It’s really entertaining to read the New York Times, especially Paul Krugman’s gloom and doom editorials. I have a colleague who writes an investment advisory letter that exhibits a similar “longing for disaster” tone. Another example is all the climate change advocates who I detect thirsting for some Atlantic hurricanes this year (hurry up, Dean!).
The politics and world views behind so many pundits’ analysis is just so obvious, and so weakly denied. Krugman’s columns ooze not just gloom and doom, but I get a strong sense that he wants to see things melt down, just to prove that the Bush administration has been a total failure. My colleague’s letters to his clients are very similar. It’s not just that he thinks a real estate crash might come, but one gets a very strong sense that he will be happy and fulfilled if it does happen.
Here is an example. In today’s NYT, Krugman writes, “According to data released yesterday, both housing starts and applications for building permits have fallen to their lowest levels in a decade, showing that home construction is still in a free fall…The housing slump will probably be with us for years, not months…Meanwhile, it’s becoming clear that the mortgage problem is anything but contained.”
Free fall, years not months, anything but contained, lowest levels in decade…well, that last phrase is the one factual statement out of all of them. But given what housing has done in the last decade, to say that activity is lower than it has been for ten years really does not sound too bad. And even with housing prices haven fallen of late, has anyone checked the rate of return on owner-occupied housing over recent periods? Some slowing down or even declines is not exactly a crash.
How much you want to bet that Krugman criticizes the Fed for throwing cold water on his dreams? Don’t you share my hunch that many of these Democratic analysts are hoping that the housing crunch does indeed snowball into a recession, so that the Presidency will go to….Hillary? Obama? Edwards?
Friday, August 17, 2007
Saturday, July 14, 2007
Health Insurance Limitations
Someone remarked the other day that if not for the war in Iraq, health care would be topic number one in the presidential race. That might well be true.
How will we devise a system to stop insurance from creating unlimited demand for health care services, creating a non-ending escalation of costs? Somehow we will have to give consumers incentive to limit their demand for services. This is tough, because when you are sick, or a loved one is sick, it is really tough to say that you cannot get treated.
Yet this has been the norm in all other important areas, such as housing, education, transportation, and food. Prices in these cases serve their normal role of inducing people to make choices to go without certain services, or at least to choose lower cost services. Many people routinely choose cheaper schools for their children, less expensive and less safe cars for themselves, and take jobs that are riskier to life and limb but pay more (e.g., fire fighters). Also, throughout history, unlimited health care has not been the norm.
Other countries are to a great extent using some kind of nonprice rationing such as waiting for service. In the US today, we have some rationing due to geography: living close to a major medical center will get you more, and more expensive, health care.
I have always felt that a part of the answer will lie in medical insurance being differentiated by degree of coverage. Some plans will not cover certain services, such as expensive transplants, or will at least have high co-pays for certain services, such as mental health.
The new Massachusetts regime requiring everyone to have medical insurance is moving in this direction. The Blue Cross Blue Shield website for the state lists several different plans at different prices and with different coverages.
What I was not able to find in the online descriptions of the plans is a key feature: lifetime maximum benefit. I think this will be critical. There should be some plans that are cheaper but have lower lifetime maximums, or in some way put a limit on what will be covered in certain situations (heart transplant, long term hospital stays, hip transplants past a certain age, etc). It is interesting that the lifetime maximum is not prominent in the plan descriptions -- indeed it is hidden. I am pretty sure there are lifetime maximums, and that they differ across plans. What will BS BS do with patients who hit that max and still want more coverage? Will our dear friend M. Moore have yet more fodder for another movie?
How will we devise a system to stop insurance from creating unlimited demand for health care services, creating a non-ending escalation of costs? Somehow we will have to give consumers incentive to limit their demand for services. This is tough, because when you are sick, or a loved one is sick, it is really tough to say that you cannot get treated.
Yet this has been the norm in all other important areas, such as housing, education, transportation, and food. Prices in these cases serve their normal role of inducing people to make choices to go without certain services, or at least to choose lower cost services. Many people routinely choose cheaper schools for their children, less expensive and less safe cars for themselves, and take jobs that are riskier to life and limb but pay more (e.g., fire fighters). Also, throughout history, unlimited health care has not been the norm.
Other countries are to a great extent using some kind of nonprice rationing such as waiting for service. In the US today, we have some rationing due to geography: living close to a major medical center will get you more, and more expensive, health care.
I have always felt that a part of the answer will lie in medical insurance being differentiated by degree of coverage. Some plans will not cover certain services, such as expensive transplants, or will at least have high co-pays for certain services, such as mental health.
The new Massachusetts regime requiring everyone to have medical insurance is moving in this direction. The Blue Cross Blue Shield website for the state lists several different plans at different prices and with different coverages.
What I was not able to find in the online descriptions of the plans is a key feature: lifetime maximum benefit. I think this will be critical. There should be some plans that are cheaper but have lower lifetime maximums, or in some way put a limit on what will be covered in certain situations (heart transplant, long term hospital stays, hip transplants past a certain age, etc). It is interesting that the lifetime maximum is not prominent in the plan descriptions -- indeed it is hidden. I am pretty sure there are lifetime maximums, and that they differ across plans. What will BS BS do with patients who hit that max and still want more coverage? Will our dear friend M. Moore have yet more fodder for another movie?
Friday, July 13, 2007
Taxing Private Equity
Not too long ago, I asked an accounting colleague about the tax treatment of someone selling things on an auction site like Ebay. Suppose you are making your living buying and selling collectibles on Ebay. How does the income you make get treated for tax purposes -- is it normal income, or is it capital gains? The difference, of course, is very large, as capital gains are taxed at 15% and normal income at higher rates. Similar analogies came to mind: how about a used car dealer? If I buy and sell cars, is the money I make a capital gain or normal income? It seemed like one of those issues where tax law would draw a somewhat arbritrary line. I can see an argument that if you are essentially a dealer, i.e., making a market in a collectible, then your income could be considered normal, rather than a capital gain, as you are essentially being rewarded for the service of providing a market. But it is going to be a tough call, and in some sense, illustrates the arbitrariness of treating income differentially to begin with.
Now comes the tax issue with the partners of private equity funds. Is the money that private equity fund managers make better considered to be normal income or a capital gain? This is a great topic for discussion. The current law may well make it legal for the managers to use capital gains rate; I suspect if they are doing it, they have had great lawyers look into the legality. So the question is what the right legal tax treatment should be.
But along comes the New York Times yesterday, with a front page story on "Tax Loopholes Sweeten a Deal for Blackstone." The intent of the story is clear -- to raise all kinds of shady questions about the tax fairness of aspects of the Blackstone IPO. The tactics are the usual combination of insinuation, vague claims, and muckraking language. Here are some examples:
"“These guys have figured out how to turn paying taxes into an annuity,” Ms. Sheppard said. “What people don’t realize is
that the private equity managers, the investment bankers, all the financial intermediaries, are in control of their own
taxation."
"The Blackstone partners sold the good will from their left pocket to their right."
"The ability to provide answers to such questions is why tax lawyers can typically charge $700 an hour or more. Just as
fashion designers blend textures, colors and shapes, tax experts mix and match elements of partnerships and
corporations, and bits and pieces of the tax code, securities laws, accounting rules and economics principles."
