Some thoughts on Social Security vs. Private Accounts

Here's a Fark headline from today: [Scary] Today, the Wayback Machine takes us to a 1996 Cato Institute report lauding the benefits of privatizing social security and putting every individual's entire retirement in the hands of private fund managers. The implication here is that because of the poor performance of the stock market recently, we would be screwed if this plan had been followed through. However there are some issues at hand that such a simple overview will not cover. Namely that:

• Stocks are a stake in real assets, they are not the economy, but they do reflect it (or rather perceptions of it). Social Security payments are claims on FICA contributions of current workers and are based on an individual's prior income. While the payments are not tied to the overall economy the revenue most certainly is. The point is that if the stock market sucks because the economy sucks then that does not imply that social security will magically avoid these economic pitfalls.
  
• Social Security has major problems. Most notably that congress borrows against the surplus that is taken in by FICA and when that surplus evaporates it will be a double whammy on the congressional budget. They'll either have to raise FICA taxes to keep up with the benefit payouts or they'll have to start paying back what they've borrowed by cutting back on spending or by raising taxes.
  
• Even still it is people who are in the market with a long horizon that should be mostly in stocks. People who are closer to retirement (provided they have a semi-competent adviser) should be in a mostly bond portfolio. I can't say what the bond performance is, but historically it's much more stable than stock returns.
  

Also here's an interesting article from the CS Monitor saying that Social Security's return beats the market's.

A new idea for a holiday

I propose that every year, the day after Election day is "Scrape off your candidate and issue bumper sticker day" that way we don't have to see that you voted for Bush in 2000--and you're sticking to your guns on that mistake--now that he is a lame duck president.

Buchanan Anticipates The Trap's Criticism

So a while back I posted about a documentary by Adam Curtis called The Trap. A big part of this documentary went about criticizing the assumptions that people are self-interested (sometimes known as "homo economicus") and it featured James Buchanan as an architect of this idea. Ironically in his 1962 work (and my current read) co-authored with Gordon Tullock, The Caluculs of Consent, they state:

The first point to be noted is that economic theory does not depend for its validity or its applicability on the presence of the purely economic man. This man of fiction, who is motivated solely by individual self-interest in all aspects of his behavior, has always represented a caricature designed by those who have sought to criticize rather than to appreciate the genuine contribution that economic analysis can make, and has made, toward a better understanding of organized human activity.

It appears Mr. Curtis has not read this book. That said, the documentary is still well worth watching.

Great Amazing Meeting 5 Interview

Wow, below is an excellent Amazing Meeting 5 lecture from Michael Shermer apparently promoting his forthcoming book The Mind of the Market, about evolution and economics. In this lecture he says:

[biological] Evolution and economics are the same subset of a larger phemonena, called complex adaptive systems. That is systems that grow in complexity from simpler systems and they grow by learning.

I could not have said it any better myself. In fact I suspect that much of the universe is organized among this principle and there's probably a whole discipline of science organized around it.

Why I love Milton Friedman

He called it in 2000. He said gridlock was the reason that we had a surplus in that year. He said that if Democrats had control of the white house and congress there would be a deficit. If it was Republicans it would be a deficit or a tax cut. We got both and Republicans have done nothing but increase deficits.

Here's the interview:

