Kevin Drum

Monday Morning Miscellany

| Mon May 4, 2009 12:18 AM EDT

Has Missouri passed a law that outlaws emergency contraception?  Appearances to the contrary, no.

If Goldman Sachs pays back its TARP money, can Tim Geithner put it back into the pot and give it to somebody else?  Geithner's desires to the contrary, apparently not.

Are America's banks actually well capitalized and in good shape?  The Treasury Department's stress testers seem to think so, but appearances can be deceving.  If banks are reducing their capital exposure by clamping down on credit lines even to blue chip customers, then perhaps they're not quite as healthy as they're claiming?

Finally: Are wage cuts a good way to save jobs?  Appearances to the contrary, Paul Krugman says no.

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The Black Swan

| Sun May 3, 2009 6:28 PM EDT

I finished The Black Swan over the weekend, and although a full review at this late date is kind of pointless, it's an odd enough book to deserve a few notes.

First, the tone: it's intensely annoying.  The problem is that Nassim Nicholas Taleb basically sounds like a crank.  His prose has all the usual markers: everyone else is an idiot (this includes philosophers, economists, historians, journalists, and pretty much all social scientists, among others); he's the only one who truly understands the world as it is; there's a monocausal explanation for this almost universal lack of understanding in others; and there's a tiny cast of other unappreciated geniuses who do get it (Benoit Mandelbrot, Karl Popper, G.L.S. Shackle, Daniel Kahneman, etc.).  It's all sort of Unabomber-like, though with a better sense of humor.

But of course, that's just an esthetic judgment.  What about the content?  Well, here's the funny thing: once I got past the tone I didn't really have a problem with most of it.  Taleb talks about confirmation bias and the narrative fallacy.  Survivor bias and the anthropic principle.  He writes about how humans are hardwired to be bad at estimating risks in the modern world.  He explains how network effects can create large inequalities out of small differences and how randomness is responsible for more of our success than we think.  As it happens, this is all stuff I was already pretty familiar with, which made the book annoying and a bit tedious, but that's obviously not Taleb's fault.

Unfortunately, I'm not sure how effective the book would be even for someone who found this stuff new and interesting.  Taleb tends to flit from subject to subject without ever really explaining anything fully enough to make sense, and in the end it's not quite clear what case he wants to make.  Generally speaking, he wants to persuade us that we know less than we think and that forecasting the future is a mug's game because history is primarily governed by huge, unpredictable events that come out of nowhere (black swans).  But this is sort of a banal point: scholars have been arguing about the importance of contingent events vs. broad historical trends forever, and the difficulty of predicting technological breakthroughs is well-trod ground.  Worse, Taleb doesn't add much to what's already been said about it.  Just the opposite, in fact.  In one chapter he cherry picks some inventions here and there to help make his case, but even using his own hand-picked examples he's not very convincing.  We all know that penicillin was discovered by accident, but the computer?  Taleb seems to think it sprang out of nowhere, but that's sure not how I remember it.  It was a big invention and a huge discontinuity, but it was hardly unpredictable and hardly an accident.

The last few chapters are a diatribe against statisticians who are over-devoted to Gaussian distributions, and I don't have the chops to know if he has a point there.  The statisticians I've come across all seem to be keenly aware that there are lots of different kinds of distributions in the world, but maybe that's all shuck and jive.  Maybe they talk a good game and then end up modeling the world using bell curves anyway.  And in the financial world, for which he reserves his primary scorn, I know even less.  Taleb says they obstinately continue to use Gaussian models that flatly don't work and hide known risks, and he probably has a good point.  Certainly recent events are on his side, and Wall Street's almost cultlike reliance on VaR and CAPM and portfolio theory and the Gaussian copula seems to have played a big role in its current collapse.  But who knows?  Maybe it was actually just a gigantic housing bubble and this other stuff is a minor sideshow.  I don't know for sure, and Taleb doesn't provide enough evidence one way or the other for me to make up my mind.

In the end, he doesn't have much advice for us.  He insists that Mandelbrot provides a better mathematical basis for financial modeling, but never tells us how.  He insists that the world is mostly governed by a small number of big events, but never seriously grapples with the arguments for or against.  He insists that he's used his sensitivity toward black swan events as a practical guide to his own trading and investing strategy, but then he sums it up with this: "As I said, if my portfolio is exposed to a market crash, the odds of which I can't compute, all I have to do is buy insurance...."  Really?  That didn't work out so well recently, did it?

(On the other hand, the rest of that sentence reads: "....or get out and invest the amounts I am not willing to ever lose in less risky securities."  That's basically a way of saying that investors should limit their leverage, and he's certainly right about that.)

So I'm not sure what to think.  Taleb makes plenty of good, if rambling, points about the limitations of human nature, but his concrete advice is pretty prosaic.  Stay open to lots of experiences.  Embrace empiricism and let the data lead you without pretending it says things it doesn't.  Keep the possibility of massive losses in mind and don't invest money you can't afford to lose.  If you are going to take risks, invest in things like startup companies, where the risks are plain and open.  I don't really have any argument with most of that, but I'm not sure any of it is really all that remarkable either.

