Kevin Drum - March 2012

"Pay for Performance" Temporarily Slightly More Meaningful Than Usual

| Mon Mar. 26, 2012 11:09 PM EDT

The Wall Street Journal reports that, at least for the moment, companies with performance goals for their CEOs are actually paying their CEOs based on whether they meet those goals:

Preliminary results highlight how corporate directors, under new scrutiny from shareholders, are tying more CEO pay to corporate performance. When companies miss targets, directors are holding the line.

"The pressure from shareholders clearly has had an effect here," discouraging boards from using their discretion to boost pay, says Robin Ferracone, executive chair of Farient Advisors LLC, a Pasadena, Calif., compensation consultant.

....That is a shift from a few years ago, compensation consultants say, when directors would often overlook missed targets and award big bonuses anyway. That dynamic has changed under pressure from investors and the Securities and Exchange Commission.

One of the worst aspects of "pay for performance" CEO compensation is that quite often it's rigged outrageously in favor of the CEO. There's almost no way to lose. And then, on the off chance that you do poorly anyway, the board decides that it was just bad luck and you shouldn't be deprived of the bonus you've been counting on all year. So they make it up to you. After all, we're all one big happy family on mahogany row, right?

But if the Journal is to be believed, company boards are actually holding their rock-jawed titans of capitalism to their promises these days. Good to hear. I wonder how long it will last?

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Nudging: More Marketing Than Economics

| Mon Mar. 26, 2012 8:58 PM EDT

The Economist writes about some promising applications of behavioral economics, especially those popularized by the book Nudge:

The book, first published in 2008, is about the potential for behavioural economics to improve the effectiveness of government. Behavioural economists have found that all sorts of psychological or neurological biases cause people to make choices that seem contrary to their best interests....That theory is now being put to the test [...] in several countries including Denmark, France and, above all, Britain, where David Cameron has established a Behavioural Insights Team, nicknamed the Nudge Unit.

The Nudge Unit has been running dozens of experiments and the early results have been promising. In one trial, a letter sent to non-payers of vehicle taxes was changed to use plainer English, along the line of “pay your tax or lose your car”. In some cases the letter was further personalised by including a photo of the car in question. The rewritten letter alone doubled the number of people paying the tax; the rewrite with the photo tripled it.

Changes to language have had marked effects elsewhere, too. A study into the teaching of technical drawing in French schools found that if the subject was called “geometry” boys did better, but if it was called “drawing” girls did equally well or better. Teachers are now being trained to use the appropriate term.

At the risk of sounding peevish, I have to ask: in what way is any of this stuff behavioral economics? Trying to figure out better ways of persuading people to do things used to go under the rubric of rhetoric, politics, or salesmanship. When did we suddenly decide that the kind of thing that marketing people have been doing for the past century is now a wholly-owned subsidiary of economics?

I remember having the same problem with Freakonomics when it first came out. It was all interesting and breezily written, but most of it was nothing more than the application of clever statistical techniques to figure out how different incentives affect people's actions. But unless we've all agreed that anything involving the study of human incentives is, by definition, economics, the title of the book is seriously misleading. Only a few of the chapters dealt with subjects traditionally viewed as economics.

I've got nothing against the study of nudging. We should do more of it! But the steady colonization of economics into every area of human behavior should be put to a hard stop. I suppose that hardnosed politicians are more likely to listen to a "behavioral economics" pitch than a "marketing" pitch, but that's not much of an excuse. Just because it uses math and deals with human behavior doesn't make it economics.

UPDATE: Richard Thaler, one of the co-authors of Nudge, tweets: "Not true of the book. The article is just a thin slice." I didn't really mean to implicate the book itself, which I haven't read, with the Freakonomics problem, so apologies for that.

It's Not Just the Economy, Stupid

| Mon Mar. 26, 2012 5:22 PM EDT

Over the past few years it's become fashionable in sophisticated political circles to argue that presidential campaigns themselves barely matter. What matters is the economic fundamentals. When the economy is strong, the incumbent party wins. When the economy is lousy, the incumbent party loses. All the rest is just a bunch of sound and fury, signifying nothing.

