Wednesday, November 30, 2011

Jason Chaffetz, no longer just a cot dweller

Instead of the usual ridicule we hurl here on politicians both local and national, we’ll break with tradition and render kudos. Jason Chaffetz, the Republican US Representative from Utah’s 3rd district, is in the currently in the news because of an immigration bill he recently sponsored. The bill, once it passes the senate, would eliminate the 7 percent cap which kept the citizens of particular foreign countries from gobbling up all the visas issued to enter the US. The 7 percent cap is arbitrary, as China and India alone hold 40% of the world’s population. Why should small countries like Chile arbitrarily have as wide a door into the US as China, right? They shouldn’t, so thanks Rep Chaffetz.

Chaffetz, you might remember, in 2008 went wide right of Chris Cannon (hard to believe, I know), a long-time Representative from Utah, and beat him in the 3rd district Republican primary. He’s come off as a little more gimmicky than substantive, however, as he’s best known for sleeping on a cot in his Washington office and introducing legislation to restrict the use of full-body imaging scanners at airports. You may not have known that he was a kicker for BYU and received a BA in communications (okay, so he doesn’t have the intellect or credentials of, say, a Mitt Romney). He later went on to work for Nu Skin, from where it seems Jon Huntsman plucked him to be his campaign manager in 2004 and subsequent chief of staff (did he know him or something? the Wikipedia profile is silent on why Huntsman thought Chaffetz fit for the job). I’m probably just in a sour mood, but shouldn’t the populace just naturally require some sort of educational requirement—perhaps something rigorous, or past the bachelors—for those who would make this country’s laws and determine the federal budget?

But, anyway. In terms of immigration once again, the Chaffetz bill, while a step in the right direction, does nothing to increase the number of educated immigrants allowed into our country, which is a travesty. The world’s best and brightest come to our universities, receive invaluable training and connections, and then we force most of them back to their home countries. It’s no wonder that Michael Bloomberg (mayor of NYC, billionaire) called this a policy of “national suicide.” And, no, foreigners don’t take jobs from Americans, as the number of jobs at any one time is not fixed. Immigrants are highly entrepreneurial. In fact, a recent survey found that 52% of Silicon Valley startups were founded by an immigrant. We’d make a decent amount of headway in helping our country’s housing crisis, entitlements problem, and largely stagnant incomes if we stapled a greencard to the diploma of all those who come to our universities from abroad.

Salt Lake City, on the grid

I love to travel not only for relaxation but also to casually observe how various societies have made a go at civilization in the modern city. I’ve also lately been reading more into the way city design plays into economic growth, so in future posts I’ll look at a few examples of what cities to promote and impede higher living standards. In the first of a series of Salt Lake City-specific posts, I wanted to say a few words about the layout of the city, the grid system of addresses, and other sundries.

First off, of course, Salt Lake City was founded in 1847 as Brigham Young and his persevering crew arrived here from points east. One of the first things they did was establish the temple block, which to this day is the heart of the city and probably the main attraction in terms of SLC-specific cultural and spiritual sites. Like other western cities of the time, such as Dodge City (1872) and Oklahoma City (1890), Salt Lake is on the grid system (apparently, originally designed by Joseph Smith; see figure). SLC is perhaps most known for it because of the Mormon-style exactitude with which is was carried out. This means that downtown and other parts of the valley are neatly blocked out, and the streets’ names are usually their address (100So, 3300So, 700E, etc.). At 600So (often just called 6th South) and need 1000So? Just head south, wary traveler. All of Salt Lake County is on the same grid. The temple site, being the heart, is the zero-point in terms of addresses go in SLC. The corner of Main Street and South Temple specifically is where you’re at 0 East, West, North, and South, whereas in other cities it would be at the capitol building or courthouse.

The blocks in Salt Lake are large, being roughly 8 to a mile (making each block a square furlong). Brigham Young was apparently one who loved to drive unfettered, as the city streets were made wide enough so a wagon team could turn around without resorting to profanity. It would have been nice if Young would have acted as a prophet when doing urban design (as he did in other matters), as the wide streets tend to make the city less walkable, less aesthetically appealing (thought it’s still gorgeous), hinder economic growth (cause the city’s less dense), and promote driving.

In terms of finding places in SLC, whichever number in the address is round (a la 700E, 4500So) will be the street and the precise number will be the house/business number (a la 5107So or 2146E). A further pleasant oddity is the fact that odd numbered addresses on streets going North/South are on the east side of the street (and evens are on the west); for addresses on streets going East/West, the odd numbers are on the north side with evens across to the south. Go explore and feel the exactitude.

Tuesday, November 29, 2011

The siren song of the student's t-test

Switching gears a bit, I want to touch on a common logical and statistical fallacy that pervades the sciences and clouds research results. While the may seem wonkish, even those who’ve just had entry level math have probably dealt with the t-statistic or student-t test. I was motivated to discuss this by an article I received while TAing for a stats class last Spring. It was by Tom Siegfried at and discusses several of the logical fallacies commonly used when presenting scientific results. Now, don’t roll your eyes just yet, as the student-t test is used in countless studies across a wide variety of fields. Knowing how to correctly interpret the results of such a test will come in handy when you’re confronted with the myriad—often conflicted, and possibly important—studies reported in the news.

For those unfamiliar, the t-test was developed by William Sealy Gosset, who worked at the Guniness brewery in Dublin in 1908. He was forced to use a pen name, which is where the term “student” was born. What his test does is tell you the odds of a sample of data (which has a Gaussian distribution) randomly occurring against the backdrop of a population with a similar standard deviation. In addition, the test is used to compare to two samples of data (where one is the control and the other has been altered in a deliberate way) and determine the odds of the altered data set randomly occurring within the control data set. This is done by comparing whether the means of the two (Gaussian distributed) samples are equal. Whether using a lookup table in a textbook or a program such as Matlab, the result is encapsulated in what’s called the p-value. And this is where the confusion arises.

