Unpleasant retirement math

on Aug 12 in Economics, Employment, Politics tagged by Trevor Hicks

Many people are starting to believe, correctly in my opinion, that the US government is on a completely unsustainable fiscal path.  On the surface, there’s a bunch of obvious spending we need to cut out - a couple of very expensive foreign occupations and our very counterproductive war on drugs at home would be excellent places to start.  Bear in mind that you get a double benefit from ending that kind of effort - not only does the government save the direct financial cost of paying for salaries and supplies, but you also free those people to add to the economy; to put their labor towards doing and making useful things instead of breaking stuff.

Unfortunately such clearly beneficial changes in government policy are still only nibbling around the edges of our looming fiscal problem.  The real heart of the problem is that relatively recent cultural innovation called retirement.  But note that it can only be supported by an economy and population that constantly growing.  And it doesn’t matter how you finance retirement, whether through tax/transfers, savings, pensions, whatever.  The math is actually pretty simple.

Imagine an economy with 110 people that produces 1000 units of GDP with 9% of the population retired.  This means 100 workers produce those 1000 “GDPs.”  If everyone has about the same standard of living, then they all get to consume about 9 GDPs.  So the workers see 10% of the value of their labor going to retired people, either as a tax or as returns on assets that the retired people own.  Now let’s imagine that over time the population and total output stays constant, there’s still 110 people and 1000 GDPs of production, but now 30 people are retired.  This means 80 workers are making the 1000 GDPs, productivity had to increase by 25% from 10/worker to 12.5/worker.  And in exchange for that extra work and innovation that led to the productivity increase, those 80 workers now give up 35% of the value of their production to retired folks so that everyone still gets to consume about 9 GDPs.

Taking money out of the equation I think is a very illuminating simplification.  Because when you introduce the concepts of money, debt, inflation and the like they must still all cancel out in the end so that the production of goods and services equals what is consumed.  The fact is when the share of consumption done by people that don’t work rises, this has huge implications for the people that work.

The story above is not unlike what all the industrialized countries in the West are facing.  We are seeing the ratio of workers to dependents (that can include retired, unemployed and most government workers) increase.  Populations are growing slowly if at all.  And there is a built in expectation that standards of living should also continually rise.  Look what happens in the above scenario if everyone expects to consume 10 in the future state.  The 80 workers have to produce 1100, or 13.7/worker and give up 37.5% of the value produced.

Growing populations, liberalization of the workplace to fully embrace women and ever-increasing levels of worker productivity have allowed us this fantastic luxury over the last 50 years to both live better and support this invention called retirement.  But now lifespans are increasing and populations are not keeping up.  We don’t have another underutilized pool of labor to tap.  Unless we experience some miracle of productivity growth we are certain to experience some combination of less retirement, lower standard of living and higher taxes.  In America we like to pretend that we don’t face such a consequence of a rising dependency ratio.

From a policy perspective, we like to argue about a few percentage points here or there on marginal tax rates.  Our mounting levels of federal debt is a direct result of our unwillingness to face the fact that the production of fewer people just cannot deliver higher levels of consumption for everyone.  Note that a loan is simply an offer to defer your right to consume to someone else in exchange for the right to consume a little extra in the future, same as if you save or invest your money.

So I’m not saying it’s immoral to retire or that anyone owes anyone else anything other than what they’ve borrowed.  Just observing that we have structured our society on the assumption that we can collectively work less and consume more.  Increased productivity and willingness to part with the fruits of that increase are our only hope to sustain that.

Against “Net Neutrality”

on Aug 10 in Politics, Technology tagged by Trevor Hicks

Net Neutrality has been picking up steam lately, especially with the announcement that Google and Verizon have reached an agreement about how they think the internet should be regulated.  I think the concept of net neutrality, that an internet or data provider should not privilege one form of content or one vendor over another sounds nice.  It sounds like making a rule that everyone must play fair.  But in practice this would be a nightmare of regulation and compliance difficulty, a morass much like anti-trust legislation and regulation.

