Sensationalism in the news

Fox News posted an article with the title "Biden Evokes Sexual, Violent Imagery Again in Push for $447 Jobs Bill".

This is a pretty low shot by a company that constantly sells articles about sex and violence.  For example, currently on its homepage are the following headlines:

• Diseased Monkey Missing After 56 Animals Escape
• Gruesome Details Emerge in Philly Dungeon Case
• Teacher Investigated for Views on Homosexuality
• Girlfriend Pleads No Contest in Beating of Man, 77
• 12-Year-Old Charged as Adult in Brother's Murder
• Hendricks' Death Scare
• 25 Dead of Listeria, Now Deadliest U.S. Foodborne Outbreak ...
• Dangerous Animals on the Loose in Ohio
• 'Horrors' Case Leads To 10 Young People
• Older Woman, Younger Man ... Good Sex

And on their U.S. page, a couple more:

• Accused Kid Sex Abuser to be Set Free?
• Local Teacher Accused of Sex Crimes Won't Face Jury

To be fair, I tried the same exercise on the New York Times.  Here's what I got:

• Brooklyn Sex-Crime Charge Dropped
• After Arrests in Park Known for Sex, Cases Are Sealed, but Names Are Made Public
• A Death-Row Love Story
• Westchester Man Killed His Wife and Children Before Shooting Himself, Police Say

And on their National page:

• Police Kill Dozens of Animals Freed on Ohio Reserve
• Faces of the Dead

The first few headlines are typical of Fox News: when it's not outrageously partisan, it's outrageously sensational.  And to accuse Biden of being sensational is pure hypocrisy.

Why we shouldn't forgive student loans

I was about to respond to someone's Facebook post about forgiving student loans, but I realized that my response would have been tactless.  So I'll post it here.

My response is regarding a resolution supporting the forgiving of student loans, a letter from the resolution's sponsor, and an article about this resolution which seems to misconstrue the issue.

The resolution states:

Expressing the sense of the House of Representatives that Congress should cut the United States’ true debt burden by... forgiving student loans... and bringing down overall personal debt....

Resolved, That it is the sense of the House of Representatives that... Congress should cut the United States’ true debt burden by reducing home mortgage balances, forgiving student loans, and bringing down overall personal debt;

So I'm a fan of free (merit-based) higher education in certain fields of study, but I'd put money on the outcome that no law actually forgiving student loans ever gets through.  The main problem with forgiving student loans is that it would lead to the same sorts of problems we saw with the housing crisis: someone is on the other side of those loans.

For many of these loans, the credit markets would again seize up (see 2008), because nobody would know how much the lending position of these loans are worth, and nobody would know who holds those positions.  Were these lenders greedy?  Not necessarily; after all, these loans would have been considered a fairly safe investment (hence low risk and low return), since they're backed by the Federal government.  So some of these loans are probably coming from decent people -- some endowments (which want to support education) and some pension funds.  Who gets hurt the most from student-loan defaults would depend on the contracts between the actual lenders (people with capital) and the loan agency (only some of which we really want to penalize).


From Clarke's article, I assume that they plan to release the federal government's guarantee on the debt, not necessarily have the government pay off this debt (and we should all agree that no taxpayer money should go toward this, since it would be better spent on infrastructure=jobs, especially with so many unemployed people).

In contrast to the Common Dreams article, there is no realistic indication that anyone will get their debt discharged for free; at the very least, they would need to discharge it through a traditional bankruptcy -- the only way to disincentivize everyone from defaulting.

My hunch is that this congressman wants this young, educated demographic to vote for him.  This in itself is silly, since he's a Democrat and already has that in his favor for this demographic.

Sean's speculation: tech bubble starting to leak

A little while back I'd commented about the tech bubble. I speculated that, once the market falls about 15%, we'd start to see a drop in investing, since tech startups are basically highly leveraged investments:

Here's how it will happen: once our stock market dips again, say 15% (and it's bound to happen eventually, even if it goes up before), Google and other established companies will pare back their acquisitions -- even if it's largely an emotional move. It won't be terrible for them, since they have clear business models and low burn rates. VCs will realize -- from market data, industry hearsay, and experience -- that it's not worth investing as freely in high-risk startups. After all, their hundreds of $100B tech startups no longer have buyers. This won't be the end of VC capital, but it will be enough for a number of tech startups to log off. Of course, many VCs will be hurt by this, which will have second-order market effects as some go bankrupt, and the stock market will drop further, as value is lost overnight. And that's how the bubble will burst.

So my hunch is that this will start to happen pretty soon. First person to bet me $1 can take the other side of the bet (specifically I'm betting that, within 3 months, there will be news article(s) in widely established national or international newspapers that mention (a) the precarious drop in tech startup funding and (b) fresh rounds of layoffs at these startups). This bet is conditioned on the market staying at 15% below its crest for that period.

The Wall Street Journal and Editorial Quality

A while back Rupert Murdoch said he would make the Wall Street Journal a more general-audience publication. It's been going on for some time.

Recently they published an article titled, "Who Gets Drunk and Why" ? To be sure, it's one of the most popular (it's the most-read on wsj.com). But it's also not such a good article. First, the article isn't really business/econ/finance related. That's okay if they're trying to make the Journal a wider-audience publication. But, in contrast to interesting general-audience articles about drinking by the New York Times, the Journal article doesn't describe new research, and its interview with an expert gives us bland, non-newsworthy information:

Drinkers who think they can tell when they've had enough are very often wrong. "Alcohol can affect your reflexes even if you feel fine," says Samir Zakhari, director of the division of metabolism and health effects at the National Institute of Alcohol Abuse and Alcoholism.