Depending how strict your study is, one may conclude that their results are significant if the p-value is less than .05 or .01. This is saying that, only if the result occurs by chance only 5 or 1% of the time, would they consider the change from the control to have a significant statistical effect. As this article mentions, however, few studies actually correctly interpret the results of the t-test. You’ll often hear that if the p-value is .05, then the author can be 95% certain that the change made to the control caused a significant difference. In the sciencenews article, Tom Siegfried diagnoses the problem with this:
I think that in life we make these type of transposed conditional type errors more often than we realize. To summarize, the correct way to interpret the results of the of value is the following: for a p-value of .05, there is a 5% chance of the altered sample occurring randomly if the change from the control has no effect on the result (i.e., if the null hypothesis is true).

If these t-statistic complications weren’t enough, Siegfried also explains some issues with the test even when it’s properly interpreted. First, if your p-value is less than your (.05 or .01) threshold, then either there is a real effect present, or the result was an unlikely fluke (i.e., sometimes it’s the latter and we won’t know). On the other hand, if your p-value is greater than your threshold, then either the studied effect doesn’t exist, or perhaps your test wasn’t powerful enough to detect a small but real effect. Lastly, statistical significance may not mean practical importance, as the studied effect may be so small such that it effects few situations or people.

While these points may seem recherché, they're important to keep in mind when interpreting the barrage of studies we come across (in the media and elsewhere) as we try to take “small steps toward a much better world.”

Monday, November 28, 2011

Is spending out of control?




Wednesday, November 23, 2011

Mitt—the hater of boomer entitlements... and apparently young people

Continuing our series on Mitt Romney, today we’ll briefly address his opinion of the sustainability of our current entitlement system and the generation that put it in place. I’ve written about this in the past, and think it’s important to make a bigger fuss about who’s getting the short end of the stick

After talking about the people who fought in WWII (Tom Brokaw’s so-called Greatest Generation) and the sacrifices they made to win the war and build the country, on page 150 of No Apology Romney goes on to criticize the current generation in charge and the system they’ve established:
Today we find in ourselves at a very different moment in history, and I fear that if we remain on our current track, history will come to know us as this nation’s worst generation—because we will force our children and their children to bear the brunt of our recklessness and the willful neglect of the problems we created. The problem is so deep-seated that relatively few of us in the postwar “boomer” generation even understand at a basic level how we are compromising future generations. If we did, I’m convinced that we would do whatever it takes to set things right. […] Never before has there been a generation of Americans that has imperiled the following generations’ opportunity for achievement and advance as we have done. [emphasis his]
Mitt gets it. The boomers have set up vast entitlement programs (Medicare and Social Security among them) and have essentially left the next generation to find the requisite funding. And yet, for some reason, young people aren’t mad as hell. I suppose it has something to do with indifference and simply not knowing much about how the federal government works.

Mitt continues on about how this entitlement problem might be fixed (by cutting benefits and raising payroll taxes) and then finally discusses who will do the fixing:
It is important to conduct the entitlement discussion without scaring our senior citizens, which is why the reforms that are necessary must be made concurrent with guarantees to our elderly that their benefits will not be slashed and the promises that relied upon will not be broken.
Sounds good Mitt, but let me get this straight. Those that have created the broken system (i.e., the boomers) won’t have to share in any sacrifice to fix it? Unbelievable pandering on Mitt’s part here; he knows that seniors vote en masse. If something’s going to be done with our country’s entitlement problem it has to be done by shared sacrifice. Why should those who have broken the system get off scot free?  DO NOT let that happen. The boomer generation has practically thrown our country into the financial sewer and they damn well better help the rest of us pull it back out.

Tuesday, November 22, 2011

Romney is regulating his party

Continuing Mitt week, we'll now address his views on the (oh so sexy) role of regulation in the economy. Those who have been watching the debates have surely noticed that most of the candidates either want to destroy or neuter most government agencies (if they can remember them), claiming that the regulation they impose is the cause of the economic malaise. As the burden of regulations imposed on businesses during the Clinton and Bush administrations wasn't any less than it is now, it appears that the theory falls flat in the face of a bit of analysis. The economist Jared Bernstein, for example, weighs in here. So, does Romney toe the party line on this or provide a nuanced perspective on a complicated issue? I'll quote directly from page 136 of Mitt's No Apology:
The Republican Party has ong been an opponent of overregulation, and rightly so. But I believe some people in my part are overly fond of bashing regulation as the constant enemy of growth and competition. They are certainly right about some regulations, but there are wrong when it comes to others. The rule of law and the establishment of regulations that are clear, fair, and relevant to contemporary circumstances provide the predictability and stability that is needed for investment and risk-taking.
Back when I was at Bain Capital, one of our first venture capital investments was in a technology that allowed machining companies to reuse their cutting oil--the cooling lubricants that are used in drilling, routing, and cutting metals. New government regulations had just been established  to prevent companies from simply throwing used oils down the drain. The regulations ultimately led to better machining industry practices, but because they weren't enforced for almost a decade, we lost our investment. Michael Porter is convinced that, far from being a drag on the economy, "National advantage is enhanced by stringent standards that are rapidly, efficiently, and consistently applied." I wish more Republicans and Democrats alike understood that important fact. [emphasis his]
It looks like Mitt is two for two thus far on the economy this week. While some regulations needlessly distort markets, others rightfully force our companies to innovate, which results not only in a cleaner and safer planet, but also one in which American firms can compete with those abroad. One of these days I'll post something he gets wrong regarding the economy, but for now I'm not seeing it.

