2010 - %3, October

Campaign Spending Update

| Mon Oct. 4, 2010 12:08 AM EDT

Here's the latest on campaign spending:

The $80 million spent so far by groups outside the Democratic and Republican parties dwarfs the $16 million spent at this point for the 2006 midterms....The bulk of the money is being spent by conservatives, who have swamped their Democratic-aligned competition by 7 to 1 in recent weeks. The wave of spending is made possible in part by a series of Supreme Court rulings unleashing the ability of corporations and interest groups to spend money on politics. Conservative operatives also say they are riding the support of donors upset with Democratic policies they perceive as anti-business.

The last time I wrote about this I was reminded that the action isn't all on the conservative side: ActBlue is on track to distribute $80 million to Democratic candidates this cycle. That's a pretty impressive number. When it comes to outside interest groups, however, the GOP pretty much owns the airwaves.

For more on the tidal wave of money in politics, check out "Who Owns Congress," a special report in the current issue of the magazine.

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The Human Nature Top 10

| Sun Oct. 3, 2010 12:33 PM EDT

Over the past few days I happen to have posted about two aspects of human nature that most people don't pay enough attention to:

  1. Loss aversion: people really, really hate to lose something they already have and will forego even favorable risks to avoid it.

  2. Regression to the mean: an especially strong performance is likely to be followed by a weaker performance and vice versa.

I propose we construct a top ten list of similar things. Not personal pet theories, but aspects of human nature that are (a) widely accepted and relatively noncontroversial among professionals, and (b) underappreciated by most of us. They can come from anywhere: economics, psychology, sociology, politics, anthropology, whatever.

("Underappreciated" is important! You might believe, for example, that people who fall in love do stupid things. And maybe so. But this is not exactly something that's failed to attract sufficient attention in popular culture.)

I encourage other bloggers to join in. What are your favorite aspects of human nature that get short shrift in popular discourse even though they're pretty strongly supported in the academic literature? It's a weekend and this should be a fun exercise. Let's hear it.

Tea Party Button Salesman Tells All

| Sun Oct. 3, 2010 5:00 AM EDT

Denver, Colorado—Jim Maser, "the pin man," is to-the-point when I ask him why he sells his collection of conservative buttons at tea party rallies: "Capitalism."

Jim's not your typical tea partier. He's quick to point out, for instance, that the proposed Islamic community center in lower Manhattan is just that—"Look, I know it's not a mosque"—and says he wouldn't really have a problem with it at all if it weren't so blatantly pegged to 9/11. Amid a sea of "We the People" and "Don't Tread on Me" banners at the 9/12 rally on the steps of the state capitol, he's wearing a plain white polo shirt and khaki shorts. He is, in other words, all business.

Before the Democratic Convention came to Denver in 2008, Jim just stuck to sports (right there on his card it still says "specializing in sports collector pins"), traveling to All-Star games and the like to hawk his wares. But he started to branch out into politics after Obama came to town. He sets up booths at liberal events too—political rallies, obviously, but also pride parades.

(Photo: Tim Murphy)(Photo: Tim Murphy)"It doesn't matter if it's Democratic money or Republican money, it's all green," he says. Although it doesn't always pay for the same things. "I've done this long enough to know that red, white, and blue stuff sells at events like this and I can't give it away at the other events."

Prospect Theory and the Taxpayer Receipt

| Sat Oct. 2, 2010 5:55 PM EDT

Yesterday I wrote about Third Way's proposal to send taxpayers an annual "receipt" showing them roughly where their tax dollars go. I thought it sounded like a good idea that just about everyone could support, but ended with a rhetorical question: "And yet, I'll bet that neither party would actually be in favor of this. Why do you suppose that is?" Matt Steinglass comments:

I'm sure Mr Drum meant this as a rhetorical question, but I'm too dumb to immediately get the rhetorical answer, so I had to think about why this might be the case. If it is the case, I can think of two explanations. One is that there's uncertainty about which side the change would benefit: Democrats think it would benefit Republicans, while Republicans think it would benefit Democrats. One of the two propositions is in fact correct, but either one party is simply guessing the odds wrong, or both parties are too risk-averse to find a zone there where they're comfortable placing a bet.