I've long had some problems with this attitude. I don't think there's any question that the state of the economy matters, and I agree that political journalists probably ought to pay more attention to this than they usually do. At the same time, it's easy to go overboard. For one thing, political scientists have come up with a lot of different models, and they don't all rely on the same economic measures. Nor do they make the same predictions. Nor do they even claim (in most cases, anyway) to explain more than about 60-70% of the variance in how well the parties do. So even if the models are accurate, there's plenty of scope for other factors to influence presidential elections too.

But are they accurate? It's easy to be impressed by a model that accounts for past election results with high accuracy. That's a nice looking regression line, pal! But it's quite another thing for your model to predict elections in advance, and that's the acid test for any election model. Until now I've never seen anyone do a systematic review of actual predictions by the various models, but today Nate Silver filled that void, taking a look at model predictions since 1992. The results aren't pretty:

In total, 18 of the 58 models — more than 30 percent — missed by a margin outside their 95 percent confidence interval, something that is supposed to happen only one time in 20 (or about three times out of 58).

Across all 58 models, the standard error was 8 points of vote margin or 4.6 points of incumbent vote share. That was much larger than the error that the models claimed they would have — about twice as large, in fact....The “fundamentals” models, in fact, have had almost no predictive power at all. Over this 16-year period, there has been no relationship between the vote they forecast for the incumbent candidate and how well he actually did.

Nate argues that the state of the economy does have some predictive power. He figures it at about 40%, but says that most current models don't even do that well because they're poorly designed. That doesn't surprise me: this is a really hard subject with lots of hard-to-answer questions. What matters most, the absolute state of the economy or whether it's on an upswing/downswing? Should we look at GDP growth or unemployment? Or something else, like disposable income? Do voters respond to some variables, like inflation, only when they get above a certain level? Etc. This is hard stuff, and we don't have a whole lot of data points to work with.

What's more, common sense suggests that other things matter too. For example, I just can't accept as coincidence that since 1950 incumbent parties have nearly always won after one term in office and nearly always lost after two terms. If I used that as my only rule, I'd have an accuracy rate of 87%. (Though only 80% if you count Al Gore as the popular-vote winner in 2000.)

All of this is one reason why I'm reasonably optimistic about Obama's chances in November. Yes, the economy is still in weak shape. But it's improving, which I suspect is at least as important as its absolute level. What's more, his party has been in power for only one term and he's a strong candidate running against a weak Republican field. Put all that stuff together, and I think his odds look pretty good.

Bottom line: the economy matters, but it's probably wise not to get too deterministic about these things. Monocausal explanations are often appealing, but just as often wrong. The world is a complicated place.

Quote of the Day: Obamaville

| Mon Mar. 26, 2012 11:50 AM EDT

From Paul Waldman, on Rick Santorum's latest video apocalypse:

Holy crap! Was that a shot of Barack Obama forcing a little girl to bite the head off her beloved guinea pig? Maybe not, but almost. Apparently, it will take Obama only two years to turn America into some combination of "The Day After" and "Saw."

Paul isn't exaggerating. Santorum's ad really does open with a Saw-like shot of a flock of crows shrieking as they fly away from an abandoned, windswept little town. The Santorum campaign is really getting desperate.

Without Apple, the Tech Sector is Kind of Sucking

| Mon Mar. 26, 2012 11:05 AM EDT

Via Joe Weisenthal, this chart from BarCap shows the growth of the tech sector with and without Apple. Take Apple's stock out of the equation, and instead of growing 8% over the past year, the tech sector has shrunk about 3%. It's true that you can see an effect like this on any kind of aggregate index if you remove the top performer, but given the size of the tech sector this is a pretty stunning example of the effect.

Torturing the Law to Argue that Obamacare is Unconstitutional

| Mon Mar. 26, 2012 10:13 AM EDT

Paul Krugman comments on the Obamacare court case being argued today:

We know, or I think we know, that a single-payer system — in which the government collects taxes, and uses the revenue to provide health insurance — would be constitutional. I mean, I don’t think the court is about to strike down Medicare.

Well, ObamaRomneycare is basically a somewhat klutzy way of simulating single-payer. Instead of collecting enough revenue to pay for universal health insurance, it requires that those who can afford it buy the insurance directly, then provides aid — financed with taxes — to those who can’t. The end result is much the same as if the government collected taxes from those under the mandate and bought insurance for them....It is in no sense more interventionist, more tyrannical, than Medicare; it’s just a different way of achieving the same thing.

