Kevin Drum

Let's Invade Ukraine! (As Soon As We Can Figure Out Where It Is)

| Mon Apr. 7, 2014 10:38 PM PDT

A couple of weeks ago, a team of researchers asked Americans to locate Ukraine on a map. You'll be unsurprised to learn that most of them couldn't. But check this out:

Accuracy varies across demographic groups. In general, younger Americans tended to provide more accurate responses than their older counterparts: 27 percent of 18-24 year olds correctly identified Ukraine, compared with 14 percent of 65+ year-olds.

Say what? The idiot youngsters, the ones who are forever being mocked for not being able to locate France on a map, did better than their older, obviously better educated peers? How about that. Keep this in mind the next time you see one of those endless surveys bemoaning what geographic numbskulls the kids today are.

But that wasn't really the point of the survey. This was:

The further our respondents thought that Ukraine was from its actual location, the more they wanted the U.S. to intervene militarily. Even controlling for a series of demographic characteristics and participants’ general foreign policy attitudes, we found that the less accurate our participants were, the more they wanted the U.S. to use force, the greater the threat they saw Russia as posing to U.S. interests, and the more they thought that using force would advance U.S. national security interests; all of these effects are statistically significant at a 95 percent confidence level. Our results are clear, but also somewhat disconcerting: The less people know about where Ukraine is located on a map, the more they want the U.S. to intervene militarily.

Yep: folks who thought Ukraine was somewhere near Chad were more convinced that Russia's actions posed a threat to US interests. Chew on that for a while. Let's toss out some possible reasons for this:

  1. Ignorant folks are more likely to be jingoistic supporters of military action.
  2. If you think Ukraine is farther away from Russia than it is, it makes sense to assume that Russia is trying to project military power over a great distance and therefore poses a greater threat than a mere border incursion would.
  3. Low-information respondents are more easily manipulated by rabble-rousers.
  4. Ignorance of geography is a proxy for ignorance of both the capabilities of the US military and the costs and likely success of intervention.
  5. This is just some weird statistical artifact and means nothing.

Or maybe there's something I haven't thought of.

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The New York Times Fails to Explain Why "Super Predators" Turned Out to Be a Myth

| Mon Apr. 7, 2014 6:37 PM PDT

Sorry for the radio silence. I went in to see my pulmonary specialist today, and he was very distressed at my lack of progress on the breathing front. So he immediately sent me downstairs for a new battery of tests, including a stat review of the echocardiogram I did last week. Verdict: I am in the bloom of health. I have the lungs of a sperm whale and the heart of an ox. As a last-ditch diagnostic effort—and since they already had an IV tube in my arm anyway—the ER doctor pumped me full of an anti-anxiety drug just to see if my attacks were brought on by stress. Apparently not, which isn't surprising since I lead an enviably stress-free life.

Unfortunately, once they had done that I wasn't allowed to drive myself home, so I had to wait for Marian to get off work and come pick me up. In the meantime, I kept up on the latest news with my iPhone. Or tried to, anyway. Kaiser brags about its Wi-Fi network, but it didn't work at all, and the nurses confirmed that everyone complains about this. So I switched to the cell, but despite the fact that there was a cell tower about 200 yards away, Verizon was unable to provide me with even 3G service most of the time. Bastards.

Still, while I was crawling through the news at 300 baud speeds, I did come across a New York Times story about the mid-90s fear of "super predators," teenage criminals with no conscience and no impulse control, who would soon be rampaging across the city destroying everything in their wake. In fact, just the opposite happened. Teen crime has declined dramatically since the mid-90s, and New York City is safer now than it's been since the 60s. What happened?

But how to explain the decline in youth violence?

Various ideas have been advanced, like an improved economy in the late ‘90s (never mind that it later went south), better policing and the fading of a crack cocaine epidemic. A less conventional — not to mention amply disputed — theory was put forth by some social scientists who argued that the Supreme Court’s 1973 ruling on abortion in Roe v. Wade had an impact. With abortions more readily available, this theory went, unwanted children who could be prone to serious antisocial behavior were never born.

That's really disappointing. The burnout of the crack epidemic is at least plausible as a partial explanation, but the rest is nonsense. Nobody still thinks the economy had anything to do with the drop in crime. Better policing might have had a minor impact, but crime dropped even in cities that didn't change their police tactics. And the abortion theory hasn't really weathered the test of time well.

I swear, I think the New York Times has some kind of editorial policy about never mentioning the most obvious link of them all: the decline in gasoline lead between 1975 and 1995. It's not as if I think the lead-crime theory is a slam dunk or anything, but surely the evidence is strong enough that it belongs in any short summary of the most likely causes of crime decline? It sure as hell has more evidence in its favor than economics, better policing, or legal abortion.