Monday, November 21, 2011

Mitt Romney—smooth tax operator

It’s Mitt Romney week here on Deferred Consumption and it comes none too soon, considering his prominence (photo is from here). A friend was recently telling me how Romney’s book, No Apology, had given him a more favorable opinion of the former Massachusetts governor, so I decided to pick it up. As I go through the book I’ll be highlighting certain passages and the relevant policy details in an effort to more properly vet the man, and hopefully make some (admittedly nuanced) comparisons to Jon Huntsman. I’ve also singled out the former Utah governor because of his sane policy proposals and level head, which is in stark contrast to what we’ve seen in the other candidates.

Today we’ll be discussing the flat (or fair) tax, which has become popular in Republican policy circles the last couple years. The basic idea is to have people at all income levels pay the same tax rate. In 2004 Mike Huckabee promoted such a tax, as have Rick Perry and Herman Cain in the current election cycle. These plans often simply rely on a consumption, or sales, tax, but are occasionally combined with a low income-tax rate. Using solely a sales tax under such a system (and replacing local taxes), Romney estimates the total tax rate would end up just under 35% for everyone. On page 130 of No Apology, he weighs in:
One challenge of the fair tax is that the very rich would see their taxes go down—a lot. If Bill Gates makes about a billion dollars a year on his investments, for example, his current taxes would be at least $200 million. Let’s say he spends $50 million on himself and his family every year—which is a huge sum and I doubt he spends that much, but let’s use it for an illustration: Under the fair tax, Bill Gates would pay “only” about $17 million in taxes—his tax bill would thus drop from $200 million to $17 million. The Wall Street Journal found that the enormous amount saved by the wealthiest under the fair tax would be made up by a higher tax burden on the middle class. This is not an outcome that will or should gain traction with the American public.
While such a consumption tax would encourage Americans to save, on this issue Romney gets it exactly right. A fair tax would cause the tax burden to be shifted towards the middle (and lower) classes, rather than resting mostly on the rich. It’s refreshing to hear such a sensible and contrarian take on this often popular Republican policy proposal. Stay tuned for more Mitt.

Friday, November 18, 2011

Early childhood development is under-appreciated

Turning from money to something a little more important, Jon Cohn at The New Republic and Kevin Drum at Mother Jones have a couple startling posts up about early childhood education. The story starts in Romania, where the former Communist dictator apparently banned abortion in order to increase the country’s population. Not only did this help their population but it also left the country with warehouses full of orphans, who received little attention or human-interaction. A neuroscientist, Charles Nelson, was later able to convince the Romanian government to allow some of the kids to go live in foster homes. Subsequently, a group of researchers studied the developmental differences between those left in the orphanage versus those who left. John Cohn:
Prior to the project, investigators had observed that the orphans had a high frequency of serious developmental problems, from diminished IQs to extreme difficulty forming emotional attachments. Meanwhile, imaging and other tests revealed that some of the orphans had reduced activity in their brains. The Bucharest project confirmed that these findings were more than random observations. It also uncovered a striking pattern: Orphans who went to foster homes before their second birthdays often recovered some of their abilities. Those who went to foster homes after that point rarely did.
 This past May, a team led by Stacy Drury of Tulane reported a similar finding—with an intriguing twist. The researchers found that telomeres, which are protective caps that sit on the ends of chromosomes, were shorter in children who had spent more time in the Romanian orphanages....It was the clearest signal yet that neglect of very young children does not merely stunt their emotional development. It changes the architecture of their brains. [emphasis is Kevin Drum’s] 

Did you catch all that? The children receiving less human interaction, and thus less intellectual stimulation, not only had psychological developmental issues, but also experienced physical changes to their anatomy! Apparently the amount of stimulus a child receives before they’re two can cause developmental losses that can’t be undone, no matter how much one spends on primary education. Kevin Drum rightly comments on the need to spend more money on early childhood development and posts the figure to the right, which shows the impact of the mother’s education on the subsequent achievement of their child.

Couple things I take away from this chart. 1) No matter how fair your economic system, we’ll always have a fair amount of economic immobility. 2) By age 3 (!) children already show substantial differences in their cognitive ability. Sadly, it appears that a lot of the K-12 money is being misspent. For the full story, do take a look at the original New Republic piece here and the subsequent The Mother Jones piece here.

Thursday, November 17, 2011

For Immediate Consumption

Today we’ll start a new feature here where I highlight various interesting articles around the web. I find that people who really want to know what’s going on in the world are disappointed by the local tv news (for certain), but also by local and even national papers. We’ll see if we can’t point you to some new, interesting sources.

Ezra Klein discusses the congressional super-committee (which is supposed to fix the budget) and provides a wrap-up of the day’s best articles.

The Economist’s Democracy in America blog on Newt Gingrich’s rise.

Business Insider on how Europe may be “days from a catastrophe.”

Paul Krugman explains why inflation is still not a problem.

The New York Review of Books talks about America’s new robber barons.

From the NY Times, this article is by a financial planner (apparently from Utah) explaining how he lost his house. Has great info on the housing mania that gripped the country 5 years back.


In a future post we’ll highlight a few different blogs and alternative news sources that might have been under your radar. Thanks for reading.