This is indeed what I had in mind, but I'd rephrase it a bit. First, though, some background.

Several years ago I got interested in behavioral economics in general and its roots in prospect theory in particular. Prospect theory, developed by Daniel Kahneman and Amos Tversky in the late 70s, tries to describe the way real-world people react when faced with risky choices, and it's largely based on empirical data gathered via lab experiments. There are several fascinating components to prospect theory, but the one that's influenced me the most is also the simplest: when faced with a choice, people are far more motivated by loss aversion than by risk aversion.

Basically, what this means is that the emotional distress you suffer from losing, say, $100, is much greater than the emotional lift you get from winning $100. Losses always loom larger than gains. Here's an example:

If you give people the choice between a sure $100 vs. a 50% chance of winning $300, most won't take the gamble. This is hard to explain since the odds say that you should expect to win $150 from taking the bet. At first, this seems like a case of people being risk averse.

But now let's switch it around. Give people a choice between a sure loss of $100 vs. a 50% chance of losing $300. This time most people will take the bet. Why? This case is mathematically identical to the first one, so they can't both be explained by risk aversion. What does explain them is loss aversion. Most people hate the idea of a sure loss and will reject bets that make them give something up (Case 1) but accept bets that give them a chance to avoid giving something up (Case 2).

Now let's put this differently: if you offer people a straight-up gamble where they have a 50% chance of winning $100 and a 50% chance of losing $100, most of them won't take it. In fact, you have to offer a 50% chance of winning $200 vs. a 50% chance of losing $100 before most people will accept. Quantitatively, it turns out, people value the prospect of a potential loss about twice as strongly as they value the prospect of a potential gain.

If you apply this to the idea of the taxpayer receipt you can see why it's unlikely to happen. Suppose that the current budget allocation contains $1 billion of goodies for Republicans and $1 billion of goodies for Democrats. And suppose both sides accurately believe that the receipt idea gives them a 50-50 chance of getting the other's guy's goodies and a 50-50 chance of losing their existing $1 billion in goodies. Neither side would take the gamble. In fact, it's even worse than that: both sides might believe they have a 50-50 chance of gaining $1.5 billion in goodies along with a 50-50 chance of losing their existing goodies and they still wouldn't take the gamble. The risk of losing something they currently have is just too strong.

The power of loss aversion is one of those insights that seems painfully obvious after someone else points it out, and once you start looking for it you can see it in all walks of life. People are simply not willing to risk losing something they already have unless they're promised a credible chance of a much larger gain. This explains a lot of otherwise odd behaviors, and it explains why neither Democrats or Republicans are likely to embrace the idea of the taxpayer receipt. Budget allocations are a relatively zero-sum game in the short term, and both sides would have to believe that the odds of getting the other guy's goodies is overwhelmingly in their favor before they'd agree to anything that puts their existing goodies at risk. So it's not just a matter of both sides mistakenly thinking the taxpayer receipt is more likely to benefit the other side and therefore shying away. Even if both sides are modestly optimistic about their chances of outgunning the other side, the prospect of a loss is still too daunting. So they won't do it.

Yet Another Palin Feud

| Sat Oct. 2, 2010 10:37 AM EDT

Politico reports that Sarah Palin is already feuding with Obama's new chief of staff, Pete Rouse. That's no surprise, I guess. Is there anyone who's ever lived in the state of Alaska that Palin doesn't have a grudge against?

But this is truly looking glass territory:

Palin appears to have been no fan of Rouse for a long time. In her 2009 memoir, she accuses him of being among those in the Obama presidential campaign who allegedly tried to smear her when she was named McCain's vice presidential nominee.