Agreed. This whole case has a serious air of angels-dancing-on-the-head-of-a-pin. The individual mandate is enforced by a tax penalty, and if it were called a tax penalty it would be OK. But since it's called a fine it's unconstitutional! Congress can tax everyone and then provide them with health insurance — outsourced to a private company if it wants to. But it can't require everyone to simply buy the exact same health insurance directly for the exact same price! Raich may seem like a precedent that binds conservatives to uphold Obamacare, but Raich was an as-applied challenge. The current case is a facial challenge!

And on and on. Maybe these distinctions really matter. But to an awful lot of people, they sure sound an awful lot like mere excuses to reach a conclusion they want to reach. That's because, broadly speaking, it's nearly impossible to argue that Obamacare is even close to pushing the envelope on Congress's power to regulate interstate commerce. It's aimed at a particular sector (healthcare) and uses a particular method (the mandate) to accomplish its goals, but lots of acts of Congress use slightly new and different ways of accomplishing legitimate goals. The methods of 1787 just don't map precisely onto 2012.

We'll see. If the conservative justices are simply bound and determined to make their mark and overturn Obamacare, they will. But if they do, they're going to have to torture the law pretty hard to get there.

More here from Adam Serwer on possible outcomes.

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Your Favorite Podcasts Revealed!

| Sun Mar. 25, 2012 11:26 AM EDT

Yesterday I asked for podcast recommendations. I got loads of 'em! So now, as a public service, I figure I should provide you with a rough Top Ten list culled from comments and emails. The full comment section has a lot more than just the podcasts below, and you should take a look if you're in the market for something a little different, but here were the favorites:

  1. Radiolab won by a mile. The entire stable of NPR shows also got a lot of votes, including Planet Money, Car Talk, This American Life, Foreign Dispatch, and others.
  2. In Our Time was the only show that came close to Radiolab. The rest of the BBC radio lineup got lots of recommendations too.
  3. The Bugle, a news sendup from John Oliver and Andy Zaltzman.
  4. Philosophy Bites, "podcasts of top philosophers interviewed on bite-sized topics..."
  5. "The Civil War and Reconstruction Era, 1845-1877," a Yale University course by David Blight. The Open Yale series in general got a lot of strong recommendations.
  6. History of Rome, a massive, ongoing series of podcasts "tracing the history of the Roman Empire, beginning with Aeneas's arrival in Italy and ending (someday) with the exile of Romulus Augustulus, last Emperor of the Western Roman Empire." So far it's up to episode #172, which covers Attila the Hun's invasion in 451 AD, so it must be getting close to wrapping up.
  7. WTF, comedy with an attitude from Marc Maron.
  8. The B.S. Report, sports talk from ESPN's Bill Simmons.
  9. The New Yorker's stable of podcasts, incuding Comment, Political Scene, Fiction, and Out Loud. 
  10. Slate's stable of podcasts, including Gabfest, Culture Gabfest, and Double X Gabfest.

On the technology side, there were also several recommendations for Downcast as an alternative to iTunes. And, of course, lots of other recommendations that were a little farther off the beaten path than the ones above. Click the link for more. Enjoy.

What Are Your Favorite Podcasts?

| Sat Mar. 24, 2012 12:56 PM EDT

As part of my ongoing effort to join the 21st century, I bought an iPhone several months ago. Now it's finally time to make some use of it. As it happens, I walk up to the market every day to buy food for dinner,1 so I'd like to start downloading podcasts to listen to on the way. Yesterday, for example, I listened to the Ira Glass retraction of This American Life's Mike Daisey story.

So: any recommendations? What are your favorites? I don't listen to the radio at all, so feel free to recommend anything. Or how about class lectures available as podcasts? Have you come across any especially good ones lately? I'm open to anything, but the ideal recommendation will come in approximately one-hour chunks and be free.

1Why do I do this every day? Because it's a good way to force myself to get outside and walk. I'm a lot more likely to do this if I actually have someplace to go, so unlike most people I buy groceries daily instead of weekly.

Why Obamacare Will Survive

| Sat Mar. 24, 2012 12:42 PM EDT

On Monday the Supreme Court will hear arguments about the constitutionality of the individual mandate in Obamacare. David Bernstein argues that the key issue is what's become known as the "broccoli test":

As I've argued several times before, the Supreme Court's conservative majority will not uphold the individual mandate if the mandate's defenders are unable to come up with a limiting principle that will prevent a decision upholding the law from eviscerating any remaining limits on Congress's power to regulate interstate commerce.

