Losers Are Easy to Spot

A new NBER paper suggests that you can make a lot of money by following the crowd:

We study the predictive power of approximately 2.5 million stock picks submitted by individual users to the "CAPS" website run by the Motley Fool company (www.caps.fool.com). These picks prove to be surprisingly informative about future stock prices. Indeed, a strategy of shorting stocks with a disproportionate number of negative picks on the site and buying stocks with a disproportionate number of positive picks produces a return of over nine percent per annum over the sample period.

But wait. Negative and positive recommendations are asymmetrical:

These results are mostly driven by the fact that negative picks on the site strongly predict future stock price declines; positive picks on the site produce returns that are statistically indistinguishable from the market. A Fama French decomposition suggests that these results are largely due to stock-picking rather than style factors or market timing.

Take this for what it's worth. Which is to say, probably nothing now that it's been written up. Still, it's interesting stuff: apparently amateur stock pickers aren't that great at picking winners, but they sure know a loser when they see one.

(Via Matthew Kahn.)

Obama's Missed Chance

There's a decent case to be made that President Obama has done about as well as he realistically could have on the economy. Sure, he underestimated the depth of the Great Recession, but it didn't matter that much. Congress was never going to pass a much larger stimulus than it did, it was never going to pass cramdown, bailing out the banks was ugly but necessary, etc. etc. Given the political realities, what more of any significance could he have done?

Today Brad DeLong produces about the best answer I've seen yet:

  1. Use Reconciliation to get a second stimulus through Congress in the fall of 2009.
  2. Expand the PPIP to do $3 trillion of quantitative easing through the Treasury Department.
  3. Have a real HAMP to refinance mortgages.
  4. Use Fannie and Freddie to (temporarily) nationalize mortgage finance, refinance mortgages, and rebalance the housing market.
  5. Announce that a weaker dollar is in America's interest.
  6. Nominate a Fed Chair who takes the Fed's dual mandate seriously and pursues policies to stabilize the growth of nominal GDP.
  7. Appoint Fed governors who take the Fed's dual mandate seriously and support policies to stabilize the growth of nominal GDP.
  8. Take equity in the banks in January-March of 2009 and keep them from lobbying against financial reform.
  9. Use Reconciliation to pass an infrastructure bank.
  10. Use TARP money as a mezzanine tranche to fund large-scale additional aid to states and localities to reduce their fiscal contractions.

My own guess is that #6 and #7, though desirable, probably wouldn't have made too much difference. And #1 and #9 both would have required reconciliation instructions to be written by April 2009. That was only a couple of months after the stimulus bill had passed, and at the time the House and Senate were willing to include reconciliation instructions in the budget resolution only for healthcare and education funding. Perhaps Obama should have pushed harder for open-ended instructions, but at the time the administration and Congress both thought the 2009 stimulus would be enough. Obviously that was a mistake, but broadly speaking, that was the mistake, not all the subsequent details that resulted from that original misjudgment.

Still, even if my understanding of the reconciliation process is right — and I'll accept correction from anyone who's an expert — that leaves six strong ideas plus two more that would have been worthwhile even if their effect would have been modest. Not bad.

Thoreau found himself trapped this weekend with a friend who kept regaling him with the wonderfulness of smart phone apps that he didn't want:

The funniest part, though, was when he told me of this awesome new app to help you find your phone: You send a text from somebody else’s phone, and your phone starts ringing. I informed him that there’s an even simpler app, one installed on landlines as well as mobiles, called “the phone.” And when you use it to call your phone, it rings. 

Yes, but the kids these days don't like using phones to talk to each other. By now, a lot of them have probably forgotten that phones even have a calling function. So the text thing is probably really handy.

After Barack Obama won the 2008 election, conservatives started up a drumbeat of conspiracy theorizing about a secret liberal plan to reinstate the Fairness Doctrine. The idea, apparently, was that this would put Rush Limbaugh and other conservative talkers out of business and thus ensure both the perpetual domination of the Democratic Party in Congress as well as Obama's plan to become president-for-life. Don't believe me? The cartoon on the right is typical of the time. Click here for further pictorial proof.