There are some interesting issues in the Blackstone deal. But this NYT story leaves me clueless as to what actually is going on, and whether it is at all questionable. Some more facts and clear language on what is being done would go SO much further than the kind of language pointed out above. The "annuity" that is referred to seems to be nothing more than the fact that if the goodwill can be written off against income in future years, then of course it creates a tax saving (assuming there is positive income). And to say that private equity managers are in control of their own taxation is really a stretch.
Well, I guess I am in control of my taxation too. If I earn less money, I will pay less tax.
Now comes the tax issue with the partners of private equity funds. Is the money that private equity fund managers make better considered to be normal income or a capital gain? This is a great topic for discussion. The current law may well make it legal for the managers to use capital gains rate; I suspect if they are doing it, they have had great lawyers look into the legality. So the question is what the right legal tax treatment should be.
But along comes the New York Times yesterday, with a front page story on "Tax Loopholes Sweeten a Deal for Blackstone." The intent of the story is clear -- to raise all kinds of shady questions about the tax fairness of aspects of the Blackstone IPO. The tactics are the usual combination of insinuation, vague claims, and muckraking language. Here are some examples:
"“These guys have figured out how to turn paying taxes into an annuity,” Ms. Sheppard said. “What people don’t realize is
that the private equity managers, the investment bankers, all the financial intermediaries, are in control of their own
taxation."
"The Blackstone partners sold the good will from their left pocket to their right."
"The ability to provide answers to such questions is why tax lawyers can typically charge $700 an hour or more. Just as
fashion designers blend textures, colors and shapes, tax experts mix and match elements of partnerships and
corporations, and bits and pieces of the tax code, securities laws, accounting rules and economics principles."
There are some interesting issues in the Blackstone deal. But this NYT story leaves me clueless as to what actually is going on, and whether it is at all questionable. Some more facts and clear language on what is being done would go SO much further than the kind of language pointed out above. The "annuity" that is referred to seems to be nothing more than the fact that if the goodwill can be written off against income in future years, then of course it creates a tax saving (assuming there is positive income). And to say that private equity managers are in control of their own taxation is really a stretch.
Well, I guess I am in control of my taxation too. If I earn less money, I will pay less tax.
Tuesday, July 03, 2007
Scooter Libby Gets Clemency
Scooter Libby won't go to jail. He still has a felony on his record, and he still pays a fine and has probation. But no jail time, which must be a relief to him and his family. Bush could still pardon him, which would wipe the felony off the record.
This is fine with me, the punishment did not seem to fit the crime, and it was all a bunch of politics anyway.
Naturally NPR this morning led off the story with Joe Wilson complaining about the pardon and saying that there should be an investigation of Bush. For granting clemency? Give me a break. Go look up the list of pardons that Clinton gave.
The nice thing about Bush is that he did this one in broad daylight. You have to hand it to Bush on that front; he is not afraid to do what he thinks is right. Disagree all you want, but give the man his due for following through on some things.
This is fine with me, the punishment did not seem to fit the crime, and it was all a bunch of politics anyway.
Naturally NPR this morning led off the story with Joe Wilson complaining about the pardon and saying that there should be an investigation of Bush. For granting clemency? Give me a break. Go look up the list of pardons that Clinton gave.
The nice thing about Bush is that he did this one in broad daylight. You have to hand it to Bush on that front; he is not afraid to do what he thinks is right. Disagree all you want, but give the man his due for following through on some things.
Friday, June 29, 2007
Does Medical Supply Really Create its Own Demand?
Dartmouth Medical School receives over 5,000 applications for just 70 spots in its MD entering class. This is typical for medical schools across the country, and it swamps even the best business schools. That is a 1.4% acceptance rate, just amazing.
Lots of questions emerge from this, one simply being why so many students want to get an MD.
But my thoughts are more on the economics of health care. My knee jerk reaction to this unsatisfied demand is to question why medical schools don't expand and accept more students -- or why new schools don't open. I believe there are constraints put onto the expansion and opening of new schools by the American Medical Association, basically a supply restriction. My economics intuition would say that this is a monopolistic restriction that is meant to keep doctors' salaries high. Removing the restricton will get us more doctors, forcing their wages down, with the result of lower medical costs and improved patient welfare.
Not so fast, some observers say. Actually, in this market, an increase in supply will simply mean that the additional doctors will be employed, at the same wages, and therefore the medical expense bill will increase. Supply creates its own demand in this market, and the secret to keeping medical costs down is in fact to force restrictions in supply -- fewer beds in hospitals, fewer doctors, fewer exotic imaging machines.
I agree that there are problems on the demand side of this market, with insurance increasingly making patients less and less sensitive to cost.
But would expanding the supply of doctors really result in a worse situation? It should still cause doctors' wages to fall, even though the total spent might increase. This is true of any market -- the dollar size of the market after an increase in supply can rise or fall, depending upon elasticity of demand and of supply.
Is the dollar size of the market really what we care about? There is way too much focus in this country on total dollar expenditures on health care. I really find it hard to believe that the restrictions on supply of doctors is welfare-enhancing. Time to investigate the AMA.
Lots of questions emerge from this, one simply being why so many students want to get an MD.
But my thoughts are more on the economics of health care. My knee jerk reaction to this unsatisfied demand is to question why medical schools don't expand and accept more students -- or why new schools don't open. I believe there are constraints put onto the expansion and opening of new schools by the American Medical Association, basically a supply restriction. My economics intuition would say that this is a monopolistic restriction that is meant to keep doctors' salaries high. Removing the restricton will get us more doctors, forcing their wages down, with the result of lower medical costs and improved patient welfare.
Not so fast, some observers say. Actually, in this market, an increase in supply will simply mean that the additional doctors will be employed, at the same wages, and therefore the medical expense bill will increase. Supply creates its own demand in this market, and the secret to keeping medical costs down is in fact to force restrictions in supply -- fewer beds in hospitals, fewer doctors, fewer exotic imaging machines.
I agree that there are problems on the demand side of this market, with insurance increasingly making patients less and less sensitive to cost.
But would expanding the supply of doctors really result in a worse situation? It should still cause doctors' wages to fall, even though the total spent might increase. This is true of any market -- the dollar size of the market after an increase in supply can rise or fall, depending upon elasticity of demand and of supply.
Is the dollar size of the market really what we care about? There is way too much focus in this country on total dollar expenditures on health care. I really find it hard to believe that the restrictions on supply of doctors is welfare-enhancing. Time to investigate the AMA.
Wednesday, May 30, 2007
Bad Immigration Policy
I am not sure how I stand on the immigration reform currently being debated.
I lean, however, toward letting more people come into the country legally. There are a variety of reasons for this, but mostly I want to give as many people as possible the opportunity that this country offers.
Another really important reason for a more open immigration policy can be seen in my world of MBA education. At Tuck, we now have foreign students hired by US-based employers who did not receive an H1-B visa this year. That means they will have to use their optional practical training (OPT) visa, which gives them one year. They will have to re-apply next year for the H1-B, and they will have to be out of the country for a couple months in between the time the OPT expires and an H1-B is granted (assuming it is granted). Is it any wonder that US-based employers don't want to hire non-US graduates of the Tuck School?
Meanwhile the UK gives something like 5 years of work authorization for any MBAs from top programs (as determined by the UK government). No problem.