We should first understand, as good post-modernists, that pure neutrality just doesn’t exist.  To put it in relevant terms, what would it mean to be neutral between sending a video stream and sending the contents of a static web page to a user?  You could deconstruct the concept of neutrality very strictly and say that the provider shouldn’t care about the bits, just send them on, first come-first served.  Now, our resources and available bandwidth or limited.  What this rule would mean is that simple content will load faster than rich content.  But is that really neutral?  The video consumer may not be experiencing the same level of service as the static content.  What if a provider was just a little bit smart about optimizing the data flows and was able to provide a smooth video stream at the expense of imperceptible microseconds of delay for a bunch of other users loading static content?  You could argue that is true neutrality - everyone would experience the same level of service regardless of the type of content they loaded.  Do you need to be neutral to the users or to the packets?

Once you grasp this type of conundrum, now imagine the task facing the regulators and indeed the compliance groups of the data providers.  Do we really want to put the internet even more under the purview of the FCC?  How has that been working out so far?  Inevitably, the rules will grow incredibly complex and incomprehensible and nobody will really know if they are violating the law until someone files a suit and it gets hashed out in court.  Just like anti-trust regulation, which is, in my opinion, a disaster we would do better to repeal.

And what’s wrong with opening the gamut of options available to providers and consumers to competition?  Maybe one provider would want to compete on the basis of providing the best HD streams of live sporting events, cutting deals with the NFL and other content owners to optimize their streams.  Why would we want to make that kind of business strategy illegal?  Maybe a provider would want to be the ‘family friendly’ provider that filters out all porn and other mature content.  Another provider could easily step in and compete on the basis of being ‘net neutral’ however it is defined.  Surely if there’s genuine demand for such a service, it would be an attractive niche for a provider to play in.  We don’t know what people and businesses will come up with, why don’t we at least wait to see if there are problems before enacting costly and difficult to enforce legislation?

The point is, ‘net neutrality’ with its inevitable thousands of pages of legislation, administrative rules and ultimately judicial opinion would stifle rather than protect innovation and the evolution of the internet.  Imagine that every new differentiating feature Comcast wanted to offer to its customers had to first survive an internal legal and compliance review that would likely result in a probabilistic instead of certain determination of legality.  What will that extra layer of bureaucracy and risk do to investment and innovation?

Net neutrality sounds nice and it is being proposed in the worthy spirit of preserving the open and creative nature of the internet.  Unfortunately the result will be to outlaw much valuable experimentation in business models and reduce innovation.

Management & incentives on the Horizon

on May 27 in Oil Exploration tagged by Trevor Hicks

I was reading coverage of the Macando disaster in the Houston Chronicle and started to think about why some of these decisions that seem crazy in retrospect were made. The article mentions that the drilling process was much more difficult than planned and there were several technical challenges.  Indeed, BP had intended to drill deeper to try to penetrate two different oil-bearing formations but they were forced to stop at one. Well, this got my speculative juices flowing.  It’s possible that poor management and incentives could be to blame, not just complacency about the warning signs that were missed.  Consider that the well did not find as much oil as planned.  Addressing the problems likely also pushed the drilling costs substantially over budget.  And with all the problems, it almost certainly was behind schedule. And behind schedule might be the most expensive problem of all.  Besides the probably close to $1 million per day they were spending to operate the rig, the bigger cost is just not producing the oil.  Let’s imagine the well would flow 10,000 barrels per day in production.  At $70 per barrel that is $7 million PER DAY in lost revenue for being late.  You might say, big deal, the oil is still in the ground, if they don’t collect today they just collect tomorrow.  But the economics don’t work that way.  Because the 10k barrels you produce tomorrow instead of today also delays tomorrow’s production by one day and on down the line for the life of the well.  Given the nature of discounting, and the exploration business uses high discount rates, a day’s delay is generally just assumed to be a total loss.  In other words, on BP’s books, that $7 million per day is as good as gone.  Every day delay is probably worth about $8 million summing revenue and cost. So you have a manager on the rig whose project is late, over budget and going to deliver much less revenue than planned.  So maybe to save time and money and try to recover some of those losses, he skips the cement bond log which might have alerted the crew to the danger hours earlier and indeed prevented the disaster.  What shows up on his record? More expense and more delay.  Does he get credit for not blowing up the well?  Probably not. He also pumps less cement than maybe you would have liked, he didn’t seal the annulus at the lowest casing shoe, he ran the pressure test until he got the ‘right’ answer, he displaces the mud with seawater before dropping the plug.  None of these decisions are obviously negligent, the vast majority of the time everything works out fine. Also, consider that the plan was what was wrong, not necessarily any of the operations that led to schedule and cost overruns.  There is a huge amount of uncertainty in any exploratory drilling - by definition you are putting a drill bit into virgin territory.  Is the BP manager held accountable to the original plan or to the reality of what was learned while drilling the well?  That’s unknown, but you can imagine his incentives being strongly tied to delivering the well as planned with little forgiveness for delays  whether caused by geology or execution.  Results and outcomes are much, much easier to measure than unforseen geological problems. There have been 30,000 wells drilled offshore in US waters.  You can stack thousands and thousands of safe and successful operations against this catastrophic failure and not get much sympathy.  How do you design compensation and incentives properly in that context?  It’s not obvious.