Wednesday, November 16, 2011


Newt Gingrich has been churned to the top of the heap this week in terms of the not-Romney set of candidates (photo by Gage Skidmore). As he was largely ignored previously in the race (and his staff once quit en masse, leaving his campaign on life support), this’ll give us an opportunity to find out whether we should continue ignoring him. By way of background, Newt was a congressman from Georgia from 1979-1999, and the Speaker of the House from for the last four of those years. In the 1994 elections he was “at the forefront” of the Republican take-over of the house, which had been controlled by Democrats for 40 years. Publicly and politically, he was to Bill Clinton what Nancy Pelosi was to George Bush. Impressively, he and President Clinton were able to pass a landmark welfare reform (1996) and actually balance the budget (1999; first time since 1969).

Newt has a PhD in modern European history from Tulane (1971), and, since resigning his congressional seat in 1998 when Republicans lost the house, has been a popular conservative analyst, consultant, and commentator. He’s currently married to his third wife, having cheated on his previous two wives and subsequently marrying the one he was cheating with. The affair that started his current marriage ironically took place during his time as leader of the Republican investigation of Bill Clinton’s dalliances. Interestingly, he blames his infidelity on his ebullient patriotism: “There's no question at times in my life, partially driven by how passionately I felt about this country, that I worked too hard and things happened in my life that were not appropriate.”

Seeing as how I don’t require the President to be a Pope or a Prophet, however, the moral lapses, sad as they are, shouldn’t automatically disqualify him for office. In terms of policy, in the past he’s shown signs of moderation, as he supported an individual mandate (saying his health care views were closely aligned with those of Hillary Clinton), agreed with John Kerry on global warming, and criticized Paul Ryan’s trumped-up health care plan as a piece of right-wing social engineering. Lately, however, it appears he’s moved sharply to the right, switching positions on both the mandate and global warming. It's hard to tell exactly where he stands, however, as he has a knack for refusing to answer any questions with any degree of detail. It appears that by taking an erudite-sounding macro view of everything he thinks he’ll impress voters.

Newt has expressed contempt for the debt reduction super committee, and instead wants to implement the lean "Six Sigma” management program in the federal government, expand energy exploration, have states set welfare eligibility, and expand research for cures to diseases such as Alzheimer’s. Indeed, a weird grab bag of ideas that probably wouldn’t make a dent in the budget. If one wants to reduce the trajectory of the deficit, you have to start with Medicare, period. Newt’s currently taking flak for a $300k $1.6m payday from Freddie Mac before the financial crisis. As I find more specific positions I’ll post them, but, as Kevin Drum points out, apparently Newt's website asks voters for their ideas instead of explaining his own, so I'm not sure there's much to find. Hopefully Gingrich’s time as the anti-Romney is short so we can move on to a more level-headed candidate (such as Huntsman and… er, Huntsman).

Tuesday, November 15, 2011

Economic mobility? Not what it used to be

When discussing the Occupy Wall Street movement or the large and growing income disparities present across America, some invariably push back by saying that the unemployed just need to try harder, and that if people would do so the great economic mobility levels in this country will take care of them. Indeed, supposed high levels of income mobility (up and down the ladder) is probably one of the only ways one can justify the fact that so much wealth is had by so few. No matter one’s political persuasion, equality of opportunity is the lens by which we should be examining policy issues.

If that’s the case then, we may have a problem. Jared Bernstein recently flagged a paper by Katherine Bradbury (2011) of the Boston Federal Reserve, which shows that income mobility in America peaked in the 1970-1980s and has markedly declined since then. See the figure above, from that paper. This holds for both poor people moving up and rich people coming down and appears likely due to declining levels of taxation from the 1980s onward. Bernstein summarizes:
As Bradbury puts it:
This notion that where you start is an increasing determinant of where you end up poses a fundamental challenge to a basic American value.  Most of us don’t seek policies to ensure equal outcomes, but we do seek equal opportunities.  The combination of increased inequality and decreased mobility suggests the violation of both: less equal outcomes and diminished opportunities. 
Moreover, I believe these two results are not simply correlated over time, as Bradbury shows, but causally related.  That is, higher inequality is itself driving a chain of events that leads to lower rates of income mobility. [emphasis is his]
Not only are income disparities widening, but people are having a harder time moving out of poverty. Not a pretty picture.

Monday, November 14, 2011

Should the boomers get off scot-free?

Oftentimes in the presidential debates you’ll see politicians talking about trimming government spending while promising retirees that their social security payments, medicare, and other government-supplied largess will never be cut or compromised. These promises are made by politicians of all stripes as retirees generally have one of the highest voter turnouts of any age group. The pandering to this age group, like most pandering, is shameless because it essentially consists of trying to win votes by promising stuff. But, you say, don’t seniors need a little extra help cause they’re not working, and maybe even a discount at the movie theater? Well, no.

Once upon a time, before social security was around, there were a striking number of seniors living in poverty (yes, despite the formerly ubiquitous pensions of yesteryear). See the chart above. As the chart also shows, the poverty rate has plunged for those over 65. The Pew Research Center recently published a study which compares wealth levels among different age groups and concludes that from 1984-2009 households headed by adults 65 and older saw their median net worth rise by 42%. In households headed by someone under 35, the median net worth had declined by 68% over the same period (notice the rising poverty rate in the chart). This results in the fact that older households have around 47 times more wealth than the median household in the youngest bracket. In 1984 this ratio was only 10. Pretty odd, no?