…In the health care area, can Congress in fact require everyone to eat broccoli?....Maybe it’s a good idea to give Congress the power to regulate whatever and however it wants, though I really doubt it. More to the point, I'm quite sure that the conservative majority is not willing to endorse the proposition that the commerce power is really the Congress-Can-Do-Whatever-it-Wants Power.

I'm not a lawyer, but I think the widespread focus on Congress's interstate commerce power is off base. Properly framed, the broccoli question is not really a hard one to answer. Here's what I think is the basic four-step legal justification for the individual mandate:

  1. The healthcare sector in America is part of interstate commerce. This is beyond dispute.
  2. Congress can regulate the healthcare sector. This follows directly from both the Constitution and many decades of actual practice. This is also beyond dispute.
  3. Broadly speaking, Obamacare is a reasonable effort to regulate the healthcare market. Regardless of whether they personally like the approach Congress took, I don't think it's hard to convince even conservative justices that the overall structure of Obamacare, with its mix of public and private delivery, is a proper exercise of Congress's authority over a large and complex segment of interstate commerce.
  4. The individual mandate is necessary to the proper functioning of Obamacare. Without the mandate, the entire structure of Obamacare fails. This is fairly easy to demonstrate.

The biggest point of contention is #4, and that has nothing to do with the interstate commerce clause. It has to do with the "necessary and proper" clause—and that's a very expansive grant of power. In McCullough v. Maryland, Chief Justice John Marshall wrote: "Let the end be legitimate, let it be within the scope of the constitution, and all means which are appropriate, which are plainly adapted to that end, which are not prohibited, but consist with the letter and spirit of the constitution, are constitutional." The individual mandate may not be the only way to accomplish Congress' goals, but I think the facts of the case provide an extremely strong basis for concluding that it's both "appropriate" and "plainly adapted" to those goals.

So then, what's the limiting rule? Why can't Congress mandate that we all eat broccoli? Answer: because it's not necessary to the proper functioning of any plausibly reasonable healthcare regulatory structure. Congress may have the power to intrude on individual liberty, but it can't exercise that power arbitrarily. It has to be appropriate and plainly adapted to a legitimate broader goal. The individual mandate is. Forcing you to eat your broccoli isn't.

This strikes me, frankly, as a pretty slam dunk legal case. The only question, then, is whether the Supreme Court will treat it as a proper legal question rather than an overtly political one in which they simply express their disapproval of Obamacare or try to cement their reputations on the right by rolling back decades of well-accepted jurisprudence. I realize that this is an act of obvious foolhardiness, but this is why I'm sticking with my prediction that Obamacare and the mandate will be upheld 7-2. I think that Thomas and Alito are true believers who are perfectly willing to overturn two centuries of precedent just to satisfy their own ideological fancies. But I have more respect for Roberts, Kennedy, and Scalia. I think they'll judge the law on its proper legal merits, and conclude that Obamacare is broadly reasonable and the individual mandate is indeed a necessary and proper part of it.

Obamacare is Now Officially Obamacare

| Sat Mar. 24, 2012 11:46 AM EDT

Sometime last year I gave up entirely on the Patient Protection and Affordable Care Act. Not the act itself, of course, but the name. I gave on PPACA and I gave up on ACA. President Obama himself seemed to be OK with it being called Obamacare, so I decided that's what I'd call it too.

So naturally I'm pleased that the Obama campaign has now made it official:

The campaign launched a Facebook feed Friday featuring a big “I Like Obamacare” logo. The social network rollout also included a Twitter hashtag that the campaign reported become the top trending topic in the world within hours. On the web, an “I Like Obamacare” frontpage popped up on the Obama campaign website.

In an email to supporters, Obama campaign strategist David Axelrod said it was time for Democrats to turn the “Obamacare” insult into a badge of honor. “I’m proud of it — and you should be, too,” he wrote. “Here’s why: Because it works.”

This has always seemed fine to me. We have Pell grants and Roth IRAs, so why not Obamacare? Like it or not, that's what everyone calls it, and it's the only widely recognized name that PPACA has. What's more, I never thought of it as an insult in the first place. The masses have spoken, and Obamacare it is.