In favor of free speech

on Jan 29 in Politics tagged by Trevor Hicks

I honestly have a hard time understanding why the left is so outraged at the Supreme Court’s recent trashing of McCain-Feingold, which was nothing more than a blatant incumbent’s protection racket.  I have a hard time understanding how it is that permitting people to say or write whatever they want, even if they pooled their resources together in a corporation to do so, is somehow undermining democracy.  If the right of an individual to do so was never in question, it’s nice to know you don’t require the fortune of a Ross Perot, George Soros or the Koch family to have your say on a national media platform.

I’ve read this decision described as enabling a corporate takeover of our government.  Excuse me?  That ship set sail 60 years ago, I fail to see how our government could be any more under the control or influence of large companies and unions and still retain the right to vote for its citizens.  And further to that point, if we don’t trust citizens to be able to appropriately weigh the value of information they receive based on its source, then why the heck do we even want them voting at all?  And what about the vaunted marketplace of ideas that supposedly motivates the First Amendment?  It’s not clear to me at all why the government should be in the business of constricting that flow of ideas.  Remember, this isn’t just about giving ExxonMobil the freedom to buy political ads on national TV, it’s also about the right of the Sierra Club, the ACLU and the NRA to do it as well.  If the decision restores the microphone in front of groups you find distasteful, it does so equally for the other side as well.  Why should we be afraid of freedom?

This decision is long overdue and will help to expose the records of candidates and particularly incumbents to the scrutiny in full public view that permits a fully informed decision by the electorate.  Is the left more concerned with empowering citizens or controlling them by carefully filtering the messages they are allowed to receive?

That Other War - Reason Magazine

on Jan 22 in Politics tagged by Trevor Hicks

That Other War - Reason Magazine.

I’m reminded of the stories we were told as kids about citizens in the Soviet Union living in fear of their own government, only replace “dissidents” with “drug suspects” in the narrative.  We shouldn’t confuse anecdotes, such as those in this article, with data.  But the data also suggests the drug war is at best a monumental waste of money spent by the government trying to control the behavior of its citizens.

Best sentence I’ve read in a long time

on Jan 11 in Technology tagged by Trevor Hicks

Clay Shirky discussing the new modes of collaboration made possible by the Internet:

The beneficiaries of the system where making things public was a privileged activity, whether academics or politicians, reporters or doctors, will complain about the way the new abundance of public thought upends the old order, but those complaints are like keening at a wake; the change they fear is already in the past.

Gatekeepers of information had their value, Walter Cronkite had enormous power, for good or ill, to focus the nation on certain issues.  As Shirky points out, though, the discussion is no longer on whether we should have gatekeepers, but we should we do now that they are gone?  By the way, the Edge Annual Question is never a bad site to spend a few hours.

Reflecting on the 2000s

on Dec 31 in Politics, Technology tagged by Trevor Hicks

First an aside to the pedants who insist on the decade ending next year, holy crap get over it already.  I know there was no year zero so a proper counting of ten year time spans would start with 1 and end in 10.  Nobody cares.  When the tens digit on the chronometer rolls over, it’s a new decade, that’s the way most humans like it.

A lot of people, myself included, are in the habit of marking time and perceiving how things are going for the nation through a political lens.  Our government schools see to that.  What did Bush screw up?  What is Obama screwing up?  Plenty I tell you, and I’ll get to that.  But culture, society, family, religion and increasingly technology are far more important to how we experience our lives.

