends on your financial relationship to oil itself — how much do you drive, how much do you (or your retirement fund) have invested in oil-based equities, and what are the inflationary consequences.

You don’t have to be a bleeding-heart liberal to agree that that some proportion of one’s destiny in life is dictated by factors utterly beyond the control of the individual. In fact, my experience has been that despite some arguments to the contrary, conservatives and libertarians are just as willing as liberals to accept such a proposition. The difference, I think, is that conservatives and libertarians are at peace with the consequences, whereas many liberals have a general uneasiness with the idea that individual achievement is ultimately constrained, regardless of effort, by an unequal starting point.

But that’s a different topic.

The question here is simple: if you accept that there are three basic lotteries in life — a genetic one for the innate talents and capacities you possess, a geographic one for the society you happen to be born into, and a financial one for the resources you and your family control at your birth — how would you rank the relative importance of each, and what would you consider as you create your ranking?

More on this later this week. Continue reading →