Surely some of this is the seniors’ good timing. They were able to take advantage of the stock market boom of the 80s and 90s and the bond market boom of the last 30 years. They also were more likely to enjoy the housing market gains make throughout the 2000s (as the young likely bought closer to the top). Current seniors also have their health care taken care of and don’t have to worry about skyrocketing tuition costs (two of the biggest burdens on the young). Surely, though, and this is related, the data reflect some of the consequences of the baby boomer mentality over the last few decades. On average, they consistently spent more than they earned and it worked out fine cause the economy provided palliative debt-fuelled growth. They pulled massive amounts of consumption forward in time, benefitted from the associated stock market gains, and have left the subsequent generation with not only the debt leftover from their party, but also an economy too sick to provide relief. Any presidential candidate who promises future social security cuts, while not asking current seniors to sacrifice, is doing so not out of fairness, but because they're pandering for votes. Don’t let politicians implement anything but shared sacrifice. Considering the gains they reaped and the mess they left, the older generation, if anything, should be asked to sacrifice more than the young.

Friday, November 11, 2011

Want a decent salary? Try engineering

There have been a couple articles in the news lately about average salaries for various career-paths that I wanted to highlight. The first comes from the Chronicle of Higher Education and breaks down salaries by undergraduate degree. The second article is from the Wall Street Journal and not only shows the median salaries by career choice, but also the relevant unemployment rate. A lot 18 year olds would probably benefit from seeing something like this. Sure, doing what you love will make you happy, but perhaps you could learn to love petroleum.

Thursday, November 10, 2011

Debate reaction: are these people just getting crazier?

Just wanted to make a few quick remarks in reaction to the Republican presidential debate last night. It saddens me to have to make these comments, and I really don’t want to be negative all the time, but I’d imagine that some of the audience takes the candidates’ remarks at face value. Thankfully, the CNBC moderators did a nice job calling them on things and following up, but the format only allows so much of it.

First, one of the most interesting things going on in the GOP right now (and no, it's not new) is the fact that so many of the candidates want to flatten the tax rate in America (or have a flat tax altogether). This basically means that, whether one makes $20,000 or $200,000,000 per year, they all pay the same rate in federal taxes. Ask yourself: should a single mother, struggling to work and raise her kids have to pay the same proportion of her income to the government as the hedge fund manager on Wall Street? For the past 100 years the country has said no, that isn’t fair. But now, the GOP is starting to think that—despite the increasing, and astounding income disparity in the country; also see Jon Stewart here—maybe that would be okay after all. Perry and Cain have largely been the ones calling for this type of tax system, but the whole party seems to be coalescing behind it. It boggles the mind.

The second point I wanted to make was regarding Ron Paul and the insanity of most of his economic policies. You might have heard him rail last night against low interest rates and that it would be better if this were determined by the market. Maria Baritromo (who’s dubbed the Money Honey), to her credit, called him on it, asking him whether it would help the economy if people had to pay more interest on their mortgages, car loans, and credit cards right now. He dodged, of course, but she was right and that’s exactly what would happen if interest rates went up. Ron Paul apparently doesn’t realize that most people in the country are paying interest instead of earning it, because he went on to bemoan the plight of senior citizens, who now can’t as easily live off of their portfolios due to low interest rates. According to this (and his claim is crazy anyway), senior citizens are doing just fine, thank you. The government has coddled that part of the population for way too long, as I’ll detail in a future post.

I’m surprised to still be shocked by the kind of policies that are being promoted at these debates, but they do indeed seem to be getting crazier. What are the two main economic threads running through the country right now? People have too much debt to spend much money (hence the continued malaise), and income disparity is at an all time high (hence Occupy Wall Street). What do Ron Paul, Rick Perry, and Herman Cain suggest? Make peoples’ debt more expensive and provide tax cuts for the wealthy. This should be enough to help people decide against voting for these three candidates. In future posts, I’ll discuss who's still viable, their policies, and some of the differences between Huntsman and Romney.

Wednesday, November 9, 2011

Italy in the cross-hairs

Not sure how much play this is getting in the media, but Italian 10 year bond yields are now above 7% (at right). The country cannot afford to pay that much interest and a vicious cycle looks to be occurring as investors realize this and stop lending. While Europe had a chance to rescue Greece, Italy is the ~10th largest economy in the world and much too big to bail out. Those Euros in your drawer might just be a thing of the past pretty soon. We'll see how the Republicans feel about it tonight during the debate (at 6 MST).

Watch the Euro disintegrate (via Italy's bond yields) here. Watch US markets here.

Ezra Klein weighs in here.

Paul Krugman contributes here.

Ryan Avent of the Economist comments here.

And Kevin Drum describes the situation here.

Tuesday, November 8, 2011

How to start getting your money to make its own money (and why it's not that hard!)

Instead of the usual criticism, in this post I thought I’d suggest a few avenues for those who are looking to learn more about personal finance and investing. It seems that most people have a decent grasp on the fact that they should spend more than they earn, but hesitate when dealing with the world of investing. Things are indeed scary out there, but there are a few havens where one can get a fair shake out of the financial markets.

In terms of basic money issues that more relate to the idea of creating and investing your surplus, the best book out there is The Richest Man In Babylon. No, it won’t tell you what mutual fund to use, but it contains some of the most plain and upfront advice on how to create a nestegg. And best of all, you can read it in a few hours. Another book worth mentioning is Your Money or Your Life, which mainly deals with how to bring your spending better in line with your income. Even if you’re doing well on that front, it provides more motivation as to how to get off the hedonic treadmill and properly evaluate whether your purchases are worth the time it takes to earn the money. This book made me think I have too much stuff, which sounds about right.

Books on personal finance:

The Wall Street Journal Complete Personal Finance Guidebook by Jeff Opdyke: This is the one that helped get me started. It goes over the basics of saving, insurance, investing, retirement planning, stocks, bonds, and IRAs. It treats complicated issues in simple terms and is a great reference book to keep on the shelf.