As a people, we in the US are so much better off than we were ten years ago, frankly it’s difficult to imagine anyone would want to go back to 1999.  The thing is, we’re better off in ways that don’t necessarily show up in government economic statistics.  And these changes are due, quite frankly, to the continuous advance of information and communication technology.  Reach into your pocket, pull out your cool little iPhone or Blackberry or whatever and compare the power of what you possess in your pocket, easily affordable by the middle class, to what was available at any price 10 years ago.  I got my first cell phone in 2001, and I distinctly recall seeing it only as an unwanted corporate leash.  Now I would wonder what the hell was wrong with a company that didn’t provide my smartphone.

Granted there are some who see the ubiquity of mobile computing as isolating and there are some who use such devices as a shield from human contact.  I say first, to each his own, I’m not one to impose my preferences on others.  But I would also add that the ability to coordinate activities, to find things, to snap a few pics and instantly share them with friends and family means we waste much less time and have richer experiences.  Mobile computing, combined with the other huge trend, the evolution of the collaborative web, enhances our lives in many ways.  One example, how much do you know about your ancestors?  Maybe you have some names on a family tree, perhaps a few photographs.  If you’re lucky you might know a little about where they lived and their occupations going back up to about 4 or 5 generations.  Our descendants, our distant descendants hundreds of years from now, will be able to watch our home movies, look at our party pics, read our blog posts!  The Internet is forever, think about that next time you’re angling for beads at Mardi Gras and the cameras are out, they’ll see those pics too.

Think about Facebook and its cousins.  Not only does it allow me to enhance the interaction I have with my closest friends as we post our own pictures and thoughts on our shared experiences, but it strengthens the weaker ties we have as well in ways that email or even personal web pages never could.  By maintaining a single repository of our social lives it means there is one place for people to keep up with all of their second or third level connections.  For someone like me who frankly has not been willing to invest the time and effort in to maintaining those weaker relationships in my life, tools like this are a tremendous enhancement to my life.

I’ll take a second to plug Tyler Cowen’s book, Create Your Own Economy for further reading on this topic and pick up on another one of his themes.  The ubiquitousness of computing, the effectively infinite amount of content there is to explore on the web and the simple tools we have available to mash things up to our own taste means individuals have the ability to tailor the culture.  Back in the day you had three channels of TV and a choice of the morning or afternoon paper.  Now it’s a simple matter to snip a few 2 minute bits from TV, movies, the Web, your own home movies, to dub your own music or other soundtrack behind it to make your own story or commentary and share with your friends.

OK, so it’s well established that I’m a techno-geek.  I promised to talk a little about politics.  I think if you go back to the WTO meeting in Seattle in 1999 through to our current crisis, you see a really disturbing evolution on the left that sees capitalism and economic freedom as existential threats, both to the environment and to the health and welfare of ordinary people.  Their remedy is more government control over the economy and industry.  If you go back to 9/11 through to the latest attempted terrorist attack, you see the right that increasingly sees existential threats from terrorism and personal freedom and their remedy is more government control over our lives.  I, on the other hand, see the existential threat coming from the increasingly heavy hand of government choking off both economic and social growth and I can’t remember the last time I heard someone say, “go ahead, it’s a free country.”  Unfortunately for both the left and the right, they want to increase the power of a government that is less interested in serving their ideological goals than in serving the interests of the politicians, bureaucrats and public employee unions.  People want to turn over control of things to government because of fear and they seek security from the reassurance that “someone” is in charge and will protect them.  On the left it’s fear about economic insecurity, on the right it’s fear about terrorism and violence.  And it’s the very technology that’s pushing more information to people that fuels those fears as the worst case scenarios are magnified in people’s minds, obscuring the fact that the risks that seem so ominous are generally pretty rare.

And I haven’t even mentioned the wars we started.  And what about our presidential candidates: Bush, Gore, Kerry, Obama, McCain - not a decent choice among them.  This past decade will have to compete with the 1970s and 30s for worst decade ever with respect to politics.

Fortunately government has not yet accumulated enough power to ruin what’s great about America, but the trend is in the wrong direction.  Indeed, as information and access to information is proliferating in ways that empower individuals to make truly informed and good decisions about their lives, we see a government that increasingly is trying to centralize regulation, power and decision making.  Decentralized decision making was already more efficient than centralized and it’s becoming even more so as technology improves the ability of individuals to get information and coordinate decisions with others.  I don’t know how things will play out, but I know that the more we are guided by fear and attempt to prevent anything bad from ever happening to anyone, the less secure we will all become.