My worry is that companies, especially the very top employers such as investment banks, private equity funds, and consultancies, will migrate to a country like the UK so they have the pick of the world's best talent. The US will suffer as top companies leave. Is this one of the reasons why the City of London is increasingly the world's financial center?
I lean, however, toward letting more people come into the country legally. There are a variety of reasons for this, but mostly I want to give as many people as possible the opportunity that this country offers.
Another really important reason for a more open immigration policy can be seen in my world of MBA education. At Tuck, we now have foreign students hired by US-based employers who did not receive an H1-B visa this year. That means they will have to use their optional practical training (OPT) visa, which gives them one year. They will have to re-apply next year for the H1-B, and they will have to be out of the country for a couple months in between the time the OPT expires and an H1-B is granted (assuming it is granted). Is it any wonder that US-based employers don't want to hire non-US graduates of the Tuck School?
Meanwhile the UK gives something like 5 years of work authorization for any MBAs from top programs (as determined by the UK government). No problem.
My worry is that companies, especially the very top employers such as investment banks, private equity funds, and consultancies, will migrate to a country like the UK so they have the pick of the world's best talent. The US will suffer as top companies leave. Is this one of the reasons why the City of London is increasingly the world's financial center?
Monday, May 28, 2007
Our First Hobie Pitchpoling Experience!
It is Memorial Day 2007, and there was a good 15mph west wind, so my two boys and I went out to the lake to sail our Hobie 16 -- here is a picture of it.
We got this boat this winter, just rigged it for the first time on Saturday, and took two brief sails on the weekend. Not a lot of wind on those first trips out. Today was different, the wind was really blowing. We got out and were having a great time, with the boys taking turns going out on the trapeze.
I was just thinking I should take my hat off before losing it when the wind really started howling. Nice whitecaps were picking up, which on an inland lake means a pretty good blow. Then followed a series of errors. I saw the leeward hull starting to go underwater, and I figured that meant trouble. I told my older son to go forward, when I should have said move aft! He was also holding the mainsheet, and kept it nicely sheeted in. My youngest son was out on the wire, controlling the jib, and he had it sheeted in so it was giving us a lot of power. I think I might have turned downwind a little as well, accidentally.
Anyway, that leeward hull dug in deeper at the same time the wind picked up even more. All of a sudden, we were in a slowmotion pitchpole! The back of the boat came up, the hulls dug in, and over we went! My youngest son went for a ride up by the forestay, as he was still on the trapeze wire. I came down on my middle son's leg, and somehow I got my own leg twisted up in the jib sheet. That gave a little excitement as I lay in the water with my leg caught up in some ropes above my head. I have a nice rope burn on my shin and lost a good bit of hair. Anyway, I looked around and saw that we were all OK, although somewhat shocked.
So there we were in the middle of the lake, with the Hobie on its side and the three of us in the water. I had read about righting a Hobie, and we had a righting line (thanks to the seller of the boat for that one!) but of course reading how to right a boat is not the same as actually doing it...especially when you have just had the shi#&* scared out of you. But we all hung on the righting line and waited, and sure enough, the boat flopped back over. We jumped up, and I yelled, "Sheet in and feel the magic!" Away we went...with a little more caution.
The nice thing is, we won't be afraid of pitchpoling again, and we know how to right the Hobie. It was actually pretty fun, definitely character building. As someone once said, "It isn't a sport if it can't kill you."
Sustainability Coordinator Wanted/ Takeover Needed
Our local grocery store in Hanover is the Hanover Consumer Cooperative. It is a great store, with good selection of fresh fish, an in-store butchery department, and nice organic produce. They even had Copper River sockeye salmon this week, at $15 per pound. The only problem is that they sometimes venture a little too far into the liberal realm, like now.
The Coop is now advertising for a person to serve as Sustainability Coordinator. You have to be kidding. A GROCERY STORE, which should be operating on the thinnest of margins, wants someone to work on, among other things, "coordination with other organizations on collaborative sustainability programs."
This will probably cost the organization something like $60,000 per year, inclusive of benefits.
It is fun to dream about taking over the Coop and putting a for-profit enterprise in its place. The local market would still demand great food, and I bet we could get it at lower prices than the Çoop provides. Now there is an idea most people would not think possible: That a for-profit enterprise, with its "need" for "unnecessary" profit, could actually provide a service at lower cost than a not-for-profit.
The Coop is now advertising for a person to serve as Sustainability Coordinator. You have to be kidding. A GROCERY STORE, which should be operating on the thinnest of margins, wants someone to work on, among other things, "coordination with other organizations on collaborative sustainability programs."
This will probably cost the organization something like $60,000 per year, inclusive of benefits.
It is fun to dream about taking over the Coop and putting a for-profit enterprise in its place. The local market would still demand great food, and I bet we could get it at lower prices than the Çoop provides. Now there is an idea most people would not think possible: That a for-profit enterprise, with its "need" for "unnecessary" profit, could actually provide a service at lower cost than a not-for-profit.
Monty Hall Revisited
My middle school son came to me with this twist on the famous Monty Hall/Let's Make a Deal probability problem. I am looking for the answer to the problem, and want the clearest most succinct explanation.
The original Monty Hall problem goes like this: There are three doors, and behind one is a prize. A contestant picks a door, but does not get to look behind it yet. Monty Hall, the master of ceremony (who knows which door holds the prize), opens one door, showing that there is nothing behind it. He then gives the contestant the chance to switch doors: The question is, should one switch?
(There are game theoretic aspects to this problem that are often ignored. Let's assume that Monty Hall ALWAYS opens an empty door and gives the contestant the chance to switch, no matter if the contestant currently has the right door or not.)
The answer is that one should switch doors. Not the most intuitive probability exercise for many people, but correct, given our parenthetic note above.
Now here is the twist. An exam in school will be either Monday , Tuesday or Wednesday, and the teacher has not said which. A student is assessing the odds of what day the test will be in order to study the night before. The day picked by the student is Wednesday, and she has arranged her schedule to study Tuesday night. Monday comes, and the teacher announces that the test will not be that day. So...should our student switch her pick, just like the contestant in Let's Make a Deal?
The original Monty Hall problem goes like this: There are three doors, and behind one is a prize. A contestant picks a door, but does not get to look behind it yet. Monty Hall, the master of ceremony (who knows which door holds the prize), opens one door, showing that there is nothing behind it. He then gives the contestant the chance to switch doors: The question is, should one switch?
(There are game theoretic aspects to this problem that are often ignored. Let's assume that Monty Hall ALWAYS opens an empty door and gives the contestant the chance to switch, no matter if the contestant currently has the right door or not.)
The answer is that one should switch doors. Not the most intuitive probability exercise for many people, but correct, given our parenthetic note above.
Now here is the twist. An exam in school will be either Monday , Tuesday or Wednesday, and the teacher has not said which. A student is assessing the odds of what day the test will be in order to study the night before. The day picked by the student is Wednesday, and she has arranged her schedule to study Tuesday night. Monday comes, and the teacher announces that the test will not be that day. So...should our student switch her pick, just like the contestant in Let's Make a Deal?