The Journal article is a rehash of stuff we learned in middle school health-ed classes, peppered with a few anecdotal interviews. The only interesting bit in the article was this:

Women's menstrual cycles are yet another factor: Alcohol metabolism increases about 10% right after ovulation.

The Times article, in contrast, actually tells us something that may be interesting:

Dr. Nora Volkow, director of the National Institute on Drug Abuse, has shown in several brain-imaging studies that people addicted to such drugs as cocaine, heroin and alcohol have fewer dopamine receptors in the brain’s reward pathways than nonaddicts. Dopamine is a neurotransmitter critical to the experience of pleasure and desire, and sends a signal to the brain: Pay attention, this is important.

When Dr. Volkow compared the responses of addicts and normal controls with an infusion of a stimulant, she discovered that controls with high numbers of D2 receptors, a subtype of dopamine receptors, found it aversive, while addicts with low receptor levels found it pleasurable.

This finding and others like it suggest that drug addicts may have blunted reward systems in the brain, and that for them everyday pleasures don’t come close to the powerful reward of drugs. There is some intriguing evidence that there is an increase in D2 receptors in addicts who abstain from drugs, though we don’t yet know if they fully normalize with time.

So what is my point? Mainly that the WSJ is indeed moving toward a general audience, but its editorial standards aren't up to snuff. Or else they are now trying to pander to an audience who didn't learn basic things in middle school.

Debt Ceiling compromise with auction theory

I wonder if there is some way we could use auction theory to reach a compromise for the debt ceiling -- or political decision-making in general. To motivate this, consider the following examples, where one might use auctions for making decisions

Examples of making choices with auctions

1. My roommate and I want to figure out who gets which room in our new apartment. On sealed bids, I say I'm willing to pay X1 and X2 for the rooms, respectively; and my roommate says he'll pay Y1 and Y2 for the rooms, respectively (the sealed-bids part is important, since it means we assign our true values to the rooms). It's then clear who gets which room -- but he gets the room for the roommate's bid on that room. Each person is happy because he got the room for less than he bid. As described so far, we're also incentivised to bid our true values (Technically, we'd probably need to adjust the room prices to make sure they sum to the total rent, which may remove the true value bit, but bear with me).

2. Four of us want to choose between three different movies. We each place some value on watching each of these movies and write our bids down on a piece of paper (secretly at first). Once these bids are made public, we choose the movie which maximizes overall utility using the VCG auction. In particular, the auction also stipulates that we redistribute total revenue from the auction in such a way that it maximizes overall utility. So if I end up having to watch a movie I really don't want to see, I get paid for watching it, so it's not so bad after all. Jonny, who got to see the movie he wanted, paid a bit more for it, but he's still happy with the outcome, since he paid less than he was willing to pay.

The benefit of the two auctions is that we're all incentivized to place our true values on these items. Further, the auction maximizes social utility.

A debt-ceiling compromise

Using this sort of an idea, a compromise might look like this: all possible spending cuts -- and even crazy amendments and such -- would receive secret "bids" by Democratic and Republican leadership. Cuts could be valued as either negative or positive. The appropriate algorithm would then proceed by selecting cuts with the most-socially-useful outcome until the $2T or $4T mark is met. Each time an outcome is selected, the parties would need to pay the VCG price.

For example, suppose policymakers are considering cutting Medicare by $1T and (independently) cutting defense by $2T. Republicans might place a party value of $2M and $-0.5M on these two, respectively. Democrats place values of $-3M and $.6M on these. The likely outcome of this case is that Medicare is not cut, and Democrats need to pay Republicans millions of dollars; and defense is cut, and Democrats pay millions of dollars to Republicans. This example might sound skewed, since Democrats paid out millions of dollars both times, but remember, these were their true values of these outcomes. If Republicans were to try to game the system by bidding a lot more so they get more payment from Democrats, they might end up winning the auction, in which case they need to pay a lot to the Democrats.

Arguments against auctions and why they're still mostly OK

This was a really simple example, and it ignores things like outcome interactions and rule by wealth. In the former problem, baskets of outcomes might have different values than the sum of their parts; combinatorial auctions with VCG mechanisms (on which there's plenty of literature) can address this. The latter problem -- where a wealthy party can achieve its ends no matter what -- isn't such a big deal in theory, because everyone is still incentivized to bid his true value, and the poor will end up getting paid quite a bit of money from their point of view -- enough to offset the damages they see. Again, if Republicans were bidding crazy amounts for their outcomes, they'd end up paying dearly for this, right into Democrats' pocketbooks.

Yet what is to prevent one party from introducing legislation which is awful for the other party and always bidding $1 for it and $0 against, just to earn money or win these votes? One solution is to penalize legislators post-facto with the hit to public utility from the status-quo position. This utility could be inferred from the VCG auction bids. Since the auction should maximize utility, overall utility is still increased.

Per-person or per-legislator auction credits

Finally, it's worth considering having individuals in society bid for these outcomes or even assigning "bid points" for legislators to use, where each legislator gets so 100 bid points per Congressional session and can only use bid points he has to bid on outcomes. This may end up giving bizarre behavior on legislation toward the end, but it's worth considering.