The Little Book of Main Street Money by Jonathan Clements: The author is a beloved former personal finance columnist for the Wall Street Journal. I used to read his stuff sitting around the kitchen counter with Dad. The book is another great intro to personal finance and discusses issues like buying a house, using index mutual funds, determining how much insurance one needs, and also delves into the ways money can and can’t affect our happiness. You can read it in a day or two.

Investing basics:

The Investor’s Manifesto by William Bernstein: This guy’s a MD/PhD who’s finally provided an interesting and basic guide to the world of investing. This is a great place to start if you’re able to save money and want to start investing money for retirement. He discusses a little financial market history, how bonds and stocks work, the investment industry, and investor psychology. Carefully read this and you’ll know more than most investment professionals. No joke.

The Bogleheads Guide to Investing: The wonderful people at people put this together a few years back and it was instantly an investment classic. It starts from the beginning and discusses the large impact mutual fund expenses, taxes, and stock-picking can have on a portfolio. They explain why one should invest passively, use tax-advantaged accounts, and tune out market noise. This is the ultimate book on common sense investing, and the best part is that their approach allows you to setup your portfolio and move on with your life.

Indeed, a common thread throughout these books is that a simple approach is truly the most sophisticated. Put it on auto-pilot and get on with your life.

Monday, November 7, 2011

Where can one turn for help?

Just wanted to highlight a point or two stemming from the Dave Ramsey post last week. In short, what Dave does is recommend financial professionals through his “endorsed local providers” (ELP) network, which is (I imagine) trumpeted on his show and is found here (you'll see the image to the right advertised around the web). The main issue here, again, is the fact the he refers people seeking investment advice to commission-based brokers. While this sounds innocent enough, those who have dealt in this arena know the kinds of pernicious conflicts of interest which arise when dealing with such people. First of all they’re paid on commission. Second, they’re paid on commission. Get it? They will sell you what makes them the most money instead of what is in your best interest. The two biggest problems with such a scenario is that they will sell you loaded mutual funds (wherein you pay a commission to buy something that’s usually free), and they will most likely try to churn your account as much as possible (i.e., they’ll encourage you to buy and sell your investments frequently so they get paid more). So, the basic lesson today is to simply avoid such jokers.

But what if you want a helping hand and don’t want to simply use a target date fund at Vanguard? Find a fee-only advisor. These guys and gals are doing what the public think stock brokers are doing (i.e., really taking care of you). Instead of being commission-based, fee-only advisors are paid by either an hourly fee, a simple financial planning fee (perhaps a flat fee per visit), or by a certain percentage of the assets they’re managing. Thus, the conflict of interest is greatly reduced compared to the way stock brokers function. Looking to find one locally? Check out the search feature on the National Association of Personal Financial Advisors website here.

After my dad died, his accountant tried to pull a fast one and sell Mom a worthless variable annuity (and thus bank a fat commission), so it’s not just brokers you have to watch. I’ll close, again, with a William Bernstein quote that puts you in the right mind-set:

“The prudent investor treats almost the entirety of the financial landscape as an urban combat zone. This means any stock broker or full-service brokerage firm, any newsletter, any advisor who purchases individual securities, any hedge fund. Most mutual fund companies spew more toxic waste into the investment environment than a third-world refinery. Most financial advisors cannot invest their way out of a paper bag. Who can you trust? Almost no one.” [italics are his]

Sunday, November 6, 2011

Tired of earning 0% interest? Try I bonds.

With interest rates at record lows, I’m sure many people out there have noticed that it’s been a bit difficult to earn any money on what you have sitting in the bank. A quick glance at my savings account at America First shows that it’s been yielding a paltry 0.15%. More sophisticated (yet still safe) investments such as CDs, money market accounts, or money market mutual funds have also provided little help to those wanting to have their money make their own money. And that is the point of the blog—to have you one day be able to live from money made by your other money. The big problem currently is the fact that, while we’re earning little to no interest, inflation hasn’t been flat. In fact, over the last six months inflation has been running at a ~3% annualized rate. So what is one to do?

You may be surprised to hear that the answer to such a conundrum comes in a little-appreciated tool called an I Bond (or, officially, a Series I Savings Bond). The current return on these risk-free bonds is a healthy 3.06%. Yup, those hum-drum savings vehicles from yesteryear may make a sophisticated play indeed. The main benefit of these bonds is that they track inflation (I is for inflation), while providing safety (they’re backed up by the federal government) and tax-deferred growth. The return is composed of a fixed rate (currently 0%, but changed every 6 months) and an inflation component (currently the 3.06%), which is calculated from the consumer price index over a recent 6 month period. So I bonds bought after November 1st receive the inflation rate as calculated from March through September.

The bonds can be held for up to 30 years, during which the fixed rate will stay the same (currently 0%), but every 6 months the inflation rate will adjust to whatever consumer prices (aka, the CPI-U) have been doing. One of the only catches is that you cannot redeem the bond for at least one year, and if you redeem it within 5 years you lose the last 3 months’ interest. But that’s not a huge deal. You’ll notice it’s very similar to a CD, but the rate is currently much better. You can either buy these things from your local bank or online at (there’s a yearly limit of $5000 per each method). While money for retirement would be better placed in stocks and other types of bonds (hopefully in a Roth), I bonds provide a great way to save money that you may need in a few years.

I bonds in a nutshell:

· Are flexible.

· Are risk-free.

· Offer inflation protection.

· Are tax-deferred (or tax-free from state and local taxes).

· Provide a great way to save for your kids’ tuition.