There will always be problems and setbacks.  Still, I celebrate a decade, a culture and a nation that is indeed getting better all the time.

There was an old woman who swallowed a fly

on Dec 18 in health care tagged by Trevor Hicks

I haven’t had much to say on health care reform lately, but I thought this article by John Calfee illustrated nicely the central problem in the Democratic proposal:

A good way to understand how this all should work is to begin with guaranteed issue— that is, the requirement that all insurance plans take on everyone who applies regardless of pre-existing medical conditions. That is a recipe for high premiums. The fix is community rating: everyone is charged the same rate. But many healthier enrollees would drop out, and premiums would spiral upward with no natural stopping point. If reform stopped there, insurance would cost more instead of less, and the ranks of uninsured would go up instead of down.

So the next fix is mandates. Individuals will have to buy insurance they don’t want, or employers will have to provide insurance (subsidized by tax laws) that many of their employees do not want to pay for. Those who balk will pay a penalty on their next tax return. If too many healthier consumers pay fines instead of premiums, upward pressure on premiums will increase because higher-risk consumers will be left in the insurance pool. But let’s assume the White House is right in saying this won’t happen.

Still, regulation could not stop there. If consumers could buy cheap, bare-bones insurance, the mandate would be gutted. Hence another fix. A new federal commission will set minimum insurance benefits. Most states already do that, and the result is usually a long list of benefits, whether consumers want to pay for them or not. Federal standards will probably be high, too, as evidenced by the quick addition of breast cancer screening over age 40 to the Senate bill. Mandated benefits, of course, increase insurance premiums.

So far, we have guaranteed issue, community rating, individual and employer mandates with fines for non-compliance, and minimum insurance standards—with each measure designed to fix the harm caused by its predecessor.

I really, really hope this bill fails.  I think it will be an expensive disaster that will be very difficult to undo.  If we’re going to go down the path expanding government health care then let’s do it the right way - I’d much prefer a French or Canadian style single payer system than this hybrid monstrosity the Democrats are trying to foist on us.

I honestly favor reform, but I don’t think I’m letting the perfect be the enemy of the good as they say.  I’m letting the bad be the enemy of the good, this bill is not a step in the right direction or an incremental improvement.  There are two primary goals we should have in reform, increasing access to health care for the poor and lowering the fiscal burden on the federal government for health care.  This plan further entrenches the perverse incentives in the system that inflate spending and while it does have some benefit for the worst off, that comes at the expense of liberty crushing and expensive mandates that will burden the middle class quite heavily.  The Democratic plan I think moves us away from both goals.

Oil Prices

on Dec 18 in Oil Market, Peak Oil tagged by Trevor Hicks

I love this graph by Euan Mearns at the Oil Drum:

We get so used to seeing financial or other data graphed against time it’s easy to forget that other relationships may be more meaningful.  In this case, Mr. Mearns is making the case that the world is supply constrained in oil, the supply and demand curves are not linear everywhere, that we are in the vicinity of a steeply upward sloping supply curve.

The graph above does appear to show a fairly robust relationship between oil consumption and prices over the last several years.  It would be interesting to see what curves can be drawn to fit this data.  And for those wondering about my position on Peak Oil, I think this is the best summation, I think that the supply curve slopes upwards very steeply at today’s production levels.  That doesn’t mean production cannot increase, just that we better be prepared to pay dearly for even small ticks upward, constrained by the global recessions that will be triggered by price spikes.

From a personal financial standpoint I think this implies caution about energy investments.  Expect continued volatility, you better be nimble when you ride the price up to jump off before the next crash.  More important, pay close attention to how fuel efficient your car is, how far you live from work, school and shopping and how big a dwelling you want to heat and cool.  Regardless of what’s going on in the financial industry with interest rates, buying a large house in the suburbs leaves you vulnerable to spikes in energy costs.  Selling a house and moving is always a laborious and expensive proposition, even worse is that real estate prices will be depressed just at the time you are forced to sell.  Just make sure you have some income cushion if that’s the lifestyle you choose.  I have a big house in the suburbs, but you won’t see me “trading up” any time soon.