The Education Bubble, Thiel, and what needs to change

We're in an education bubble, and Thiel wants to deflate it.

I'd posted a little while back about unaccredited institutions and the education bubble.

This bubble has existed for some time, with online institutions getting billions in federally subsidized student loans. Recently, the well-known entrepreneur Peter Thiel also posited that we're in an education bubble:

“A true bubble is when something is overvalued and intensely believed,” he says. “Education may be the only thing people still believe in in the United States. To question education is really dangerous. It is the absolute taboo. It’s like telling the world there’s no Santa Claus.”

[Housing and education] whisper a seductive promise into the ears of worried Americans: Do this and you will be safe. The excesses of both were always excused by a core national belief that no matter what happens in the world, these were the best investments you could make. Housing prices would always go up, and you will always make more money if you are college educated.

But Thiel’s issues with education run even deeper. He thinks it’s fundamentally wrong for a society to pin people’s best hope for a better life on something that is by definition exclusionary. “If Harvard were really the best education, if it makes that much of a difference, why not franchise it so more people can attend? Why not create 100 Harvard affiliates?” he says. “It’s something about the scarcity and the status. In education your value depends on other people failing...

Thiel organized a $2M challenge and has selected 20 promising students to recieve $100,000 apiece to stop out of school, to be mentored and end up with awesome results ("stop out" means they have the option of returning).

Thiel is trying to prove a point, but his point is muddied by a lack of rigor. These stop-outs already have distinguished records, so I'm guessin most of them will do pretty well outside of school (although it seems like half of them already have college degrees). If Thiel wants to make a rigorous point instead of generating buzz around his idea, he should set up a control group, by finding 40 "winners" and randomly selecting 20 of those to stop-out. Better yet, if he really wants to prove college is overrated for everyone, they should pick 1000 random students from US schools (not just top ones), then mentor 500 of them. A few years (decades) later, compare the groups.

The benefits of college

Let's re-evaluate why college seems important to people. Americans are taught from birth by families and the federal government that they should go to college. College becomes an end in itself. It used to be the case that having a degree at all meant you were one of the few who put yourself through by sheer will and determination, or at least your parents were well-enough off to send you to school.

Now, we're facing huge numbers of enrollments, as students are taking out record levels of student-loan debt. School is no longer as much of a flag that you're employable, because everyone has a college degree, and many of them are not good hires. The result is already becoming clear: people who study non-scientific subjects are not paid especially well. To make matters worse, the US Department of Education encourages student apathy about college major by providing testimonials from inexperienced students:

"There is no reason to have to know what you want to do when you come to college. College is a place and time for you to explore all those avenues and opportunities."

Adam,
Kansas State University

"Your choice of major depends on your interests and what you'd like to do after college. For example, I'm really interested in helping people, so I chose psychology..."

"There is not really a 'best' major. Remember to choose one that's interesting and enjoyable to YOU, not one that your friends and family think is best. After all, YOU will be taking the classes and doing the work!"

More importantly, we still need people to fix our cars, take out the trash, paint and build houses, take care of our elderly, and install electrical systems. These are necessarily not bad jobs, even though they do not require a college degree. Sending more people than necessary to school just to go to school is bad for the economy, since it makes white-collar jobs underpaid and siphons money into educational institutions. I could even be convinced that it increases wages of those jobs that don't require a college degree, because those with a college degree don't want to do those jobs.

The traditional value of a college education

Traditionally, schools might be seen as "country clubs for the young". Wealthy parents sent their kids off to whichever private college is known to their peers, to network with other wealthy parents' kids. A reasonable amount of learning happens, but remember that these students are also reading Chaucer, Homer, and Nabokov to become "well-rounded" individuals. Public schools offer a similar service, but based a bit less on the exclusivity part.

The value of the school to the student is at least fourfold:

1. Information learned in the classroom.
2. It looks good on a resume.
3. Socialization. I learned how to live with roommates, for example, and I probably talk with a dialect more similar to the others at my undergraduate school than to my own brother.
4. Networking. I met several professors who had an influence on my future and were able to write letters of recommendation. Perhaps future jobs will take advantages of friends I met.

The only one of these that an any school can provide to an arbitrary level is (1), and that assumes no limit to the quality of the teachers. (2), (3), and (4) typically will only work out if the school ranks highly and, hence, is somewhat selective.

But these schools must be well-known (and not just selective) to be useful for (2)-(4). Consider the following schools, which are among the most-selective 20 in the U.S.:

1. Amherst
2. Cooper Union
3. College of the Ozarks
4. Annapolis (US Naval Academy)
5. Pomona College
   
6. Claremont McKenna

Of course I'm oblivious, but I only recently learned that Amherst is one of the most-selective, and I've only heard fleetingly of a few of the rest (perhaps this is because I am a non-liberal arts person). And yet these are extremely expensive. Tuition at Pomona, for example, is $38,394 per year. Tuition at Claremont McKenna? $38,510. Room and board is another $11,000 or so at these places.

Despite these tuitions, a resume coming from one of these schools would look no better to me than U. Virginia ($9,872 in-state and $31,872 out-of-state), which accepts more students but has a pretty good engineering school. And, unfortunately, the similarly named West Virginia State University is not even accredited, and, hence, useless as a school.