Did I miss the point?  Maybe.  To be honest, I'm really not sure.

Quote of the Day - 5.3.09

| Sun May 3, 2009 11:16 AM EDT

From Arlen Specter (D-ish–Penn.), on his newfound party allegiances:

"I did not say I would be a loyal Democrat. I did not say that."

I'm glad we got that straightened out.  I wonder how Joe Sestak's primary challenge is coming along?

Books on Paper

| Sat May 2, 2009 11:57 PM EDT

I got my Kindle in early March and I haven't read a book printed on actual paper since then.  Today, however, Eric Boehlert's Bloggers on the Bus came in the mail, all bound and printed on genuine dead trees.  And it looks definitely worth reading.  But it's going to feel so weird....

The Revenge of Dr. Evil

| Sat May 2, 2009 10:52 PM EDT

From a Washington Post story about wage cutbacks:

Members and employees of the Virginia Symphony Orchestra are bracing for more hard times. The orchestra has had to contend with a $1.5 billion debt....The musicians were furloughed, and the administrative staff, including Johnson, took a 20 percent pay cut. The two moves saved the VSO about $500,000.

Not bad!  At that rate they should have their debt paid off in another 3,000 years.

I know I'm being sort of prickish for even bringing this up, but seriously: at least one reporter and two editors worked on this piece, and apparently none of them were taken aback by the idea of a regional orchestra being $1.5 billion in debt.  At any rate, not taken aback enough to wonder idly if maybe it was $1.5 million instead.  Sheesh.

Out of Power

| Sat May 2, 2009 7:57 PM EDT

Matt Yglesias notes that even Republican members of Congress in razor-close swing districts voted unanimously against Barack Obama's budget:

These are not people who can count on the angry anti-Obama minority to win elections for them. And John Boehner has little in the way of favors to hand out, while Nancy Pelosi is in a position to give them something to take back to their district at home in exchange for acquiring a veneer of bipartisan cover. And yet not a one of them — nor even a single House Republicans nationwide — could be induced to vote for the Obama Recovery Act or the Obama budget plan. It’s impressive. My best guess is that the Club for Growth has really put the fear of God into everyone, but maybe there’s more to it.

There's another side to this too.  Basically, these votes are freebies: both the stimulus bill and the budget plan were obviously going to pass the House by wide margins, so Republican votes really didn't matter.  This means GOP members of Congress could cast a base-pleasing no vote without having to worry that their vote might actually derail anything and come back to haunt them.  Being utterly out of power may be a bummer, but I suppose it has its occasional bright spots too.

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Social Security Blues

| Sat May 2, 2009 7:30 PM EDT

In the previous post, Dean Baker noted that Social Security payments went up considerably last quarter because they're based on inflation measurements that included the big runup in gasoline prices through mid-2008 but not their subsequent fall.  Needless to say, though, there's a flip side to that:

For the first time in more than three decades, Social Security recipients will not get any increase in their benefits next year, federal forecasts show.

.... The forecasts, by the Obama administration and the Congressional Budget Office, indicate that Social Security beneficiaries will not receive any cost-of-living increase in 2010 or in 2011.

This certainly won't help whatever recovery we manage to start eking out next year.

First Quarter Consumption

| Sat May 2, 2009 12:45 PM EDT

Thursday's miserable GDP number supposedly included a bit of good news: personal consumption was up 2.2%.  Yay consumers!  Something didn't quite add up, though, but after looking at the numbers for a few minutes I got distracted by something else and never came back to it.  Luckily, Dean Baker did:

Many pointed to this rise as an increase in consumer confidence.

Okay, so how does this increase in confidence fit with the rise in the savings rate from 3.2 percent to 4.2 percent?....Higher consumption can't be explained by rising income either. Income fell in the first quarter. So, where does higher consumption come from?

The answer to the mystery is lower taxes and higher transfers, most importantly the big cost of living increase in Social Security payments that seniors got this year. (The cost of living adjustment is based on the 3rd quarter CPI compared with the prior year. This included the run-up in gas prices, but not the subsequent fall.)

So there you have it.  Not really especially encouraging news, after all.  Atrios has another big reason to be pessmistic about the economy over at his place.  And I'm still waiting for Eastern Europe to implode.  Did somebody say "green shoots"?

Friday Cat Blogging - 1 May 2009

| Fri May 1, 2009 2:06 PM EDT

Happy May Day!  The Worker's Paradise of Cattistan welcomes you.  On the left, Domino strikes a heroic socialist post.  On the right, Inkblot relaxes with a concrete bunny while his human serfs provide for his every need.  Come join us, comrades!  You have nothing to lose but your chains.

Nominating Judges

| Fri May 1, 2009 1:20 PM EDT

Is Arlen Specter's defection to the Democratic Party bad for the Democrats?  Jay Newton-Small suggests there's one extremely specific way in which it might very well be.  You'll be unsurprised to hear that arcane Senate rules are at the bottom of it.