Saturday, May 19, 2007
Thankfully, Jimmy Carter is no longer President
As reported on Breitbart, Jimmy Carter had this to say about outgoing Prime Minister Blair:
"Former US president Jimmy Carter on Saturday attacked outgoing Prime Minister Tony Blair for his "blind" support of the Iraq war, describing it as a "major tragedy for the world". In an interview with BBC radio, Carter was asked how he would describe Blair's attitude to US President George W. Bush. He replied: "Abominable. Loyal, blind, apparently subservient. "I think that the almost undeviating support by Great Britain for the ill-advised policies of President Bush in Iraq have been a major tragedy for the world."
I gave up on Jimmy Carter a long time ago. A very smart man, but not enough appreciation for what Libertarians believe in -- the amazing power of free individuals to organize a decentralized but efficient society. I started really turning against Carter after he sat next to Michael Moore at the Democratric National Convention in Boston. And now comes this latest broadside. Has the man no decency? Does he really think that Tony Blair is subservient to Bush? I can't believe that liberals are willing to give Bush such a complement -- that he somehow manages to get a person of Blair's intelligence and demeanor to be subservient. Hmmm....is there an alternate theory out there that would explain Blair's behavior? Such as, he is doing what he believes to be right and best for his country?
"Former US president Jimmy Carter on Saturday attacked outgoing Prime Minister Tony Blair for his "blind" support of the Iraq war, describing it as a "major tragedy for the world". In an interview with BBC radio, Carter was asked how he would describe Blair's attitude to US President George W. Bush. He replied: "Abominable. Loyal, blind, apparently subservient. "I think that the almost undeviating support by Great Britain for the ill-advised policies of President Bush in Iraq have been a major tragedy for the world."
I gave up on Jimmy Carter a long time ago. A very smart man, but not enough appreciation for what Libertarians believe in -- the amazing power of free individuals to organize a decentralized but efficient society. I started really turning against Carter after he sat next to Michael Moore at the Democratric National Convention in Boston. And now comes this latest broadside. Has the man no decency? Does he really think that Tony Blair is subservient to Bush? I can't believe that liberals are willing to give Bush such a complement -- that he somehow manages to get a person of Blair's intelligence and demeanor to be subservient. Hmmm....is there an alternate theory out there that would explain Blair's behavior? Such as, he is doing what he believes to be right and best for his country?
Friday, May 18, 2007
The Libertarian View
I was listening to a great radio show on Bloomberg radio on my way out to my camp tonight. They had a CATO Institute fellow on, I think it was Brink Lindsey, and he was talking about what it means to be a Libertarian. He said how Libertarians are not comfortable with either the Republican or Democrat labels, but that they would tend to side with Republicans on economic issues and with Democrats on social and privacy issues. I agree. He also had a line about the Libertarian’s trust in the power of decentralized actions taken by free individuals. I agree there too. I had more trouble agreeing with his position on foreign policy. I suppose that the Libertarian tendency would be non-interventionist, simply on the basis of distrust of centralized government. But a Libertarian will certainly support my right to defend myself. The question comes down to where the line is that separates defense versus activist intervention.
The Berkshire Hathaway Phenomenon
This post will cause me some trouble, I am sure.
Now don’t jump to conclusions, I generally agree with much of what Warren Buffett says, and specifically, I think that much of his investment advice is good. But I am a little worried that over 20,000 people are willing to shell out good money, and burn fuel, to travel to Omaha to watch Warren and his partner chat on stage for several hours. I also worry a bit about the message that many people seem to hear, even if it is not what Buffett would profess: that stock picking is good, and the lessons of modern investment theory, especially those concerning the value of diversification and indexing, are wrong.
The observations I would put to you are the following. On the one hand, my friends and colleagues who are of a liberal mind (small “l,” not liberal in the political sense but in the “liberal arts” sense) have no problem in seeing only the role of chance, random mutations, and natural selection when they observe the glory of some biological wonder like the human eye. No reason to bring in any role for divine intervention here; chance-based evolution takes care of it all. (Please, bear with me, I do like the theory of evolution!) But these same people, when they observe the glory of Warren Buffett’s investment returns, with the Berkshire Hathaway stock portfolio beating the S&P 500 20 out of 24 years, and an abnormal annual return of 8.6%, have no hesitation in pointing out….well, the equivalent of divine intervention!
We have this thing in auction theory called the winnner’s curse, which means that the winner of an auction needs to think carefully about what it means to be the winner: if there is uncertainty over the value of the item to bidders, then there is a very strong tendency for the person who makes the biggest error in value estimation to be the one who bids the most and wins the auction. Ex ante, all bidders’ estimates are unbiased, but ex post, the WINNER’S estimate is known to be a biased high estimate of the true value. And the more bidders, the more biased is the winner’s estimate. With 2 bidders, the highest value estimate is not too bad an estimate of true value; with 2000 bidders, the highest value estimate will be biased by several standard deviations.
A very similar phenomenon occurs with investment results. Start with 10,000 investors, and let them randomly choose stock portfolios over 24 years – no talent, just random stock picks. After 30 years, what do you think the winner of this contest will look like? I promise you, there is a very good chance that the winner of that contest will have beaten the average return in 20 out of 24 years, and have an abnormal return of at least 8.6% per year. Should we crown that investor queen, and travel thousands of miles to worship at her feet? Or should we say, “Hey, your ideas are great; I will take them into consideration. But what I would really like to borrow is some of your luck.”
Now don’t jump to conclusions, I generally agree with much of what Warren Buffett says, and specifically, I think that much of his investment advice is good. But I am a little worried that over 20,000 people are willing to shell out good money, and burn fuel, to travel to Omaha to watch Warren and his partner chat on stage for several hours. I also worry a bit about the message that many people seem to hear, even if it is not what Buffett would profess: that stock picking is good, and the lessons of modern investment theory, especially those concerning the value of diversification and indexing, are wrong.
The observations I would put to you are the following. On the one hand, my friends and colleagues who are of a liberal mind (small “l,” not liberal in the political sense but in the “liberal arts” sense) have no problem in seeing only the role of chance, random mutations, and natural selection when they observe the glory of some biological wonder like the human eye. No reason to bring in any role for divine intervention here; chance-based evolution takes care of it all. (Please, bear with me, I do like the theory of evolution!) But these same people, when they observe the glory of Warren Buffett’s investment returns, with the Berkshire Hathaway stock portfolio beating the S&P 500 20 out of 24 years, and an abnormal annual return of 8.6%, have no hesitation in pointing out….well, the equivalent of divine intervention!
We have this thing in auction theory called the winnner’s curse, which means that the winner of an auction needs to think carefully about what it means to be the winner: if there is uncertainty over the value of the item to bidders, then there is a very strong tendency for the person who makes the biggest error in value estimation to be the one who bids the most and wins the auction. Ex ante, all bidders’ estimates are unbiased, but ex post, the WINNER’S estimate is known to be a biased high estimate of the true value. And the more bidders, the more biased is the winner’s estimate. With 2 bidders, the highest value estimate is not too bad an estimate of true value; with 2000 bidders, the highest value estimate will be biased by several standard deviations.
A very similar phenomenon occurs with investment results. Start with 10,000 investors, and let them randomly choose stock portfolios over 24 years – no talent, just random stock picks. After 30 years, what do you think the winner of this contest will look like? I promise you, there is a very good chance that the winner of that contest will have beaten the average return in 20 out of 24 years, and have an abnormal return of at least 8.6% per year. Should we crown that investor queen, and travel thousands of miles to worship at her feet? Or should we say, “Hey, your ideas are great; I will take them into consideration. But what I would really like to borrow is some of your luck.”