Are colleges doomed? I imagine we'll see a considerable shrinkage in the next decade, as employers become jaded with the quality of students. From my earlier post, I'll repeat the tips for college-seekers (note that checking the accreditation is also important for hiring managers):

Also, make sure the school you attend is a well-known school, that people will recognize. If you're staying local, a major state school or community college that people will recognize should be fine. If you're going national or abroad, try to pick a top-25 school. And, if you're hiring, be scrupulous about checking the accreditation of your newhires' schools.

I'll also add some new advice: study something that will get you a decent job. Check out the link above (re. pay in scientific subjects), for example.

End of the world

Harold Camping was the preacher who thought the rapture would happen today.

To justify this theory, he came up with a rather arbitrary mathematical formula:

Christ was crucified on April 1, 33 A.D., exactly 722,500 days before May 21, 2011. That number, 722,500, is the square of 5 x 10 x 17. In Camping's numerological system, 5 represents atonement, 10 means completeness, and seventeen means heaven. "Five times 10 times 17 is telling you a story," Camping said on his Oakland-based talk show, Family Radio, last year. "It's the story from the time Christ made payment for your sins until you're completely saved. I tell ya, I just about fell off my chair when I realized that." [End of the World: Top Doomsday Fears]

Harold's approach is disappointing because it seems to take advantage of his followers' (i.e., Americans') poor grasp on math and their frequent view that math formulas are arbitrary when, in fact, they're not. At the same time, his station notes in his biography that he has a degree in civil engineering from UC Berkeley. Presumably he is taking advantage of his position as an "expert" to push his agenda by obfuscating it with math.

Camping's approach seems a disgrace to the program, as the undergrad program at UC-Berkeley is ranked second in undergrad civil engineering (UIUC is first).

What else has Harold applied his crazy math to? From the same biography:

Harold Camping earned his living from his own construction business, which he began shortly after the end of World War II.

I'd actually be curious about projects Harold's business has worked on. What was the quality of their services? Were the buildings up to industry standards? The only thing I found on the Web about "Camping Construction Company" was a lawsuit about unions.
I should have posted this sooner to make it evident how kooky I thought Harold Camp was before 6pm in the U.S.. In any case, I think my point is clear.

Primary Education in America: pay and standardized tests

The NYT has an editorial today about how poorly U.S. teachers are paid.

I agree with the main idea of the article (I have a few issues with some of its points), although I think there would need to be a few changes for something like this to be very successful.

As it is, teachers' salaries are below-market for a given education level:

At the moment, the average teacher’s pay is on par with that of a toll taker or bartender. Teachers make 14 percent less than professionals in other occupations that require similar levels of education.

This is based on weekly pay (which seems to be a known metric in the field, so I believe their Summer break is factored in), and it does ignore some things like the benefits in having a job that makes you feel good about yourself. That said, this suggests that those going into teaching are also not the best in the market. (Granted, many good people go into teaching because they are passionate about it, and this is wonderful; but it's not enough). What happens when great people go into education? I have a friend from college who was extremely bright, in the honors program at a top research university; within a few years of teaching inner-city youth, he had decided to quit his job for more reasonable pay. He definitely wanted to help these kids, but he gave me an example of the state of affairs: one of his 8th graders asked him how to spell "hit".

This means that, while there are some great teachers out there, there are simply not enough great ones.

In any case, for higher pay to work well, we need to be open to a few things.

1. First, we would need to be open to laying off underperforming teachers. This is necessary if we are to pay teachers market- or above-market- rates for their education level, since it will increase the pool of talent. Naturally, we'll need to re-evaluate existing teachers in the new talent pool.
2. Focus on standardized testing to calibrate and pay teachers. Many decent people still question standardized testing based on unfounded fears of things that are easily addressed. Unfortunately, teachers and teachers' unions often add to these concerns, when they should be the ones most embracing them. Standard concerns are:
   
   1. How can we fairly compare teachers when the student quality or school quality differ so much? The primary variable we should be using to measure teachers is aggregate improvement in students' test scores compared to peer students. This means we don't reward or penalize a teacher for teaching kids who have problems to start with or for teaching kids who learn more slowly; we reward or penalize them based on how much their students have improved, compared to peer students. It is possible -- nay, easy! -- to measure these things fairly. Several approaches include (a) building variables into a statistical model that account for typical school performance and how quickly students learn (see item-response models, for a simple example of what's possible) at a school; or (b) moving teachers around a district as a form of experiment. The latter would help to calibrate different districts (which, in turn, is used to calibrate teachers). Teachers don't want to move around? They will if it's local and if you're paying them $100k.
      
   2. Standardized tests makes teachers teach to the test. This is not a problem, if the tests are well-designed. In fact, with a well-designed test, that's exactly what we should be getting teachers to do! In particular, a well-designed test should be broad enough to make teaching to it meaningful to the student, and it should be narrow enough to measure coherent skills. Both are easy.
      