The World Is Flat

So I just finished The World Is Flat by Thomas Friedman and I have to admit that I 0nly thought it was so-so and had to push myself to get through the entire book. The first half of the book reads like an intro to business class. In fact, I'm pretty sure Professor Friedman did much of his research by sitting in on business classes at Harvard and then writing them down as if it was coming from him. He even cites a case or two that we studied in our capstone course for the school of management (the Zara case comes to mind). This in its self isn't necessarily bad, but having been through business school Friedman comes off as someone with a newbie's understanding of business.
The second half is roughly where Friedman delves into his policy prescriptions. Economic validity of the policies aside, I found a lot of it to be just internally contradictory. For example, Friedman states that if he were to run for office he would campaign on the platform of getting everyone wired up with broadband. According to Friedman, the value of the information on the internet and the ability to access it with quickness is vital for the USA to remain a world economic leader. But not much further down the road, Friedman blames our culture for holding us back and for our students for not being motivated to learn. What is one thing he attributes to our laziness? Nothing other than spending too much time on the internet, the very thing he wants to everyone to get easy access to.
Friedman also rarely backs up his policy prescriptions with hard empirical research or sound logic (he does occasionally cite reports such as the Doing Business report by the IFC). Instead he prefers to ask someone important what they think and just quotes that as evidence. Or worse than using someone's opinion to back up his own, he simply states his with authority. A poorly thought out idea forcefully stated is still a poorly thought out idea.
But the biggest pet peeve of Friedman's writing style is his need to try to make up words to describe phenomenon. I considered quitting reading the book when he introduced the word "glocalize" (fortunately for me he only used it for that chapter). For the most part they're not even necessary or creative, just goofy. One or two I can handle, but it seems like a new word appears every chapter.
Another moment where I was beside myself with Friedman's writing was where he starts off a chapter by explaining how he picked up on a phrase that a lot of top executives were using. What is this mysterious phrase might you ask? Why it's none other than "just in the past couple of years..." I am not making that up. Professor Thomas L. Friedman actually tries to act like this is some brand new expression or one that people have only recently ramped up on using!
The flaw in much of Friedman's thinking seems to stem from a single problem, incomplete thought processes (or he at least conveys it incompletely, but given the conclusion I can only surmise that his process is incomplete). He has not quite put all of the pieces of business and the economy together and this may or may not get better with time. Friedman is clearly a journalist who is trying to comprehend the phenomenon of globalization and explain it to readers of his book, but he regularly cites examples of how behind he is on the technology. If his daughters are way ahead of him in comprehension of technological advances, should he really be the one writing a book on how this very technology is going to revolutionize everyone's lives?
One example of the flaw of his incomplete thinking is that Friedman states "development is a choice." Huh? If development was a choice nobody would be under-developed. Rather I think what Friedman is trying to grasp and convey is that it is a choice for governments of under-developed countries to step out of the way of development and to let the spontaneous order of the market take over. But he does not say this, he states it as if leaders are too lazy to choose to develop and he does so because his thought process on this subject is incomplete.
Further, not once does Friedman give credit to the spontaneity of the institutions he so praises. He in fact, quite often makes them look as if they were the design of conscious effort. He relies far too much on calls for the "right" kind of leaders to get things done and complains that our politicians need to stop pandering to special interests without considering that the nature of our system may very well put politicians in place that do this. So rather than adjust the system to change the incentives he merely just wants our system to depend on who is in place.
His account of the development of the web is a perfect example of his attribution towards conscious design. Friedman describes how the internet came about, but describes the genesis of the series of protocols and standards that now make up the internet as if at the time it was developed, it was done so with the modern internet as an end in mind. What's closer to the truth is that they were just trying to solve a problem for a small group of people, and that their solutions happened to fit nicely for others and thus became commonly adopted by other users of the system (often unconsciously adopted). But in Friedman's ex post facto view, it's entirely obvious that things should develop the way they did.
Not only is this book flawed, it is also long. I made the mistake of buying the extended version, which clocks in at around 550 pages. In all of the 55o pages Friedman repeats himself regularly and uses too many examples to illustrate the same phenomena all scattered throughout the book and each told as if it's a new discovery. This book could have easily been around 200 pages and had even more impact than it's 3x long form.
However, all of this is not to say that the entire book is worthless. The chapter on the "unflat world" is actually overall pretty good, in particular the segments on the middle east and the anti-globalization crowd. I found these to be quite insightful and interesting. However this shouldn't have been a surprise to me, these areas are where Friedman has made a name for himself--especially with middle east relations--and are where he is an expert. Had it not been for these chapters I probably would have discounted Friedman all together, but because of them I would actually be interested in reading From Beirut to Jerusalem and some of his other works...on middle east relations, not technology and economics. I think it's a testament to him that I read a book of his that I do not enjoy, but the good parts still give me encouragement to read his other books on those subjects.
Another positive to this book is that in spite of its poor policy prescription I know a few people where this book has had a mind changing influence. They were previously opposed some of the market forces shaping our lives and the lives of the poor around the world and after reading it they became more pro-free markets. Where it can get dangerous though is if they also come to endorse his policy prescriptions as well.
So, maybe rather than trash Friedman we can not only learn from his mistakes, but his successes. In spite of this books flaws and Friedman's rudimentary understanding of a lot of the subjects he discusses, this book has sold quite well and those who wish to argue in favor of leaving the forces globalism alone should take a page from Friedman on how to exert influence by selling books.

Predatory loans and home buyer assistance

Today I was listening to a FEE podcast of a lecture given by James Bovard (Here is the lecture, but here is an artcile written by Bovard that contains many of the same facts.) and Bovard had an interesting point. Beginning about 26:30 he discusses how programs that help high credit risk borrowers have in fact caused these buyers to become major defaulters on their mortgages. Bovard argues that:

The default rate on mortgages from the largest down-payment-assistance organization, Nehemiah Corp., is 25 times higher than the nationwide mortgage-delinquency rate, according to the HUD inspector general. The default rate on Nehemiah mortgages quadrupled between 1999 and 2002, reaching almost 20 percent.

Wow! And Hud is worried about market oriented predatory loans because of high default rates. Maybe it's time to look in the mirror.

My favorite quote from this is lecture "In Bush's eyes, self-reliance is so wonderful, the government should subsidize it."

A View of the Housing Bubble

So out of boredom I used the Washington Post's historical record of sales for the condos in my apartment. It's an extremely localized view of the demand for housing, but it's interesting non the less. The upper line are the 2 bedroom units and the lower one are the 1 bedroom units. I am going to break it down some more, but so far it's pretty interesting.