And yet the New York Times stubbornly refuses to so much as mention it in passing. I found one short piece on the subject from 2007, and then nothing. During the past seven years, even as the evidence linking lead to declining crime rates has become more and more solid, they don't seem to have mentioned it even once. Are they afraid of pissing off the police commissioner or something? What's the deal?

In Defense of "Flash Boys"

| Mon Apr. 7, 2014 10:45 AM PDT

Felix Salmon reviews Michael Lewis's Flash Boys today, and he's not impressed. I think Salmon's basic criticism is on point: the big problem with high-frequency trading isn't that small investors get ripped off, it's that the system is so complex that literally no one really understands how it works or what kind of danger it poses:

By far the biggest risk posed by the HFT industry, for instance, is the risk of the kind of event we saw during the flash crash, only much, much worse. The stock market is an insanely complex system, which can fail in unpredictable and catastrophic ways; the HFT industry only serves to make it much more brittle and perilous than it already was. But in Lewis’ book-length treatment of HFT, he barely mentions this risk: I found just one en passant mention of “the instability introduced into the system when its primary goal is no longer stability but speed,” on Page 265, but no elaboration of that idea.

HFT cheerleaders like to brag that their algorithms increase liquidity. And that's probably true. The problem is that HFTs don't guarantee liquidity. In fact, it's far worse than that: they displace other sources of liquidity during normal times, but there's a good chance that during a crisis, at precisely the moment when liquidity is most important, HFT traders could suddenly and systematically exit the market because events have outrun the parameters of their algorithms. This could easily spiral out of control, turning a bad situation into a catastrophe.

Is this a real threat? Nobody knows. And that's the problem. HFT is so complex that literally no one knows how it works or how it will react in a crisis. This is not a recipe for financial stability.

Unfortunately, that doesn't make for a very entertaining book, so Lewis instead focuses on the ability of HFT shops to "front run" orders in the stock market—that is, to see bids a few milliseconds before anyone else simply by virtue of having computers that are physically closer to a stock exchange than their competitors. An HFT algorithm can then execute its own order already knowing the direction the price of the stock is likely to go. But even though this isn't the biggest problem with HFT, I do think Salmon is a little too dismissive of it. Here he is on the subject of Rich Gates, a mutual fund manager who discovered he was being front run:

Gates “devised a test,” writes Lewis, to see whether he was “getting ripped off by some unseen predator.”....Gates “was dutifully shocked” when he discovered the results of his test: He ended up buying the stock at $100.05, selling it at $100.01, and losing 4 cents per share. “This,” he thought, “obviously is not right.”

Lewis does have a point here: It’s not right....In Gates’ mind, what he saw was the 35,000 customers of his mutual fund being “exposed to predation” in the stock market. Between them, those customers had lost $40: 4 cents per share, times 1,000 shares. Which means they had lost roughly a tenth of a cent apiece, buying and selling $100,000 of Chipotle Mexican Grill within the space of a few seconds.

But there’s always going to be a nonzero “round-trip cost” to buying $100,000 of a stock and then selling it a few seconds later....But still, $40 for two $100,000 trades is hardly a rip-off. Especially when you consider the money that Gates himself is charging his 35,000 mom-and-pop customers.

When Gates was running his experiments, his flagship fund, the TFS Market Neutral Fund, had an expense ratio of 2.41 percent: For every, say, $100,000 you had invested in the fund, you would pay Gates and his colleagues a fee of $2,410 per year. That helps puts the tenth of a cent you might lose on Gates’ Chipotle test into a certain amount of perspective. TFS trades frequently, but even so, any profits that HFT algos might be making off its trades are surely a tiny fraction of the fees that TFS charges its own investors.

That's true. But the whole point of HFT has always been to skim tiny percentages from a large number of trades. Nobody has ever suggested that individual traders are losing huge amounts of money to HFT shops. Nevertheless, that's no reason to downplay it. In fact, that's one of the things that makes HFT so insidious: it's yet another way for Wall Street players to game the system in a way that's so subtle it's hardly noticeable. This is the kind of thing that permeates Wall Street, and I think Lewis is correct to aim a spotlight at it.

There are plenty of reasons to be very, very wary of HFT. I wish Lewis had at least spent a few pages on the potential instability issues, but let's face facts. Front running is a perfectly legitimate problem to focus on, and it's likely to generate a lot more public outrage than a dense abstract about the possibility of robots causing a financial crash sometime in the dim future. So if you're the rare person who can attract a lot of attention to a legitimate financial danger, it makes sense to write a book that concentrates its fire on the most accessible aspect of that danger. That's what Lewis chose to do, and I don't really have a problem with that.