   3. Teachers and administrators can cheat on these tests. Then (a) make it a federal offense to cheat on these tests, and (b) fire teachers and administrators who interfere with this testing process. There are many ways to identify cheating test administrators; statistical models are just a few of them.
   4. Tests don't measure the important things. The argument here is that teachers can teach many important things that aren't captured by tests. I'll use a counterexample-by-anecdote: my fifth-grade teacher had won a number of Teacher-of-the-Year awards throughout the years. When I had her, we rarely made it to studying math and never made it to studying science. I discovered why this was the case: she did not understand fundamental math. For example, she couldn't solve a basic algebra problem posed in our 5th-grade textbook (A robot takes a number, adds 3, multiplies by 4, adds 2, and divides by 2. The result is 7. What is the input?). On the other hand, she had a way of getting students to like her. We spent our time in her class playing games and having her chat with us about whatever she felt like chatting about. When she told us that we'd be learning the 50 states and the Gettysburg address, I obediently memorized them, to find later that she never expected us to learn these things. She was good at getting kids to like her and sounding ambitious, which was good for getting her teaching awards. The only science we ever learned in that class was from substitute teachers.
   Some people actually favor written essays instead of multiple choice questions; I'd argue that such an approach must be done very carefully or not at all, since many such essays are about politically charged issues: "Take a side in the dispute about affirmative action and argue your side." "Should state schools teach the humanities? Take a side and argue it." To argue that an essay grader (who works in academia) can take an objective approach to grading the composition of such essays (on material with which the student is not familiar) is silly -- they're really just a way to see whether the student fits into the academic mindset. (For full disclosure, I tended to do worse on the written essays than on multiple choice questions.)

On the topic of standardized tests and education, I'll argue that we should be much more open to experimenting on kids. If we were to implement nationwide experiments in education, we could have coherent ways of improving curricula (examples might be, "if we teach geometry before algebra, how does that affect mean increase in scores 3 years down the road?" "if we minimize memorization in math and focus on applying core ideas like the Pythagorean Theorem and basic algebra, how does that affect scores?"). I envision this as being similar to the way Amazon and Google experiment with their Web traffic with A/B experiments.

Returning to teacher pay and summarizing: I'm a huge fan of increasing teacher pay, but I think it should come hand-in-hand with clear, objective metrics of success and critical performance reviews.

In the last post, I discussed why we're in a bubble. In this post, I'll discuss why people keep founding startups.

Why people start startups

From an engineering perspective, you might rationally work as an employee in a startup under at least one of two conditions (I'll explain this below):

1. you feel that the founders have significant skill or resources that you lack
2. you are receiving a market-reasonable salary

I should clarify that there are a few other reasons you might reasonably work at a startup. Note that I said "reasonably", not "rationally". I'm leaving "rationally" to mean something that's purely economical.

1. you feel that the company has a great product which will change the market
   
2. you really like working with the team
3. you enjoy working on this product
   
4. you can't get a job anywhere else (unlikely)

Those "reasonable" reasons aside, let's get back to being rational. Let's review the economics of being a startup employee. You might expect two things when you're offered a job at a startup -- a salary and stock options. Typically, you might expect your salary to be reasonable -- and a percent or less of stock options; or you might forego a competitive salary in exchange for a few more stock options. It's not reasonable (I learned) to expect more than a percent or two in equity. Even if you're the first engineer, with a very low salary, you shouldn't expect more than 5% in equity. So let's go with half a percent, which is reasonable in a startup with 20 people.

If you're very lucky, the company might be sold for $100M. When you start, the company is probably already worth a fair amount -- say $20M, so the option income might be $400k. Tack this onto a slightly-below market salary of, say, $80k (for someone graduating with a BS), and you've made $180k per year. And again, that's if you're lucky. In contrast, it's not unlikely that you'd make almost this much as a late employee at Facebook, which is going to offer restricted stock units, a much more reliable way of making decent income. To be more clear: there's also a decent chance that the startup will be worth nothing in two years. Then you're out of work, you have Netscape on your resume, and you've made below-market wages for a while.

To be sure, startups aren't a bad lifestyle: you have flexible hours, you learn a lot, and there are a lot of reasonable reasons (second list, above) to work for them. They're particularly great for new grads.

But if you have the same skills and resources as the founders, or at least think you do, then it's completely irrational to work for them, when you could be taking a higher level of equity from the start. A 20% share of that $100M company is now $20M, or $5M/year. With even a 10% success rate, you're taking home an average of $500k / year, compared to your $120k from before.

My suspicion is that this explains the exploding number of startups we're seeing: many reasonably-skilled founders are finding that they don't want to work for Mark Zuckerberg: they want to be the next Mark Zuckerberg.

How will this turn out? My hope is that founders will start giving considerably higher equity to non-founding employees -- co-ops, effectively. Unfortunately, I don't have high hopes for this. First, it doesn't make sense to give high equity to employees whom you barely know. Second, distributing a company more widely gives much less control to the founders. This distributed control might lead to all sorts of infighting, indecision, and bad decisions.

High-risk startups as high-leverage investments

Nobody can go far without hearing discussion about startups or speculation about bubbles:

http://www.businessweek.com/smallbiz/content/mar2011/sb20110329_239744.htm
http://dealbook.nytimes.com/2010/12/03/a-silicon-bubble-shows-signs-of-reinflating/
http://www.businessinsider.com/a-few-points-about-the-tech-bubble-debate-2011-3
http://blogs.reuters.com/mediafile/2011/03/24/the-41-million-mobile-app-or-the-web-bubble-debate-now-in-full-color/

In this post, I'll talk about why we're in a bubble. In the next, I'll talk about why people are still founding startups.

I'm not sure what to make of the startup market either: is it really a bubble? I'll argue that it is. I'll give non-rigorous arguments that (A) tech startup investments tend to be highly leveraged against the broader stock market and (B) our market has at least two factors which might contribute to bubbles. I encourage any readers to contribute market data or ideas.