She also accuses him of lifting Obama's "change" slogan from her own gubernatorial campaign in 2006.

"Every part of our campaign shouted 'Change!'" she wrote. "We were amused a couple of years later when Barack Obama, one of whose senior advisers (come to think of it) had roots in Alaska — adopted the same theme," she wrote in reference to Rouse.

I don't know whether Rouse tried to smear Palin or not. Given Palin's expansive understanding of the word "smear," I wouldn't be surprised. But does she really think that she's the first politician to ever run on the theme of "change"? And that Obama via Rouse stole it from her? Holy cow.

The Rise and Fall of the Third Reich in Hayden Lake, Idaho

| Fri Oct. 1, 2010 9:01 PM EDT

Moscow, Idaho—Okay, a confession: We never actually saw the site of the former Aryan Nations compound in Hayden Lake. We got really bad directions and drove around for a while looking for it, but we had to be in Moscow at a decent hour, so we kept on going. Sorry. Basically, though, the story is this: For about three decades northern Idaho was the notorious base of operations for the Aryan Nations, who'd turned to Hayden Lake because of its isolation and general absence of non-whites. By day they'd attend services at their shrine to Adolf Hitler,* or conduct exercises at their 20-acre wooded compound outside town; by night, they'd unwind to pagan death metal. Once a year, white supremacists from around the world would converge upon Hayden Lake (population 494) for a big conference.

Of course, if you happened to live in Hayden Lake and didn't hate the rest of the planet, this was a really frustrating situation. But it wasn't until 1998 when things finally reached a tipping point. That's when a bunch of Aryans Nations guards opened fire on a mother, Victoria Keenan, and her son, Jason, who had stopped on the side of the road to look for a wallet. The guards—drunk, I should note—hopped in a truck, assault rifles in tow, and followed the Keenans for two miles, spraying the car with bullets until the Keenans swerved into a ditch. Then the guards held them at gunpoint and beat them.

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Friday Cat Blogging - 1 October 2010

| Fri Oct. 1, 2010 2:08 PM EDT

I have fresh new pictures of the furballs this week. Unfortunately, it's been pretty hot in Southern California this week, which means the cats were even more lethargic than usual. Basically, they roused themselves briefly when they heard food being dumped in the food bowl, and then immediately conked out again like sacks of potatoes. So there weren't a whole bunch of great Kodak moments available. But willy nilly, here they are, lounging on the bed, waiting for me to go away so they can conk out again. Isn't the life of a housecat great?

What Caused the Flash Crash?

| Fri Oct. 1, 2010 1:56 PM EDT

So what caused the "flash crash" of May 6th? Today the SEC and the CFTC issued a joint report confirming earlier speculation: it was caused by a large sell order on E-Mini futures contracts, a security that mimics trading in the S&P 500 stock index. Before it happened, the market was already on edge over reports of the crisis in Greece:

At 2:32 p.m., against this backdrop of unusually high volatility and thinning liquidity, a large fundamental trader [Waddell & Reed Financial of Kansas] initiated a sell program to sell a total of 75,000 E-Mini contracts [at] an execution rate set to 9% of the trading volume calculated over the previous minute, but without regard to price or time.

The execution of this sell program resulted in the largest net change in daily position of any trader in the E-Mini since the beginning of the year (from January 1, 2010 through May 6, 2010)....Lacking sufficient demand from fundamental buyers or cross-market arbitrageurs, HFTs began to quickly buy and then resell contracts to each other — generating a “hot-potato” volume effect as the same positions were rapidly passed back and forth.

....In the four-and-one-half minutes from 2:41 p.m. through 2:45:27 p.m., prices of the E-Mini had fallen by more than 5%....Between 2:32 p.m. and 2:45 p.m., as prices of the E-Mini rapidly declined, the Sell Algorithm sold about 35,000 E-Mini contracts (valued at approximately $1.9 billion) of the 75,000 intended. During the same time, all fundamental sellers combined sold more than 80,000 contracts net, while all fundamental buyers bought only about 50,000 contracts net, for a net fundamental imbalance of 30,000 contracts.