If you’re tired of earning nothing at your bank, check ‘em out. For more info, check out a great four part I bonds series by the bogleheads on here, here, here, and here. Another basic article, which was excited about the 4.6% rate offered earlier in the year, is here.

Friday, November 4, 2011

Why all the hate for the 15 year mortgage?

Sticking with housing for a bit, I wanted to highlight an underused and under-sung borrowing option: the 15 year mortgage. Yup, it does it exist, largely sitting in the toolbox, enviously glaring at its 30 year cousin, desperate to see some action. In this post I wanted to highlight some of its benefits and drawbacks so homeowners have a better idea of what’s out there.

First of all, obviously when financing something—anything really—the longer the term the easier the payments. As Americans have become less adept at deferring consumption over the last several decades the terms (i.e., the length) of our loans have extended in lock step. One obvious example of this is the fact that people now often finance a car purchase over 5, 6, or even 7 years. You’ll often notice 6 or 7 year offers now when watching a tv commercial. These loan terms were relatively unheard of just a decade or two ago.

While extending the loans in this way makes it easier to afford the payments (obviously), it has the under-appreciated side effect of making everything more expensive. While people will go to great lengths to secure the best absolute deal on the price of a car, without flinching they’ll sign up for the 6-7 year loan, which will often cost them ~$1000 or more than if they stuck with a 4 year deal (and that's for a cheap car when interest rates are low). Check out this calculator to find what your car is really costing you ('hit show amortization table'). At the rate people change cars these days (and at the rate that they depreciate), who imagines themselves wanting to be paying on a car for 6 years anyway?

On to the housing part of the equation. Yes, obviously, a 15 year mortgage will lead to a higher monthly payment, but have you ever figured out how much it might save you? You may be surprised. Let’s quickly walk through it. Using this calculator and starting with a 30 yr mortgage (using a $200k mortgage and a 4.08% rate; hit ‘show amortization table’), the interest costs add up to ~$147,000. That’s just in interest. If one instead gets a 15 year mortgage with a rate of 3.38% (these are current national averages), the same $200k mortgage would cost you only ~$55,000 in interest, which is a savings of around $92,000 over the loan’s lifetime. If we average it out over the longer 30 year period, that’s a savings of roughly $3000 per year. Not exactly chump change. Yup, the monthly payment goes from $964 to $1418 per month, but if one simply waited a couple years to save up a larger down payment and pay off other debts, it’s not that unreasonable of a jump.

An additional benefit of the 15 year mortgage is that you pay down your principle faster, ensuring you don’t go underwater (during falling house prices) and end up with the problems detailed here. A significant advantage of the 15 year comes with its lower interest rate, which is why the monthly payments aren’t that different. Most of the savings in terms of interest, however, come from the fact that you’re simply holding the debt for a much shorter period. Despite the general belief that buying a house is a necessary part of building wealth, let’s face it—debt is expensive. If you’re patient and defer your purchase until the terms are more favorable, you can save yourself, oh, almost $100k.

Thursday, November 3, 2011

The mysterious origins of couscous

Continuing my fascination with getting to the essence of everything, last night the lady and I finally made couscous. It had been something of a mystery to me, so it was gratifying to be able to catalogue it finally (the image is from here). For the unfamiliar, couscous is based on semolina, which is (from Wikipedia) the “coarse, purified wheat middlings of durum wheat used in making pasta, and also used for breakfast cereals and puddings.” This site says that, using cast-iron rollers to process the durum wheat, “the bran, germ and endosperm are separated and the endosperm breaks into coarse grains,” the latter of which is semolina. (Despite the fact that bran and germ are typically removed, we were able to buy whole grain couscous, so that step doesn’t appear absolutely necessary). This semolina is also often used to provide an unusual and appealing crisp texture to cookies, desserts, and breads (often helping the crust). Apparently, if one similarly grinds a soft wheat you can get either farina (which is the basis of Cream of Wheat) or porridge. The couscous is finally made by mixing roughly 2 parts semolina with 1 part durum flour. The dish apparently comes from North Africa but today is also popular in places such as Brazil, Latin America, and Europe.

That’s a big paragraph on couscous. Sorry. So, on to the recipe. We found this again from And it’s called crab couscous salad. Don’t worry though if crab freaks you out, cause it is still pretty enticing without it. The recipe:


  • 2 cups vegetable broth
  • 1 tablespoon butter
  • 8 ounces couscous
  • 6 tablespoons olive oil
  • 1/4 cup lemon juice
  • 1/4 teaspoon ground cumin
  • 1 1/2 pounds imitation crabmeat, coarsely chopped
  • 1 1/2 cups chopped peeled mango
  • 1 cup quartered cherry tomatoes
  • 1/4 cup chopped green onions


  1. In a saucepan, bring the broth and butter to a boil. Stir in the couscous. Remove from the heat; cover and let stand for 5 minutes. Transfer to a large bowl; cool to room temperature. Fluff with a fork.
  2. For dressing, in a small bowl, combine the oil, lemon juice and cumin. Add the crab, mangoes, tomatoes and onions to couscous. Drizzle with dressing and toss to coat.

You may think the mango goes weird with the onions, but you’d be wrong. It’s totally fine somehow and very unique. One of the best things about couscous (as it's sold in the US) is that it cooks in literally 5 minutes, so this meal was super easy to make. Now, the local Whole Foods didn’t have fresh crab (cause we’re in Utah!), but they did have a 16oz can of the stuff for $14.99 which turned out to be quite tasty. I think part of my pleasure came from simply not having to crack all those damn crab legs. I may have effectively doubled my lifetime crab intake last night because of it. But again, the meal is fine without it too.