(A) To see why tech startups are a highly leveraged against the broader stock market, consider that many tech startups are eventually acquired by other companies. In many recent cases (at least in the Web- or consumer-facing cases), they are acquired by large companies like Google, IBM, Apple, or Facebook. These acquisitions, however, typically come when the acquiring firm is flush with capital -- and have enough that they can comfortably afford to buy entire companies. Now, a 10% increase in the stock price of Google might give it $18B extra to spend. Surely not all of this will go towards startups; say just 5% of it does. Even that would generously buy about ten $100M startups. In short, a 10% increase in the stock market is enough to promise 10 great prizes to 10 great entrepreneurs. VC firms see this, so they're willing to fund 10 companies -- or more. After all, if they miss on a few but are reasonably accurate, they'll be fine. In fact, they'll be better than fine.

Added 30 March 2010:

The leverage part comes here: say the market increases 10% again. Google can now buy about twenty $100M companies. The market for startups has doubled, on a 21% increase in the stock market. This example is exaggerated, since there's always a market for startups, but it's reasonable to assume that, if tech companies' stocks dropped to 50% of their current value, they wouldn't be acquiring anything for a while. Going by this assumption, the leverage is at least double the stock market.

I've also realized that "beta" might be a more appropriate term to use than "leverage".)

(B) The stock market has bounced back in the past two years, with indices such as the S&P having risen by about 60%. Naturally investors are feeling cushy again (I am, even as a novice investor: I bought an unnecessary car a few months ago). Part of this increase is due to low interest rates: stocks are simply more attractive than bonds right now. Add to this the fact that banks are able to borrow money at record-low rates, and in many cases they're re-investing it in exactly those VC markets that we are talking about.

Here's how it will happen: once our stock market dips again, say 15% (and it's bound to happen eventually, even if it goes up before), Google and other established companies will pare back their acquisitions -- even if it's largely an emotional move. It won't be terrible for them, since they have clear business models and low burn rates. VCs will realize -- from market data, industry hearsay, and experience -- that it's not worth investing as freely in high-risk startups. After all, their hundreds of $100B tech startups no longer have buyers. This won't be the end of VC capital, but it will be enough for a number of tech startups to log off. Of course, many VCs will be hurt by this, which will have second-order market effects as some go bankrupt, and the stock market will drop further, as value is lost overnight. And that's how the bubble will burst.

Google Trends: World War 3

The global recession has encouraged a number of social uprisings, including the recent overthrow of Egypt's autocratic government and milder protests such as those across Europe and in Argentina. Right-wing extremism is predictably on the rise.

It's rather apocalyptic to argue that World War 3 is around the corner, given that I know little about history. Still, I'm placing my bet on increasing nationalism and economic warfare in the next 15 years.

What are people searching for? Right now in Google News, "world war 3" is ranked higher on autocomplete than "world war 2" (this is very possibly an artifact of their autocomplete algorithm). World War 3 picked up in news searches around mid-2009, although it's not clear what the units on these searches are; perhaps the phrase only became popular enough to appear at all at that time. It's also still less frequent than "world war 2".

At the same time, "world war 3" is almost as popular a query as "nationalism": the latter has become less prominent over time. Hedged bets such as "economic warfare" and "trade war" are much less frequent, until you look at concrete examples of these, such as "tariff". "tariff" really picked up in mid-2009 and is much more popular than any of the above queries. India, Norway, South Africa, and Hong Kong are by far the biggest country sources of these queries. Washington, D.C. ranks highest among American cities.

Link to this search

You cannot Endure / Industrial Pesto!

Larry Hosken provided the winning caption to this photo (which was taken from here.)

Clementi's suicide

A freshman at Rutgers committed suicide shortly after his roommate secretly recorded him making out with another guy.

First, there's no question that this is a tragedy.

Further, what Ravi did is terrible: it's an invasion of privacy, and he deserves to be punished for that.

However, Clementi would probably have been less likely to commit suicide if society were more accepting of homosexuality. That Ravi watched Clementi himself may have indicated that Ravi was expressing reaction formation, a common behavior among people battling their homosexual feelings by acting very much against them. Further, he was not attacking Clementi directly; he was clearly doing and saying these things for his friends, probably in part to try to avoid rumors that he might be gay since he has a gay roommate (yes, rumors like this do spread in college dorms). This is unfortunate, but it happens because homosexuality is still socially taboo. Further, what Ravi did is still socially accepted in many social circles (take my highschool football team, whose members tormented gay students in my high school, or my parents and their friends, who make jokes about gay people. This phobia is common in much of America, suggesting that Ravi didn't realize that what he was doing was such a big deal.)

Governor Christie said he didn't see how Ravi and his friend could sleep at night "knowing that they contributed to driving that young man" to suicide. First, we all as a society contributed to this because we do not tolerate homosexuality. Second, such statements are overblown and cruel: suicide is a tragedy, but nobody should be made to feel guilty about something like this (I say this because someone close to me committed suicide, and it's confusing enough to cope with with these things without the guilt).

Ravi should be punished for invasion of privacy, but his punishments should match that for similar behavior, regardless of this death. To do otherwise would be finding a scapegoat for a problem (i.e., widespread homophobia) that we as a society are unwilling to accept responsibility for; instead, we should all admit a little bit of responsibility and try finding ways to improve society's view of gay people.