Gallup Confirms Further Fall in Uninsurance Rate

| Mon Apr. 7, 2014 9:04 AM PDT

The latest Gallup poll on the uninsured is out, and it shows that the uninsurance rate continues to drop. Using the same 2011-12 baseline I've used before, uninsurance has now dropped about 1.8 percentage points since the rollout of Obamacare. Since the Gallup poll includes everyone, not just the nonelderly, this amounts to about 5.6 million people. However, note that this 5.6 million drop doesn't include sub-26ers who are on their parents' insurance, since that policy change had already taken effect by 2011. Nor does it include the entire late surge in Obamacare enrollment. Add those in and the real number is probably in the neighborhood of 8-9 million. By the end of the year, we should hit 10 million or so.

The biggest declines in uninsurance were among the young, among blacks, and among the low-income. More details at the link.

Why Are We All So Obsessed With Inflation?

| Mon Apr. 7, 2014 8:36 AM PDT

Paul Krugman brings up a familiar trope this weekend: why is it that everyone is so obsessed with ultra-low inflation, even in the middle of a sluggish economy that would almost certainly benefit from a few years of 4 percent price growth? His answer: rich people are uniquely vulnerable to high inflation, and therefore fear it. And since rich people have tremendous influence on policy—especially economic policy—we've consistently implemented policies dedicated first and foremost to restraining inflation. Tyler Cowen dissents:

We all know that inflation is extremely unpopular with voters.  We also observe that inflation remains extremely unpopular in a variety of northern European economies, which typically have more egalitarian distributions of income (though not always wealth) than does the United States.  In any case the top 0.1 percent in those countries has less wealth per capita than in the U.S. and, at least according to progressives, less political influence too.

....People that wealthy can put their money into hedge funds, private equity, private capital pools, and the like....The very wealthy also have the greatest ability to hedge against inflation using derivatives and commodities, if they do desire....I am not suggesting that the very wealthy are out there pushing for higher inflation. But they are much more protected against such inflation than Krugman’s analysis suggests, and the middle class in protected service sector jobs is more vulnerable than is usually recognized.  There is a reason why 4-6% price inflation has become the new third rail of American politics.

I chalk this up to something a little different: inertia. Practically speaking, I don't think protected service sector workers have a lot to fear from moderately high inflation. They're mostly unionized, and their contracts often include COLA hikes. But I agree that rich people don't have a lot to fear either. Given modern portfolio management, it's not hard to hedge against inflation, especially if you're wealthy enough to pay a good money manager. The elderly are often brought up in this context too, and they probably really do have a certain amount of vulnerability to inflation. But not that much. Social Security benefits are indexed to inflation, and even most middle-class investments (in 401(k)s, etc.) tend to be inflation-resistant, if not inflation-proof.

So what's going on? My take has long been fairy simple: it's mostly due to septaphobia, or fear of the 70s. It's not actually true that the middle class was decimated by the 70s, but a lot of middle-class workers felt hard done by, especially since the price we all paid for the 70s was the traumatic Volcker recession of 1980-81. As for rich people, they really did suffer losses during the 70s as we made our rocky transition from an era of financial repression and fixed returns to our current era of global finance and variable returns. Central bankers belong in this story too: during the 70s, they developed a deep fear of their own inability to control wage-price spirals once inflation got above 2 percent or so. This fear is badly misguided, however: the economy has evolved enormously since the 70s and modern central banks have plenty of tools to fight inflation before it gets out of control. Basically, the 70s are to modern publics what Weimar hyperinflation was to a generation of Germans: a scarring experience that forged a deep and broadly-held fear of inflation of any kind.

There's so much inflation indexing in our modern economy—sometimes explicit, sometimes not—that inflation poses only a moderate threat to the rich. In fact, if I had to choose a class of people who probably should be threatened by inflation, it's the broad working and middle classes. After all, why do so many economists think a higher inflation rate would be good for the economy? Partly because it produces lower real interest rates, and thus stimulates investment. However, it's also because it allows a faster downward adjustment of real wages, since employers can simply let inflation erode wage rates instead of angering workers with deep nominal cuts. And who does that affect? Not Bill Gates.

That said, I don't disagree that, in reality, elite opinion drives much of the inflation fear in the United States and Europe. It's irrational, since the rich benefit from lower middle-class wages and a faster-growing economy, but that doesn't mean it's not real. Phobias are hard to cure.

Russia Demands Lease Refund After Invading Crimea

| Sat Apr. 5, 2014 12:10 PM PDT

Russia is threatening to nearly double the price of natural gas that it sells to Ukraine:

Russia's natural gas monopoly Gazprom's Chief Executive Alexei Miller said Saturday in a televised interview the company has raised the cost of gas to Ukraine to $485.50 from $268.50 for 1,000 cubic meters from April 1. Moscow says the price change is due to Kiev's failure to pay its bills.