This particular paranoid fantasy didn't get a lot of attention because there were so many other better ones flying around, but I had a loyal reader who kept emailing me about this, so I wrote a few posts about it. Today, I'm happy to report, Obama's FCC, responding to an Obama executive order, has finally nailed the coffin shut on the Fairness Doctrine:

The FCC gave the coup de grace to the fairness doctrine Monday as the commission axed more than 80 media industry rules.

Earlier this summer FCC Chairman Julius Genachowski agreed to erase the post WWII-era rule, but the action Monday puts the last nail into the coffin for the regulation that sought to ensure discussion over the airwaves of controversial issues did not exclude any particular point of view. A broadcaster that violated the rule risked losing its license.

....Monday’s move is part of the commission’s response to a White House executive order directing a “government-wide review of regulations already on the books” designed to eliminate unnecessary regulations.

Will this persuade anyone? Probably not. They'll just insist that Obama really did plan to bring back the Doctrine, and it was only their relentless opposition that forced him to back down. What's more, this is all just a feint. Obama may have lost a battle, but behind the scenes the war still goes on.

For the rest of us, though, this is the final chapter in the story of the Fairness Doctrine. Adios.

There are tyrants who got their position by inheritance, there are tyrants who got their position by election, and then there are tyrants who got their position by seizing power. With the apparent demise of Muammar Qaddafi, John Quiggin notes that there are damn few of the third kind left:

Now, there’s Mugabe clinging to a share of power in Zimbabwe, a couple of shaky-looking strongmen in the ‘stans, and that’s about it for tyrants in the classical sense (feel free to point out cases I’ve overlooked). There’s Kim jr, Assad jr and Castro minor, the first two of whom are certainly tyrannical in the ordinary modern sense, but all of whom inherited their positions, as of course, did the remaining absolute monarchs. More surprising to me are the number of cases where classic tyrants, having established one-party states, have been succeeded by self-selecting oligarchies — China is the most striking example. Looking at the evidence of the past, I would have predicted that such oligarchies would either collapse in short order or see the emergence of a new tyrant, but there is no sign of that for the moment.

I don’t have a good theory to explain the rise of so many tyrants in the modern period, beginning with Bonaparte (or maybe Cromwell), or the sudden disappearance of this form of government from around the mid-1960s. But it seems that it’s a development worth noting.

Is this true? In comments, Doug M proposes a whole slew of additional tyrants who have seized power and kept it. By country: four out of five of the stans, Cambodia, Zimbabwe, Ethiopia, Eritrea, Chad, Equatorial Guinea, Angola, Uganda, Cameroon, the Central African Republic, Sudan, both Congos, Rwanda, Djibouti, Algeria, Belarus, Fiji, and Burma. "A lot fewer than 40 years ago," he says, "but too many to claim that this form of government is 'disappearing.'"

I can't referee this, but thought I'd throw it out for comment. It's an interesting conjecture and an interesting rebuttal. Even if John miscounted in his original post, you can still say that (a) there are many fewer tyrannies that originated in a seizure of power than there used to be, and (b) outside of Africa there are way fewer. But why?

The Financial Times, speaking ex cathedra, says that the outlines of a stimulus deal are plain: "Cut the payroll tax, extend jobless benefits and subsidise new jobs; then curb entitlement spending by raising the retirement age." Matt Yglesias is unimpressed:

In my view, raising the retirement age is basically the worst possible form that credible longer-term fiscal restraint could take. The way this works is that if you’re rich, the benefit cut in dollars and cents terms is very small since your life expectancy at 65 is already high. But if you’re poor, the benefit cut is much more severe. Except in real psychological terms it’s even more regressive than that, since poor people are more likely to have jobs that are physically taxing and generally unpleasant. So it sounds like a stinker of a deal to me.

I'm perpetually amazed by the parade of pundits and talking heads who continue to insist that the first and best way of attacking entitlement spending is to raise the retirement age. In fact, as Matt says, it's probably the worst possible way of doing it: not only does it produce pretty modest savings, but it's savagely unfair to the poor and the working class. As the chart on the right shows, the life expectancy of upper income earners has gone up a lot over the past few decades, so even if you increase their retirement age they still have a lot more retirement years than they used to. But low earners? Their life expectancy has barely gone up at all. If you raise their retirement age, it entirely wipes out the tiny gains they've made. The bottom line is that high earners get longer retirements while poor people just tread water.