Sunday, April 15, 2007
Updating Beliefs on Climate Change: Extreme Weather Events
With all the cold weather of late, I have been thinking of how we should update our beliefs about changes in climate parameters as extreme weather events occur. This analysis applies, of course, to the warm weather events we had in early winter, and the earlier cold snaps back in September around here. My son is also studying conditional probability in high school right now, so this is good for him as well.
There are at least two “takeaways” from this little excursion. The first is that, as we should have suspected, extreme weather events should indeed lead to some updating of our beliefs about climate change, but not a lot. More important, and my second takeaway, is that this excursion is a great way to see some of the basic ideas of Bayesian statistics.
So I am considering how my beliefs about the probability of climate change taking place change when I observe a (local) extreme cold weather event. Intuitively, a cold event should make us wonder if climate change – which should result in warmer temperatures – is actually occurring. But also intuitively, we should be really surprised if we learn too much from one single weather event.
Our starting point is Baye’s Rule:
Pr(climate change| event) =
{Pr(event | climate change) * Pr(climate change)} / Pr(event)
In words: The “posterior” probability of climate change conditional upon observing a weather event equals: The “prior” probability of climate change, Pr(climate change), times the probability of the event happening conditional upon climate change occurring, all divided by the unconditional probability of the weather event occurring.
If you multiply both sides by Pr(event), you see that both sides of the above equation give the probability of both climate change and the weather event occurring. The equality obviously holds therefore.
We normally use the term “posterior probability” for the left hand side of Baye’s Rule. The Rule tells us how our posterior probability is different from our “prior” probability after observing an event.
It is neat to see how Baye’s rule plays out in our climate context.
Let’s suppose that we have “diffuse” prior beliefs on climate change, that is, that Pr(climate change) from the right hand side of the equation equals ½. The question is how that prior belief changes after we observe an extreme weather event.
To do the analysis, we need to know Pr(event | climate change). Again in words, this is the probability of the weather event conditional upon climate change having happened. This is a key calculation. I take “climate change having happened” to mean that the distribution of daily temperatures in my local location having shifted to the right. Specifically, I assume that climate change has increased the average daily temperature by one degree. Let me also define my extreme weather event as a new record low temperature for the day April 16 in Hanover, NH. What is the probability of this event, conditional upon climate change having occurred? Well, it turns out that the long term average daily temperature for April 16 in Hanover is 33 degrees. And the standard deviation, I will assume, is about 7.5 degrees. The record low for this date is 15 degrees, having occurred in 1940.
If we assume that daily temperatures are normally distributed, then the probability of breaking that 15 degree record given the historical mean of 33 degrees is .008198. With climate change, the average shifts up to 34 degrees and the probability of breaking the record goes down: to .005649.
We now have everything that we need to complete Baye’s rule. The denominator of the equation is a little tricky; it is the unconditional probability of the new low temperature record. To find this, we use this equation:
Pr(event) = Pr(event | climate change) * Pr (climate change)
+ Pr(event |no climate change) * Pr(no climate change)
This is just adding up the different ways that we could observe the extreme weather event: there are two ways, either through climate change or not through climate change.
We have all of these probabilities mentioned in the above discussion. If we calculate it out, we get Pr(event) = (.005649*.5) + (.008198*.5) = .0069235.
Now take the first term of Baye’s Rule and divide by the denominator; this is called the likelihood ratio. In our case, this ratio is .005649/.0069235 = .8159168.
Our posterior belief about climate change after observing the extreme cold event is about 82% of our prior belief before we observed the extreme event.
This is more than I would have expected going into this exercise. What determines how much our prior beliefs are affected?
First, note that the stronger our prior beliefs, the less we would change our priors after observing the cold event: The denominator of Baye’s Rule is a weighted average of the probability of the cold event under two different scenarios, climate change or no climate change. The weight on climate change increases as our prior belief on climate change increases, and this makes the weighted average move closer to the probability of the extreme event conditional on climate change.
As the denominator moves closer to the probability of the extreme event conditional on climate change, the likelihood ratio moves closer to one, and our prior belief is affected very little by the extreme cold event. Intuition: With strong prior beliefs on climate change, a cold event does little to affect them. With weak prior beliefs on climate change, a cold event makes us even more skeptical. Wonder why people are affected differently by events? Bayes would not be surprised!
The other thing that affects our much our prior beliefs change is the term
Pr(event | climate change) relative to Pr(event | no climate change). This gets to the heart of how informative the cold event is. Think about it: If climate change really doesn’t do anything to the probability of cold events happening, then these two probabilities would be equal, and the likelihood ratio in Baye’s Rule would equal one. (Why might climate change not affect the probability of extreme cold events? Well, if climate change did nto affect the distribution of daily temperatures very much, that would work.) And in that case, our posterior probability equals our prior probability. Makes sense, no?
On the other hand, what would make the extreme cold event very informative? This would happen if Pr(event | climate change) relative to Pr(event | no climate change) was large. This would be the case if climate change made extreme cold events very unlikely, so that the ratio of these two terms would be very small. Then the likelihood ratio would be small, and our posterior probability of climate change would be small relative to our prior probability.
Well, in conclusion, this got a little more complicated than I thought, but I learned a bit from it.
One lingering concern I have is over a “data mining” sort of issue. Let me put it this way: Seeing a record cold event in SOME locality in the country is much less informative than seeing a record cold event in one particular locality such as Hanover. Somewhere in the country is going to see a record cold event pretty often; one locality will see one only rarely. The above analysis does not apply to the event of just seeing a record cold event SOMEWHERE (well, it does apply, but the probabilities need serious adjusting -- especially the probabilities of observing extreme weather events).
All of this was stimulated because I wanted to spend the night at my camp. When I got there, this late Nor’Easter had blown out the electricity and the downdraft in my woodstove was so extreme I couldn’t get a fire started. Real pain. I was tempted to stay and cook my dinner on the Coleman stove, but came back home instead. Nasty weather.
There are at least two “takeaways” from this little excursion. The first is that, as we should have suspected, extreme weather events should indeed lead to some updating of our beliefs about climate change, but not a lot. More important, and my second takeaway, is that this excursion is a great way to see some of the basic ideas of Bayesian statistics.
So I am considering how my beliefs about the probability of climate change taking place change when I observe a (local) extreme cold weather event. Intuitively, a cold event should make us wonder if climate change – which should result in warmer temperatures – is actually occurring. But also intuitively, we should be really surprised if we learn too much from one single weather event.
Our starting point is Baye’s Rule:
Pr(climate change| event) =
{Pr(event | climate change) * Pr(climate change)} / Pr(event)
In words: The “posterior” probability of climate change conditional upon observing a weather event equals: The “prior” probability of climate change, Pr(climate change), times the probability of the event happening conditional upon climate change occurring, all divided by the unconditional probability of the weather event occurring.
If you multiply both sides by Pr(event), you see that both sides of the above equation give the probability of both climate change and the weather event occurring. The equality obviously holds therefore.
We normally use the term “posterior probability” for the left hand side of Baye’s Rule. The Rule tells us how our posterior probability is different from our “prior” probability after observing an event.