....Mr. Miller said Ukraine owes Gazprom $2.2 billion for March deliveries, and another $11.4 billion the country saved as part of a discount agreement that Moscow recently scrapped....Mr. Miller the discount was a prepayment for the Russian Navy's use of Ukraine's Black Sea port of Sevastopol through 2017, but as that port had been annexed by Moscow, along with the rest of Crimea, Ukraine should repay $11.4 billion it saved, Mr. Miller said, following similar statements by Russian Prime Minister Dmitry Medvedev.

So Russia gave Ukraine $11.4 billion as a payment for its lease of naval facilities in Crimea through 2017. But now that they've invaded and conquered Crimea, they figure they deserve a refund. The mind boggles.

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Friday Cat Blogging - 4 April 2014

| Fri Apr. 4, 2014 11:36 AM PDT

Well, I managed to make it through the morning. In case you're curious about what's going on with me, I'm having difficulty breathing. It came on rather suddenly a couple of weeks ago, and since then I've undergone loads of tests. The results are simple: my heart is fine, my lungs are fine, my O2 saturation is fine, and my ribs aren't cracked. A CT scan showed no inflammation or blood clots. A pulmonary specialist prescribed an inhaler just to see if it would work—I'm guessing it's an extract of pure unobtanium considering how much it cost—and it might be helping a little bit. But probably not. Sometimes I'm OK, other times I feel like I just ran a marathon. Yesterday I laid on the couch and watched movies all day. Today I'm better, but hardly breathing easily.

It's frustrating as hell. Can I blame Obamacare? In any case, the only catblogging pictures I have are a few I took earlier this week when I was feeling better. So here you go, Domino sunning herself in the front yard on Tuesday. Enjoy.

Can We Please Ditch the Splaining Meme?

| Fri Apr. 4, 2014 10:26 AM PDT

Hey there. Is there any chance that we could deep six the splaining meme? You know, mansplaining, straightsplaining, whitesplaining, and all their myriad offshoots. I get that it's a useful term, but it's gotten out of hand. Obviously we should all be careful when we talk about things outside our personal experience, and nobody gets a pass when they say something stupid. Still, we should all be allowed to talk about sensitive subjects as best we can without instantly being shot down as unfit to even hold an opinion.

The splaining meme is quickly becoming the go-to ad hominem of the 2010s, basically just a snarky version of STFU that combines pseudosophisticated mockery and derision without any substance to back it up. Maybe it's time to give it a rest and engage instead with a little less smugness and narcissism.

Here's a Second Look at Obamacare and the Uninsured

| Fri Apr. 4, 2014 9:49 AM PDT

Here's a quick follow-up on my guess earlier this week that Obamacare will reduce the ranks of the uninsured by about 10 million when we finally close out 2014. The Urban Institute has released its latest survey results and concludes that Obamacare insured about 5.4 million people through early March. This is a comparison with Fall 2013, so it doesn't include the sub-26ers who have been covered by their parents' policies since 2010. It also doesn't include the March signup surge. If you add those in, we're probably somewhere in the neighborhood of 8 million right now, which I think is consistent with a guess of 10 million by the end of the year.

There's still a lot of guesswork in these numbers, but this is about the best we have right now. It's less than the 13 million the CBO projected, but it's a pretty healthy number nonetheless.

UPDATE: It turns out that the CBO uses pro-rated years. If you sign up for coverage on April 1, you count as three-quarters of a year. If you sign up on July 1, you count as half a year. I didn't know that, and it changes my guess. By normal human terms, I think about 10 million of the previously uninsured will have Obamacare coverage by the end of 2014. By CBO terms, that might come to 9 million or so.

Yep, Most of Paul Ryan's Budget Cuts Come Out of Programs for the Poor

| Fri Apr. 4, 2014 7:56 AM PDT

A few days ago I guessed that 80+ percent of the cuts in Paul Ryan's latest budget blueprint came from programs for the poor. Today, CBPP dives a little deeper and puts the number at 69 percent. The cuts come in five categories: health care; food assistance; college grants; other mandatory programs such as SSI, school lunches, and EITC; and miscellaneous discretionary cuts. However, CBPP warns that its 69 percent number is very likely conservative:

In cases where the Ryan budget cuts funding in a budget category but doesn’t distribute that cut among specific programs — such as its cuts in non-defense discretionary programs and its unspecified cuts in mandatory programs — we assume that all programs in that category, including programs not designed to assist low-income households, will be cut by the same percentage.

That's definitely a risky assumption. In real life, two-thirds of those cuts would almost certainly end up coming out of programs for the poor. We'll never know for sure because Ryan never has the guts to specify where his cuts would go, but I'm willing to bet that if Republicans were forced to provide line items for all of Ryan's broad categories, we'd end up back at 80 percent of the cuts hitting those with low incomes.