Hayek vs. Galbraith

I have often heard that John Kenneth Galbraith referred to as an eloquent and easy to read economist, while Friedrich von Hayek--even by many of his fans--is wordy and dense.
I have read The Road to Serfdom and a handful of essays by Hayek (and sadly I own three other Hayek books that are unread) and I have read Money : whence it came, where it went by Galbraith and find it to be quite the opposite. I found that while Serfdom was quite wordy and occasionally you needed to pause to digest what was said, the logic behind what was said had a solid foundation in reality.
Money on the other hand I did not enjoy, nor could I follow it. I found myself wondering what point Galbraith was trying to make and how he arrived at the conclusions he was making. It seemed totally disjointed and flooded with cloudy logic. Additionally, it was no less wordy than Hayek was.
I will, however concede that maybe Money wasn't the best representative of Galbraith's work, and will give him another chance by reading The Affluent Society some time (which I have seen considered his best). I also admit that my training was almost entirely Neoclassical and Austrian based, and as such I was engrossed in the logical foundation and language of these two disciplines as opposed to the Keynesian tradition. This could help contribute to my lack of comprehension of Galbraith and thus given me a bad impression of Galbraith.

The Trap

I got pretty excited when I read the wikipedia entry for this BBC documentary called "The Trap" that features FA Hayek, John Nash, Richard Dawkins and James Buchanan. It is written, directed and narrated by Adam Curtis.
I was a little surprised at this film. Given the list of free market advocates, you would think that it would be pro-free market. Instead it takes aim at some concepts of liberty based on negative and positive liberty as laid out by Isaiah Berlin and the famous "invisible hand" argument that people acting in their own self interest will create an organized society that uplifts all of society (this is reinforced with the Selfish Gene and Public Choice theories). Curtis portrays this as a "narrow view of freedom" and always leads to the opposite of its intended effect.
Curtis says that the idea of negative liberty leads to policy of foreign interventionism and rolling back the very freedom that it proposes to protect. He basically says that it leads to the idea that it is the duty of the free to liberate the unfree. However, it also lays some of this blame on people like Jean Paul Satre who espouse Marxism and promote violence as a means of obtaining freedom.
I have to admit that while I disagree with the conclusion it is interesting to watch. One notion that I had not heard before this was that the Vietnam war was as messy as it was because it was politicians set body count targets and other such numerical benchmarks of the success of the war. This seems counter to the conventional wisdom that it was as messy as it was because of the communist guerrilla like tactics where you could not tell combatant from civilian. Which one is true I can not say.
The other is that Bill Clinton is one of the major forces for the push towards market oriented reform of government.
I think the biggest flaw with this documentary is that it spends a lot of time demonstrating what Curtis sees as the flaws with trying to implement the idea of negative liberty and almost no time examining any alternatives. Curtis concludes that some positive liberty is good, but never examines how much or in what forms it is good. In this sense, there is no ability to criticize or critique this alternative idea, it's just given.
Additionally Curtis seems to blame the idea of negative liberty for the encroachment of positive liberty based tyranny, yet it accepts positive liberty as the correct response. How is Curtis to say that it doesn't always lead to tyrannical regimes as well? It was after all flaws with this idea that lead to the Thatcherite ideas it criticizes. At best, Curtis demonstrates a tendency of a cycle of encroachment and revolt rather than to show a cause and effect relationship with positive liberty being the effect of negative liberty as Curtis implies at the end.
In the end, this documentary has even further convinced me that negative liberty is the way to go, but it is still fascinating and well worth watching. Which you can do below:

Episode 1:


Episode 2:


Episode 3, Part 1:


Episode 3, Part 2:


Episode 3, Part 3:

Who am I and what am I doing here?

Ah yes, the famous words of Admiral Stockdale that uttered at the beginning of his VP debate so many years ago. They made Stockdale look like a senile old man, but as he later said, he intended to answer those throughout the debate, it all just came out wrong.

The title of this blog is a play on the title of Alexis De Tocqueville's famous book on his experiences in early America (which you can look up or guess the title of if you have never heard of him. I'll give you a hint, it's "Democracy something something"). It reflects how I think De Tocqueville would see America today if he had a time machine to compare and contrast when he wrote the book to now (but I think he'd be more horrified by what his home France has become).

I am a GMU graduate who got his degree in Finance with a minor in Economics (oh great another GMU econ person with a blog) now out in the real world. I used to run a sometimes read and now defunct blog Order From Chaos, but it has been so long since I have written anything on it that I thought it would be best to start fresh. Basically I had the bug to express myself, got burnt out and the bug is back. I am a libertarian whose interests include economics (hold your shock), public policy, property rights, moral philosophy, evolution related sciences, space travel, and a slew of other nerdy interests.

I make no pretenses that what I say is groundbreaking and original and will be read by thousands. I do however hope to occasionally put things into a way that makes things worth reading.