It is neat to see how Baye’s rule plays out in our climate context.
Let’s suppose that we have “diffuse” prior beliefs on climate change, that is, that Pr(climate change) from the right hand side of the equation equals ½. The question is how that prior belief changes after we observe an extreme weather event.
To do the analysis, we need to know Pr(event | climate change). Again in words, this is the probability of the weather event conditional upon climate change having happened. This is a key calculation. I take “climate change having happened” to mean that the distribution of daily temperatures in my local location having shifted to the right. Specifically, I assume that climate change has increased the average daily temperature by one degree. Let me also define my extreme weather event as a new record low temperature for the day April 16 in Hanover, NH. What is the probability of this event, conditional upon climate change having occurred? Well, it turns out that the long term average daily temperature for April 16 in Hanover is 33 degrees. And the standard deviation, I will assume, is about 7.5 degrees. The record low for this date is 15 degrees, having occurred in 1940.
If we assume that daily temperatures are normally distributed, then the probability of breaking that 15 degree record given the historical mean of 33 degrees is .008198. With climate change, the average shifts up to 34 degrees and the probability of breaking the record goes down: to .005649.
We now have everything that we need to complete Baye’s rule. The denominator of the equation is a little tricky; it is the unconditional probability of the new low temperature record. To find this, we use this equation:
Pr(event) = Pr(event | climate change) * Pr (climate change)
+ Pr(event |no climate change) * Pr(no climate change)
This is just adding up the different ways that we could observe the extreme weather event: there are two ways, either through climate change or not through climate change.
We have all of these probabilities mentioned in the above discussion. If we calculate it out, we get Pr(event) = (.005649*.5) + (.008198*.5) = .0069235.
Now take the first term of Baye’s Rule and divide by the denominator; this is called the likelihood ratio. In our case, this ratio is .005649/.0069235 = .8159168.
Our posterior belief about climate change after observing the extreme cold event is about 82% of our prior belief before we observed the extreme event.
This is more than I would have expected going into this exercise. What determines how much our prior beliefs are affected?
First, note that the stronger our prior beliefs, the less we would change our priors after observing the cold event: The denominator of Baye’s Rule is a weighted average of the probability of the cold event under two different scenarios, climate change or no climate change. The weight on climate change increases as our prior belief on climate change increases, and this makes the weighted average move closer to the probability of the extreme event conditional on climate change.
As the denominator moves closer to the probability of the extreme event conditional on climate change, the likelihood ratio moves closer to one, and our prior belief is affected very little by the extreme cold event. Intuition: With strong prior beliefs on climate change, a cold event does little to affect them. With weak prior beliefs on climate change, a cold event makes us even more skeptical. Wonder why people are affected differently by events? Bayes would not be surprised!
The other thing that affects our much our prior beliefs change is the term
Pr(event | climate change) relative to Pr(event | no climate change). This gets to the heart of how informative the cold event is. Think about it: If climate change really doesn’t do anything to the probability of cold events happening, then these two probabilities would be equal, and the likelihood ratio in Baye’s Rule would equal one. (Why might climate change not affect the probability of extreme cold events? Well, if climate change did nto affect the distribution of daily temperatures very much, that would work.) And in that case, our posterior probability equals our prior probability. Makes sense, no?
On the other hand, what would make the extreme cold event very informative? This would happen if Pr(event | climate change) relative to Pr(event | no climate change) was large. This would be the case if climate change made extreme cold events very unlikely, so that the ratio of these two terms would be very small. Then the likelihood ratio would be small, and our posterior probability of climate change would be small relative to our prior probability.
Well, in conclusion, this got a little more complicated than I thought, but I learned a bit from it.
One lingering concern I have is over a “data mining” sort of issue. Let me put it this way: Seeing a record cold event in SOME locality in the country is much less informative than seeing a record cold event in one particular locality such as Hanover. Somewhere in the country is going to see a record cold event pretty often; one locality will see one only rarely. The above analysis does not apply to the event of just seeing a record cold event SOMEWHERE (well, it does apply, but the probabilities need serious adjusting -- especially the probabilities of observing extreme weather events).
All of this was stimulated because I wanted to spend the night at my camp. When I got there, this late Nor’Easter had blown out the electricity and the downdraft in my woodstove was so extreme I couldn’t get a fire started. Real pain. I was tempted to stay and cook my dinner on the Coleman stove, but came back home instead. Nasty weather.
The Fall of Imus
I have never been a huge fan of Imus, finding him underwhelming with his reasoning.
But boy, did he fall fast. Now once I understood what the word "hos" means (showing my age and ignorance of popular culture there!) I did have to agree that what he said was really bad.
But was an apology not acceptable? Imus did way more than apologize: he grovelled. He grovelled to everyone, even to Al Sharpton. And everyone was after him, especially some of the Presidential candidates. Is the real story here that they all were not looking forward to having to appear on Imus' show several times?
But boy, did he fall fast. Now once I understood what the word "hos" means (showing my age and ignorance of popular culture there!) I did have to agree that what he said was really bad.
But was an apology not acceptable? Imus did way more than apologize: he grovelled. He grovelled to everyone, even to Al Sharpton. And everyone was after him, especially some of the Presidential candidates. Is the real story here that they all were not looking forward to having to appear on Imus' show several times?
One Sad Tax Code
April 15th is upon us, and my taxes have been filed. What was my marginal tax rate this year? Well, that is a really good question. It looks to me like I was right at the cusp of getting hit with the Alternative Minimum Tax. Last year, I did get caught by that, but this year, for some odd reason unknown to me, I did not. It was close; the calculation required computes your tax under the regular code and under AMT, and if AMT is greater, then you pay according to that.
In an earlier post this year, I noted my uncertainty then as to my marginal tax rate, saying it would be either 26% or 42%. It turned out to be more like the 42%, the regular code rate plus Medicare and the effects of phasing out exemptions and deductions.
What kind of tax code do we have, where during the year when I am making income-earning decisions, I cannot determine what my effective tax rate will be? I mean, let's just totally screw up our incentives. If I had made an additional $10,000, I would have netted $7200 (AMT, with the rate this year of 28%) or $5800 (regular code). Anyone who says that a 14% difference in your rate of pay will not make a difference in what you do, is talking nonsense.
As I said before, the Democrats have a chance to show the country that they can respect individual privacy (easy for them); construct a reasonable tax code and manage government spending (not too hard; Bill Clinton did a fair job); and maintain a strong national defense posture (seemingly impossible for the current Democrats). Probably if they got two out of three, they would have a chance to govern for a while. One out of three should mean the wilderness for them.
In an earlier post this year, I noted my uncertainty then as to my marginal tax rate, saying it would be either 26% or 42%. It turned out to be more like the 42%, the regular code rate plus Medicare and the effects of phasing out exemptions and deductions.
What kind of tax code do we have, where during the year when I am making income-earning decisions, I cannot determine what my effective tax rate will be? I mean, let's just totally screw up our incentives. If I had made an additional $10,000, I would have netted $7200 (AMT, with the rate this year of 28%) or $5800 (regular code). Anyone who says that a 14% difference in your rate of pay will not make a difference in what you do, is talking nonsense.