And it's even worse than that. Not only do high earners get long retirements, but they've mostly spent their lives working in cushy jobs that don't wreck their bodies and are often fairly interesting. An extra couple of years of work isn't that big a deal for them. But for truck drivers and coal miners and nursing home workers? That's hard work that's hard on their bodies, and it's absolutely no fun. An extra couple of years of that is something to shudder at.

But wait! It's even worse than that! If raising the retirement age were the only way to address entitlement spending, maybe we'd have to bite the bullet and do it. But it's not. There are dozens and dozens of better ways to do it. Social Security is quite easy to fix without touching the retirement age: there's a nice list of options here from the CBO, and you'll note that raising the retirement age is barely even a blip compared to all the other options. Medicare is more complicated, but it's still the case that raising the retirement age (a) doesn't save very much money, since healthcare costs go up rapidly the older you get, and (b) doesn't change the rate of growth of Medicare, which is our key problem. Like it or not, the answer has to be found elsewhere.

So why does this zombie idea continually resurface with such clocklike predictability? Two reasons, I'd guess. First, it's a perfect sound bite. "Raise the retirement age" is a whole lot easier to understand than "Change the AIME bend points, reduce the top two PIA factors, and raise the taxable maximum to cover 90% of earnings." So that's what we get.

Second, all the loudest voices come from highly educated, white-collar folks who write and talk for a living. They belong to, and speak for, a class that has interesting jobs that don't tax their bodies, probably aren't planning to retire at 65 anyway, and in any case, get paid well enough that they can retire early on their investments if they want to, regardless of Uncle Sam's official retirement age. So it just slips their mind that a higher retirement age would be a way bigger deal to other people than it is to them. Basically, they need to get out more.

Raising the retirement age is an idea that really needs to be buried once and for all. Social Security's retirement age is already scheduled to rise to 67, and for medical care, age 65 is old enough already. There are plenty of other ways of tackling entitlements, ways that are both fairer and more effective. Anybody who really cares about this stuff needs to understand that.

Can We Fix the Economy?

I don't really have anywhere to go with this post, but I've been musing for the past few days over all the theories floating around that imply — or are used by others to imply — that we really can't do much of anything to help the economy recover, so there's not much point in pursuing either monetary or fiscal stimulus. Here's a brief list:

  • The basic Rogoff/Reinhart observation that financial collapses due to asset bubbles just take a long time to work through. Given the size of the 2008 collapse, historical evidence suggests that it's going to take five or six years to recover, and that's that.
  • The Tyler Cowen "Great Stagnation" hypothesis. We've picked through all the low-hanging economic fruit over the past century, and like it or not, we're now entering an extended period of low productivity growth because we're not inventing lots of cool new stuff.
  • The related (I think) investment drought hypothesis. Ben Bernanke famously ascribed the housing bubble partly to a "savings glut" from overseas, and the flip side of that is an investment drought. The reason financial assets became so popular is that, even with all that money sloshing around the system, there simply weren't very many high-quality investment opportunities available in firms that make real-world goods and services, and that hasn't changed.
  • The peak oil theory. Production of oil has pretty much maxed out, which means that every time the economy gets moving it will create a spike in oil prices, which will send the global economy back into recession. We're now in a continual oil-fueled boom/bust cycle that limits our long-term growth rate.
  • The Michael Mandel contention that increased consumption simply leaks out of the economy to China and other countries. Stimulating consumption in the U.S. just won't do much for the American economy if all those extra dollars mostly get spent on overseas goods and services.
  • Various structural explanations that suggest the United States has an increasing number of workers who flatly don't have the skills to do anything useful in the modern economy — a problem that was temporarily masked by the housing bubble and was only fully exposed when the economy collapsed. This takes various forms, both weak (workers can be retrained but it will take a while) and strong (forget it, they're simply useless).
  • The self-serving group of partisan hack theories: regulatory uncertainty is the real problem, taxes are too high, the EPA is strangling America, hyperinflation is just around the corner, markets are cowering in fear of future deficits, etc. etc.

Please note that I don't mean to suggest that Reinhart, Rogoff, Cowen, or Mandel are themselves arguing that fiscal and monetary policy are pointless. I'm just using their names for some of these ideas because they're the ones most associated with them.

Anyway, as I said, I'm not really going anywhere with this right now. I'm just collecting theories. Any others to add to the list?

From Rick Perry, on August 14th:

Have you read my book, "Fed Up!" Get a copy and read it.