Add a caption to this image.

In the comments section, add a caption to this image. The best caption gets to go here. The image is taken from this article.

Parroting of the Republican talking points

David Brooks over at the NYT is parroting the typical Republican talking points.

http://www.nytimes.com/2010/07/20/opinion/20brooks.html?hp

Here are some current typical Republican talking points he's squeezing in here, and why they're bad arguments:

1. "the middle is rising up in revolt in the tea party movement" (although he's careful not to mention the tea party) Where's your source, except for Glen Beck and Fox News? Sure, there's a tea party "movement", but it's still relatively small, and Obama's ratings are still relatively high.
2. "Obama and friends are arrogant and think they know everything with their technocratic analysis" Arrogance is a cute spin on obama's cabinet's credentials, but these people certainly don't think they know everything, and you can hardly blame them for using rigorous analysis to understand what's going on. More importantly, they also don't make things up when they don't know something, or when they don't have enough evidence to support their side, and they don't have a record of distorting science.
   
3. "there are sweeping changes going on that people don't agree with" There are always sweeping changes going on in government. There will always be things people don't agree with. But many people are also happy with the changes occurring. See the reader's comment below.
   

I'm not arguing that the Democrats are perfect. U.S. citizens have reasons to be angry at them, too. But these talking points -- outrageous as they are -- are not the right reasons. Instead, Republicans seem to think that real Americans are too dumb to understand more sophisticated arguments, or else that these reasons are not emotionally captivating enough for a broad audience.

In any case, one NYT reader points out in the column's comments that "Brooks only quotes Heritage Foundation and American Enterprise Institute studies".

Another NYT reader (Stefan Cover) makes a good point about how bureaucracy is not really the target of peoples' anger--

Come now - this is not about the role of government; this is about control. Most of the angry would be perfectly happy with lots of bureaucracy if they felt that it served their purposes and was controlled by those who shared their social and political views. Most of their anger is spawned by feelings of disenfranchisement, not by the proliferation of bureaucracy. You vastly overestimate the intelligence behind the backlash

The economics of trust

In this post, I'll explore interest rates with a focus on trust.

Earlier this year I was listening to the book-on-cd version of Alan Greenspan's Age of Turbulence. Greenspan's political views aside, it was an interesting biography which provides some important insight to a dabbler in economics.

One of the things mentioned by Greenspan was the importance of trust in a capitalist economy: Greenspan noted its importance multiple times, citing it as a reason for the problems with some of Russia's past failed attempts at capitalism. And, indeed, it seems that trust can be a useful lens through which to view much of our economy.

First, trust is behind any notion of financial credit (and the two are really synonymous): our own economy has been in dire straights recently because banks are less willing to lend to one another or to individuals. Normally this would drive interest rates up, if the government were not willing to subsidize the credit markets with its record-low federal funds rate. This subsidy of trust can sometimes do wonders to the system, with all sorts of second-order effects (these second-order effects include making safer investments less attractive, which leads investors to invest in more risky securities).

In addition, trust allows disparate groups to work together. Instead of spending economic resources competing, or spending these resources duplicating work, groups can turn attention to shared goals and exchange of legit promises.

Finally, trust improves personal responsibility, as individuals aim to improve their credibility in a system which rewards it.

Trust Bubbles

At other times, subsidized loans can inject too much trust into the economy, as happened originally when the interest rates were too low in the middle of the 2000-2010 decade. Here, market participants all over felt too much trust: mortgage lenders trusted that borrowers would pay back their loans (okay, sometimes this was not true). Both borrowers and lenders trusted that the houses being purchased would continue to be valuable. Once it was clear that these houses were not worth as much, owners began walking away. And those buying these mortgages from the lenders as mortgage-backed securities trusted that the mortgages were actually worth something.

Note that it's not clear whom these borrowers trusted -- there was a mutual trust shared by all market participants -- essentially a bubble. But none of this could have happened if people hadn't trusted one another so much. So how much trust is optimal? I'm not sure yet.

Trust in low-income populations

I'm convinced that improving trust can help certain low-income or historically oppressed populations in the U.S. improve their economic situation. Many of these populations have been found to have low interpersonal trust, and conspiracy theories are associated with lower income (these theories both feed off and encourage mistrust, although the object of this trust is unclear).

Perhaps there could be an effort to improve trust in these socioeconomic groups by subsidizing trust in them. We're already doing this to the larger economy with interest rates and with direct payments to other countries (take our subsidy of trust between the U.S. and Pakistan); it is only natural to improve trust in those parts of our population which need it most.

The advantages are clear: Sam will happily lend his paintbrush to Jonny next door because he knows Jonny will return it. Sam can trust that his neighbor Maggie will carefully watch his toddler while he's at work. And Maggie -- who still needs to support her family -- knows that Sam will pay her at the end of the month when he gets his paycheck. No need for Sam to waste money on payday loans. Jonny does not need to buy his own paintbrush. And Maggie's can make an income from watching Sam's kids. Everybody wins, because of shared trusts.

How can we provide these subsidies? Subsidized sub-prime lending has already been inadvertently tried and failed.

Here are some potential scenarios: the city offers low-income resident groups packages (i.e., money) up front to paint, clean, and maintain certain areas of the city. Once a project has been completed, a new package is offered. This would foster a better relationship between the city and residents, while also improving inter-resident relations and property values.