As I said before, the Democrats have a chance to show the country that they can respect individual privacy (easy for them); construct a reasonable tax code and manage government spending (not too hard; Bill Clinton did a fair job); and maintain a strong national defense posture (seemingly impossible for the current Democrats). Probably if they got two out of three, they would have a chance to govern for a while. One out of three should mean the wilderness for them.
Friday, April 06, 2007
An Excellent Blog for Climate Change
I continue to be impressed by Robert Pielke Sr.'s blog on climate science.
Here is a quote from him on a likely underlying goal of the climate change alarmists: As discussed on Climate Science and Scitizen (e.g. see and see), the underlying reason for this aggressive campaign to focus on the human emissions of carbon dioxide from fossil fuels as the main culprit is to promote energy policy changes, not to develop an appropriate comprehensive climate policy.
The most recent guest post by Professor Ben Herman of the University of Arizona is also worth reading for anyone who is willing to question some of the predictions and policy prescriptions being bandied about.
Here is a quote from him on a likely underlying goal of the climate change alarmists: As discussed on Climate Science and Scitizen (e.g. see and see), the underlying reason for this aggressive campaign to focus on the human emissions of carbon dioxide from fossil fuels as the main culprit is to promote energy policy changes, not to develop an appropriate comprehensive climate policy.
The most recent guest post by Professor Ben Herman of the University of Arizona is also worth reading for anyone who is willing to question some of the predictions and policy prescriptions being bandied about.
Apple and DRM
Lot's going on with Apple and DRM. The EU is threatening antitrust action against iTunes, and Apple and EMI announced a new deal on DRM-free music.
Let's think about the EMI deal. EMI, with Apple's partnership, is going to make its library (ex-Beatles!) available on iTunes without DRM, and in close-to-CD audio quality.
The catch? Instead of the usual $.99 per song, EMI's songs will go for $1.29.
What accounts for the higher price? We have a few choices, not mutually exclusive:
1. Songs unencumbered by DRM are worth more, so the price is higher.
2. Songs of higher audio quality are worth more, so the price is higher.
3. Songs without DRM are going to spread more, reducing purchases by other users of the same song, so they have a higher marginal cost and therefore should sell for more.
4. As I pointed out in this post, Apple should be concerned that if iTunes songs are priced below their "stand-alone" profit-maximizing price, then entry by competitors into the portable musice device market is aided. From the perspective of pricing iTunes songs and iPods, Apple should be pricing songs lower than their stand-alone price, but above marginal cost. To eliminate the aid to entry, Apple has incentive to introduce DRM, preventing iTunes songs from playing on other devices.
If Apple drops DRM for some songs, then to maintain a deterrent to entry, it should increase the price of songs.
5. Last argument, it may be that EMI is simply charging a higher royalty to Apple for its songs (why?) and Apple is simply charging the relevantly higher price.
My choice of answers? A combination of all of these. Look at it from EMI and Apple's perspectives. Everything points to a higher price for the DRM-free songs (and by the way, the DRM-encumbered songs are still available at a lower price). "Let's try it and see what happens."
Based on my own recent experience in hitting the 5-machine limit, I would probably opt for the higher priced version. If there were no choice available, I would likely buy almost the same number of songs at $1.29 instead of $.99, when the higher price was for a higher quality and DRm-free version.
Let's think about the EMI deal. EMI, with Apple's partnership, is going to make its library (ex-Beatles!) available on iTunes without DRM, and in close-to-CD audio quality.
The catch? Instead of the usual $.99 per song, EMI's songs will go for $1.29.
What accounts for the higher price? We have a few choices, not mutually exclusive:
1. Songs unencumbered by DRM are worth more, so the price is higher.
2. Songs of higher audio quality are worth more, so the price is higher.
3. Songs without DRM are going to spread more, reducing purchases by other users of the same song, so they have a higher marginal cost and therefore should sell for more.
4. As I pointed out in this post, Apple should be concerned that if iTunes songs are priced below their "stand-alone" profit-maximizing price, then entry by competitors into the portable musice device market is aided. From the perspective of pricing iTunes songs and iPods, Apple should be pricing songs lower than their stand-alone price, but above marginal cost. To eliminate the aid to entry, Apple has incentive to introduce DRM, preventing iTunes songs from playing on other devices.
If Apple drops DRM for some songs, then to maintain a deterrent to entry, it should increase the price of songs.
5. Last argument, it may be that EMI is simply charging a higher royalty to Apple for its songs (why?) and Apple is simply charging the relevantly higher price.
My choice of answers? A combination of all of these. Look at it from EMI and Apple's perspectives. Everything points to a higher price for the DRM-free songs (and by the way, the DRM-encumbered songs are still available at a lower price). "Let's try it and see what happens."
Based on my own recent experience in hitting the 5-machine limit, I would probably opt for the higher priced version. If there were no choice available, I would likely buy almost the same number of songs at $1.29 instead of $.99, when the higher price was for a higher quality and DRm-free version.
Friday, February 09, 2007
Steve Jobs on DRM
Steve Jobs posted this week on the Apple site a letter in which he argues for the abolition of digital rights management (DRM) software for online music. If DRM were abolished, then any songs purchased from iTunes could be played on any device, and vice versa -- music purchased on any other sites could be played on iPods.
Not too long ago, I wrote a post on why it could be in Apple's interests to prevent iTunes songs from playing on other devices. My basic argument had to do with assumed pricing of songs on iTunes. I argued that Apple was pricing songs above marginal cost, but below the price they would set if they were not also selling iPods. Essentially, Apple was, I argued, trying to prevent new entrants into the portable music player market from getting the benefits of relatively cheap songs from iTunes. New entrants obviously would find entry into the device market easier with a full iTunes library at low prices ($.99).
So what might have changed, in order for Jobs to call for no restrictions on songs purchased on-line?
Three possibilities. One, if Jobs' description of the contracts with the music publishers is correct, then they could shut down the iTunes site within weeks of a determination that Apple's DRM has been hacked. That is a big albatross to have circling over one's head all the time. It is not clear that Apple will be able to stay ahead of the hackers. Jobs may have had to agree to this contract clause when nobody knew whether iTunes would take off, but I suspect he has a bit more negotiating clout at this point.
Two, with more and more online music sellers, we are likely to approach marginal cost pricing of songs. With marginal cost pricing, and more music available, the ability to deter entry into the device market by keeping iTunes songs only for the iPod disappears.
Three, I don't think the incentive to deter entry into the device market is nearly as strong as it was when the iPod was new. Apple has a huge lead, both technologically and in the marketplace, and it is moving on to a whole new competitive arena with the iPhone. The advantages to Apple of having (cheap) songs from other sellers able to be played on its iPods and iPhones outweigh the advantages to Apple of having its songs not be playable on other devices.
I predict that Jobs' recommendation will be accepted.
Not too long ago, I wrote a post on why it could be in Apple's interests to prevent iTunes songs from playing on other devices. My basic argument had to do with assumed pricing of songs on iTunes. I argued that Apple was pricing songs above marginal cost, but below the price they would set if they were not also selling iPods. Essentially, Apple was, I argued, trying to prevent new entrants into the portable music player market from getting the benefits of relatively cheap songs from iTunes. New entrants obviously would find entry into the device market easier with a full iTunes library at low prices ($.99).
So what might have changed, in order for Jobs to call for no restrictions on songs purchased on-line?