....At 2:45:28 p.m., trading on the E-Mini was paused for five seconds when the Chicago Mercantile Exchange (“CME”) Stop Logic Functionality was triggered in order to prevent a cascade of further price declines. In that short period of time, sell-side pressure in the E-Mini was partly alleviated and buy-side interest increased. When trading resumed at 2:45:33 p.m., prices stabilized.

"Significantly," says the New York Times, "the report found that the plunge was not caused by any market manipulation but by a single firm trying to hedge its investment position, if in an aggressive and abrupt manner." Does this make me feel any better? Not really. Market manipulation can be monitored and regulated, at least in theory. But a large sell order? If a $4 billion E-Mini dump can wipe out the market just because it's a little jittery over events in Greece, that's not a good sign that the market is inherently very stable. And remember, this stuff all happened within five minutes, with prices apparently stabilized by a five-second trading pause at 2:45:28. This stuff isn't even happening at human speeds anymore. Kinda scary.

Rockefeller Means Business With EPA Block

| Fri Oct. 1, 2010 1:22 PM EDT

Earlier this week, Politico's Darren Samuelsohn reported on Sen. Jay Rockefeller's admission that his effort to delay carbon dioxide regulations from the Environmental Protection Agency is really just a message vote. Even if it passes in the Senate, President Obama will veto it.

But now Rockefeller is clarifying that he really does mean it—he wants to block EPA action on climate change, and he wants do it this year. The bill, he said, is one of his "top priorities." Here's the statement he put out last night:

With the Senate heading into recess and a lame duck session on the horizon, one of the remaining items that this Congress must consider is my bill to suspend EPA regulation of greenhouse gases for two years. As I have said repeatedly, the Majority Leader has committed to allowing a vote on my bill this year and I believe we have more and more momentum to get it passed in the Senate.
Even in the face of the President’s veto threat, we must send a clear message that Congress–not an unelected regulatory agency–must set our national energy policy. Together we must make sure that in this very fragile economic recovery, our manufacturing and energy sectors are able to grow and generate jobs. We can address emissions and secure a future for the U.S. coal industry, but we need the time to get it right and to move clean coal technology forward.
This bill is one of my top priorities and it is needed as soon as possible to reduce the uncertainty facing so many American industries at a time when we need them to invest in our economy and create jobs. EPA is set to begin regulating on January 2, so we cannot let up on our fight to move this issue forward.

Chart of the Day: Healthcare Spending

| Fri Oct. 1, 2010 12:40 PM EDT

Dr. Aaron Carroll has finished up his series on healthcare spending, and the chart on the right shows the main areas where America overspends. In short: everywhere. Here is his summary:

It’s been interesting to read the emails I’ve gotten over the last two weeks on this series. Many of you seem to believe I’ve got some secret agenda with respect to how to fix this. I don’t. The truth is that I don’t think there is a simple solution. Some of you on the right think that increased consumer costs will fix the whole thing. It may, for some sectors, but it will do nothing in others. Plus, I think it would negatively affect outcomes. Similarly, tort reform isn’t the answer either.

Some of you on the left think it will be just as easy if you had your way. But even if we went to a single-payer system, and significantly decreased insurance costs, that won’t touch the bulk of the problem. Nor would singling out changes to pharmaceutical spending.

....The final thing is that we have to stop looking for others to blame. We are all to blame. So let’s get past blame entirely, and start dealing with the problem. Our goal isn’t to reduce our spending to that of other countries. Our goal is to reduce spending so that it is in line with GDP. It’s to get spending down to the curve in the above graph. It’s to get spending down to just the green slice of the pie.

The introduction to his series is here, and it includes links to all ten parts. It's worth a read if you want to get a quick, very readable take on why healthcare in America is so expensive without producing results any better than all the countries that spend less than us.