Another possibility: the city can help property owners to offer financial "options", or a share of any increase in home value, to renters. With an actual stake in the value of their homes, renters will have a clear incentive to improve and maintain their homes. Renter-tenant trust increases with the shared incentive.

Finally, a trust campaign might help. With modest funds from the city's stimulus money, the city can offer an advertising campaign, encouraging residents to trust one another.

These possibilities may or may not work. But if we are able to discern and define exactly the trust we should aim to improve, there must exist an appropriate subsidy.

Finally, the economic importance of trust extends to the city government. Only when the city has demonstrated that its interests lie first and foremost with Saginaw residents will the residents trust the city. And when they trust the city, everyone wins.

(This post is a bit scattered as-is. I may submit some polished version of this to the Saginaw News)

EU flights (including flights by US carriers to/from EU countries) must put you up when you're stranded

Flights by EU carriers and all flights to or from EU countries must put you up and pay for meals when you're stranded. They also must pay you a fee if it's their fault, and they need to reimburse you for cancelled flights.

From TFA:

The rules themselves are fairly simple. When a flight is canceled, regardless of the cause, a passenger can choose to get a refund for the unused portion of the ticket or be rerouted on another flight. If this results in an overnight stay, the airline has to pay for a hotel, meals and transportation between the hotel and the airport, even if the cancellation is due to weather or any other factor outside the airline’s control.

If the cancellation is considered within the airline’s control —such as when the plane has mechanical problems — the carrier must also pay each passenger between 125 and 600 euros, depending on the length of the flight and the delay.

Remember this next time you book a flight. It sounds like you might have to make a fuss, but I suspect they'll give in if make it clear that you'll speak up if they don't follow the law.

Recall also that the EU includes quite a few countries.

This is great if you're a EU carrier. I'm hugely in favor of laws like this in the U.S., but I'm also curious about whether such laws provide an incentive for risky flights when conditions are nasty? (Presumably flights are cancelled due to bad weather conditions by the FAA and its EU counterpart instead of by the carrier, mitigating such incentives?)

Knowing when you're in a bubble, case study: college degrees

As we'd seen in the middle of the past decade, knowing when you're in an asset bubble can be extremely difficult, often only obvious in retrospect.

So what are the current bubbles now? It's still hard to say, but I'll posit one bubble. Post a comment if there are other bubbles you see happening right now.

Bubble: The value of a college education. An education is definitely important, but only for certain things and certain people. With very low interest rates, student loans are available at an (apparent) low cost, and many adults dive into an education, with a focus more on the end degree than the actual education: many degrees are simply not marketable. For-profit schools are popping up all over, which means that the value of any degree is decreased, even if these schools are accredited, due to the clear conflict of interest.

And many of these institutions are not accredited at all, including legitimate-sounding names like "West Virginia State University". From Breyer State University:

Is Breyer State University accredited by an accreditor approved by the US Department of Education?

Response: Breyer State University is not accredited by an accreditation agency approved by the U.S. Department of Education. Such approval is a voluntary process, and in fact, the U.S. Department of Education states that accreditation itself is a voluntary process. There is no mandate by federal law for a School, College or University to be accredited. Many good schools are not accredited.

... Breyer State University is an accredited member of [a] private institution...

What they don't tell you is that non-accreditation will prevent many people from getting jobs: some states require job-seekers to divulge when a degree listed in their credentials is non-accredited. And their degrees generally aren't transferable to accredited institutions. That said, it's likely that many employers unknowingly hire people with non-accredited degrees.

I am not suggesting that people not go to college, or even that for-profit schools are inherently evil. But the glut of graduates due to a lower bar from massively available student loans, and due to graduates from non-accredited universities (250k to 500k, by one estimate), will make degrees less meaningful -- and, ultimately, less valuable to future generations. Does that mean fewer people will get degrees? Maybe. Maybe it will encourage more people to get degrees in the short run, since they need to compete somehow. But I suspect that people will gradually find that their investment in questionable degrees is not paying off, and enough people will find that it's more economically viable to skip the degree and make $35k/yr at Uncle Tony's Window Company.

How can you address this bubble? It's not clear how easy -- or ethical -- it would be to short student loans. My hunch (as a non-financial expert) is that there must be publicly traded securities that package up these loans, just like mortgage-backed securities. On the other hand, the federal guarantee of these loans makes them less risky, hence less attractive to short-sellers. So your best best may be to go after the non-accredited (and especially online) institutions that depend on these loans, and to find ways to short them. And remember that you're not attacking education. You're attacking fraudulent education.

Also, make sure the school you attend is a well-known school, that people will recognize. If you're staying local, a major state school or community college that people will recognize should be fine. If you're going national or abroad, try to pick a top-25 school. And, if you're hiring, be scrupulous about checking the accreditation of your newhires' schools.

Engineering life forms

Olivia Judson usually writes pretty interesting pieces for Science Times. Yesterday's article on engineering life forms was a great example (it doesn't present new, groundbreaking research; but you feel like you've learned a bunch after reading the article...

China [burns more coal] than the US, the EU, and China *combined*

Apparently either the US and the EU burn no coal, or China burns infinite coal:

China is the world’s largest consumer of coal, burning more than the United States, the European Union and China combined.

From this article about a freighter crashing into the Great Barrier Reef near Austrailia.

(Note: it looks like this typo has been fixed in the posted article.)