Three possibilities. One, if Jobs' description of the contracts with the music publishers is correct, then they could shut down the iTunes site within weeks of a determination that Apple's DRM has been hacked. That is a big albatross to have circling over one's head all the time. It is not clear that Apple will be able to stay ahead of the hackers. Jobs may have had to agree to this contract clause when nobody knew whether iTunes would take off, but I suspect he has a bit more negotiating clout at this point.
Two, with more and more online music sellers, we are likely to approach marginal cost pricing of songs. With marginal cost pricing, and more music available, the ability to deter entry into the device market by keeping iTunes songs only for the iPod disappears.
Three, I don't think the incentive to deter entry into the device market is nearly as strong as it was when the iPod was new. Apple has a huge lead, both technologically and in the marketplace, and it is moving on to a whole new competitive arena with the iPhone. The advantages to Apple of having (cheap) songs from other sellers able to be played on its iPods and iPhones outweigh the advantages to Apple of having its songs not be playable on other devices.
I predict that Jobs' recommendation will be accepted.
The Consensus on Global Warming
A really good blog to keep up on science of climate change that you won't read elsewhere is Roger Pielke's blog.
Roger notes two attempts to remove state climatologists -- David Legates in Delaware and George Taylor in Oregon -- because of their failure to follow the consensus views on global warming. Roger also gives the cite to Heidi Cullen's (of the Weather Channel) post where she speaks about having the American Meteorological Society remove their seal of approval from meteorologists who "can't speak to the fundamental science of climate change" and about the inability of some meteorologists to differentiate between "solid, peer-reviewed science and junk political controversy." Take a look at Roger Pielke's resume and tell me if you see anything other than solid, peer-reviewed science. About all you will see on his site is peer-reviewed science, and it is good stuff.
So what kind of consensus is this, if by speaking out against it you are vilified?
Wait -- another late breaking item, Ellen Goodman from the Boston Globe says
"I would like to say we're at a point where global warming is impossible to deny. Let's just say that global warming deniers are now on a par with Holocaust deniers, though one denies the past and the other denies the present and future."
Now if you read my post on warming from February 1, you will see I agree that global warming (that the average global temperature has increased in the last 100 years) is tough to deny. But that, I don't think, is what Ms. Goodman means when she refers to the deniers of global warming. I suspect that if I said to her that maybe the best response to warming is to make sure that the world economy grows at a good rate for the next 100 years so that our children have the capital and capacity to adapt to climate change, she would consider me a denier. Or if I said that it simply did not make good economic sense to spend a lot on reducing CO2 given the cost of reductions and the relatively minor benefits that would be forthcoming, she would consider me a denier. Or if I said that it was not clear just how much of the warming of the last 100 years was due to anthropogenic greenhouse gas emisssions, she would consider me a denier. Read her editorial and tell me if I am wrong.
At any rate, bringing the Holocaust into the argument over climate change is just going way over the edge.
Roger notes two attempts to remove state climatologists -- David Legates in Delaware and George Taylor in Oregon -- because of their failure to follow the consensus views on global warming. Roger also gives the cite to Heidi Cullen's (of the Weather Channel) post where she speaks about having the American Meteorological Society remove their seal of approval from meteorologists who "can't speak to the fundamental science of climate change" and about the inability of some meteorologists to differentiate between "solid, peer-reviewed science and junk political controversy." Take a look at Roger Pielke's resume and tell me if you see anything other than solid, peer-reviewed science. About all you will see on his site is peer-reviewed science, and it is good stuff.
So what kind of consensus is this, if by speaking out against it you are vilified?
Wait -- another late breaking item, Ellen Goodman from the Boston Globe says
"I would like to say we're at a point where global warming is impossible to deny. Let's just say that global warming deniers are now on a par with Holocaust deniers, though one denies the past and the other denies the present and future."
Now if you read my post on warming from February 1, you will see I agree that global warming (that the average global temperature has increased in the last 100 years) is tough to deny. But that, I don't think, is what Ms. Goodman means when she refers to the deniers of global warming. I suspect that if I said to her that maybe the best response to warming is to make sure that the world economy grows at a good rate for the next 100 years so that our children have the capital and capacity to adapt to climate change, she would consider me a denier. Or if I said that it simply did not make good economic sense to spend a lot on reducing CO2 given the cost of reductions and the relatively minor benefits that would be forthcoming, she would consider me a denier. Or if I said that it was not clear just how much of the warming of the last 100 years was due to anthropogenic greenhouse gas emisssions, she would consider me a denier. Read her editorial and tell me if I am wrong.
At any rate, bringing the Holocaust into the argument over climate change is just going way over the edge.
Thursday, February 01, 2007
The Eiffel Tower is Dark!
The news media is in high gear in anticipation of the IPCC summary for policymakers that will be issued tomorrow. I think I will have to go into hiding for a couple days or my blood pressure will go through the roof. Leave it to the French to darken the Eiffel Tower to reflect the seriousness of the event.
So about 12 years ago, in my Environmental Economics course at Tuck, I had a "skeptic" in to class to discuss climate change -- Robert Balling. Now in the interest of balance, I also invited to the class Donella Meadows (Limits to Growth) and she did attend. It was one of my all time favorite class sessions. The students who were there probably still do not realize how lucky they were to see Balling and Meadows square off -- and agree on much of the science, but not on the policy implications!
So it sounds like one of the news bytes will be that mankind is "very likely" to be a cause of some (how much?) of the warming we have observed. Twelve years ago, Balling, a skeptic, would have agreed to that. I remember him going through the data, with a focus on moderate warming, especially at night and in winters, and more rainfall generally. That, he said is global warming. The question then, and now, is what we should do about it.
So the IPCC summary will try to make a big deal out of the "very likely" language, and all the media will try to use it to say that all skeptics have been discredited. I don't know of any skeptics who deny the theory of climate change (i.e., the causal relationship to CO2) or indeed any who would not agree that some of the warming we have observed in the last 100 years is "very likely" due to human influence.
That is just not the point.
It will be interesting to see the spin if, as I expect, the expected temperature increase and expected sea level increases both fall from previous expected values. How do you spin that into more of a crisis?
So about 12 years ago, in my Environmental Economics course at Tuck, I had a "skeptic" in to class to discuss climate change -- Robert Balling. Now in the interest of balance, I also invited to the class Donella Meadows (Limits to Growth) and she did attend. It was one of my all time favorite class sessions. The students who were there probably still do not realize how lucky they were to see Balling and Meadows square off -- and agree on much of the science, but not on the policy implications!
So it sounds like one of the news bytes will be that mankind is "very likely" to be a cause of some (how much?) of the warming we have observed. Twelve years ago, Balling, a skeptic, would have agreed to that. I remember him going through the data, with a focus on moderate warming, especially at night and in winters, and more rainfall generally. That, he said is global warming. The question then, and now, is what we should do about it.
So the IPCC summary will try to make a big deal out of the "very likely" language, and all the media will try to use it to say that all skeptics have been discredited. I don't know of any skeptics who deny the theory of climate change (i.e., the causal relationship to CO2) or indeed any who would not agree that some of the warming we have observed in the last 100 years is "very likely" due to human influence.
That is just not the point.
It will be interesting to see the spin if, as I expect, the expected temperature increase and expected sea level increases both fall from previous expected values. How do you spin that into more of a crisis?
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