From Rick Perry's communications director, Ray Sullivan, on August 18th:

The book, Mr. Sullivan said, “is a look back, not a path forward.” It was written “as a review and critique of 50 years of federal excesses, not in any way as a 2012 campaign blueprint or manifesto,” Mr. Sullivan said.

This has been making all the usual rounds today, and why not? It's unusually dumb. Given the amount of — well, let's call it inconvenient bluster in the book — I guess Sullivan has to give this a try, but does he really think Perry can disown a book that he released nine months ago? That's not very swaggering and tea partyish. Sounds like Mr. Perry is all hat and no cattle.

Which of course makes this the perfect time for Sarah Palin to enter the race. We could use a common sense conservative who doesn't kowtow to the lamestream media. There's a real shortage of that in the Republican contest right now.

Does Rick Perry really think we should repeal the 16th Amendment and completely eliminate the income tax? This has been making the rounds, so I got curious. Here's what he says in his book:

This leads me to the great milestone on the road to serfdom: the passage of the Sixteenth Amendment....This was the birth of wealth redistribution in the United States.

....[One] option would be to repeal the Sixteenth Amendment [] and then pursue an alternative model of taxation such as a national sales tax or the Fair Tax....America needs a fairer, flatter, and simpler system, one which working families can complete without having to hire a bevy of professionals to assist them.

So that's the skinny. Obviously Perry doesn't think very highly of the 16th Amendment and believes that repealing it is an "option." That's pretty loopy, but it's actually what comes next that's really loopy: he'd like to replace all federal taxes with the Fair Tax, a proposal that basically levies a 30% sales tax on all goods and services — including housing, healthcare, food, and everything else. Mike Huckabee was touting this nitwit idea back in 2007, and Bruce Bartlett shredded it here pretty conclusively. My comment at the time:

What's really amazing is that Bruce can write a thousand words on this subject and maintain a calm and even demeanor throughout. After all, among serious tax analysts a national sales tax ranks right up there with eliminating the Fed and putting the United States back on the gold standard. It's crankery. And yet it keeps rearing its ugly head, like a vampire that just won't die. Anybody got a silver bullet handy?

This is really scary. At the time, I assumed that eliminating the Fed and putting the United States back on the gold standard were so obviously stupid that they were good examples of transparent economic crankery. But guess what? Both of those cretinous ideas have gained a lot of traction among Republicans lately. So it's hardly any wonder that at least one of their candidates has reanimated the zombie Fair Tax proposal too. I wonder what's next? No one's mentioned fluoride in the drinking water lately, have they?

Matt Ridley has an odd column in the Wall Street Journal this weekend called "A Truce in the War Over Smarts and Genes." He's optimistic that a recent discovery in molecular genetics conclusively demonstrates that intelligence does indeed have a genetic basis but also that it doesn't matter that much:

The immediate cause of this optimism is a recent paper in Molecular Psychiatry, which confirms that genes account for about half of the difference in IQ between any two people in a modern society, but that the relevant genes are very numerous and the effect of each is very small.

....It turns out the genetic differences may have been all just below the measurement radar. A new technique, which can now detect very slight genetic influences, has succeeded where the old techniques failed. The genes for intelligence are there, but there are thousands of them and each has only a tiny impact....So the old terror, which so alarmed many psychologists and educationalists, that one day people—or governments—would use genes to decide whom to kill, sterilize or prevent being born because of their intelligence, suddenly looks a lot less scary. There are just too many genes.

I don't get this. First, it's been a very long time since I've read anyone suggesting the existence of "an IQ gene." The proposition that intelligence and other cognitive traits are the product of lots of different gene complexes has been pretty well accepted for decades, even if definitive proof was lacking. So although this new result may be important, it doesn't seem all that earthshaking in the context of the nature/nurture wars.

Second, the reason that nature vs. nurture has been such a nasty battle hasn't really been due to fears of a new eugenics movement breaking out. It's been due to fears that if intelligence has a genetic basis, then it's also conceivable that different races have different inherent IQs. That's where the emotional core of the war has resided since at least the 50s and 60s, and it remains there whether intelligence is the result of one gene or thousands.

But I confess that I haven't paid very much attention to the nature/nurture debate over the past decade or so. So maybe I'm wrong about this. Anyone care to weigh in on the current state of the controversy?