Wednesday, November 2, 2011

The Euro and its potential demise

With all the headlines about Europe over the last few days, I thought I’d take a stab at describing what went wrong and what may come next (the image is from here). In the late 1990s many of the countries in Europe decided it was a good idea to not only be a member of the European Union (which had existed for a while), but also to share a common currency. This currency, the Euro, was first issued in 2002 and was promoted as a way to reduce trade barriers across Europe, reduce the hassles of dealing with myriad currencies, and more fully integrate a continent that had a checkered past. With a common currency comes a common central bank, which is the European Central Bank (ECB; similar to the Fed in the US), based in Brussels.

This was setup such that the continent would have a currency union without an accompanying political union. This essentially means that there are no fiscal transfers (normally) throughout the continent. In the US, certain states, such as Mississippi or Alabama have more people on Medicaid and other forms of welfare than do richer states, such as Connecticut and New York. What happens over time in the US is that the richer states end up transferring large sums of cash to poorer states (through payroll and federal taxes; see a map of this here). In Europe, as you might imagine, the citizens of Germany are loathe to send money to profligate (or poorer) Europeans in, say, Portugal. The problem, though, is that there is only one European central bank for all the disparate economies in Europe. So, if Germany is experiencing inflation, the ECB will raise interest rates (to head it off), even though Spain or other members of the Euro may be suffering from economic malaise (which is helped with lower interest rates). It’s essentially a problem wherein Europe’s economies need varying remedies but the ECB has to treat them all as one patient. Obviously this doesn't work.

Enter Greece. Over the last few years the country has suffered from a profligate government, over-generous public benefits, and a poor ability to properly collect tax revenue. What usually happens in this situation (like with the US) is that the country sells bonds to local and international investors to raise revenue and plug the shortfall. Greece has done this, of course, but bond investors no longer trust the Greek government to pay investors back. This is seen in Greece’s soaring interest rates, which at last check were at 93% for the 2 year bond. This is unsustainable, of course (as no country can afford that), and what happens is that the EU itself and the International Monetary Fund (IMF) step in to help make the country whole. When they dole out the piles of cash, however, they also impose conditions of austerity to help get the country back on track. This doesn’t help, though, as an economy usually tanks—which is happening—when people (and governments) stop spending money, so Greece and Europe are essentially trapped. Greece can’t grow out of its debt cause of the austerity plans imposed on them, they can’t devalue their currency (and boost exports) because they’re in the Euro, and they can’t get funding from international bond markets at sane rates. The EU is also trapped because many French and German banks hold Greek bonds, so if the EU just lets Greece default then it will take Europe’s big banks down with it.

A related problem is the fact that Spain and Italy also have large deficits and the worries around Europe (especially about the EU’s lack of coherent policy-making) are sending their bond yields higher, which makes the debt harder to sustain, thus making them look less credit-worthy, which sends their yields even higher, etc. It’s a vicious loop and this is what the European authorities are trying hard to stop.

In the middle of all this, the Greek president, George Papandreou, yesterday said that he’d put the latest installment of aid money to a vote. While free money always sounds good, many Greeks are bristling at the austerity measures imposed on them and the fear is that the Greeks will reject the money and the government will default on its bonds. Another, related, worry is that the Greek government will collapse, which will make it near impossible for the country to maintain some semblance of confidence, implement the needed cutbacks, raise enough revenue, and not default on its bonds. Nicolas Sarkozy and Angela Merkel are meeting today in Cannes to sort it all out. If Europe doesn’t commit to a significant and sustained transfer of money to Greece then the country may well default and leave the Euro. Scarily enough, Italy could follow. No one knows what might result from this financially and economically.

While some in America may be tempted to feel a bit of schadenfreude from all this, it would surely be misplaced, as our economy (the world’s second biggest) cannot easily do well when Europe’s (the world’s biggest) is on the brink.

With that, happy Wednesday! Learn more about this here, here, here, and here.

Tuesday, November 1, 2011

The case for 20%

Getting back to basics as a personal finance blog, I’d like to quickly explain some of the benefits of putting down a significant amount of money when purchasing a house. Personal finance books often recommend at least 20%, so we’ll try to spell out why the smaller down payments often leave you vulnerable to forces beyond your control.

First, remember what the concept of marginal utility of wealth is? It’s basically the idea that, as one gets richer, increments of extra income don’t bring as much happiness as they do when one is poor. Once you’ve got the basics in life covered, an extra few grand doesn’t make that big of difference. This seemingly tangential point should be ingrained in everything one does when it comes to money. Essentially, it makes you want to protect your downside rather than making risky bets that could net you a few more thousand dollars.

For example, borrowing a lot of money for a house is a risky venture; it just seems less risky cause so many people do it. While you may enjoy rising house prices and be able to lock in a capital gain, there are a couple of scenarios that could wipe you out. The main one is that house prices could trend down after you purchase your home. If one put a pittance down on the house in such a scenario and need to move and sell the house, they’ll need to come up with cold hard cash to pay off the loan.

The scary thing is that we can’t do a damn thing about house prices, and no, they don’t always go up, as was the refrain in the late 2000s. Felix salmon here explains why owning a house is like owning a small business you have no control over (or like gambling, as he calls it). People with adjustable rate mortgages or a volatile job outlook are especially vulnerable to these types of situations, as the former are forced to move or refinance after a few years and the latter may have to move and find a job (paradoxically) to be able to afford their mortgage. One under-repeated fact is that you can’t refinance your house (and lock in a lower, or simply a fixed rate) unless your equity amounts to about 20% of the home’s value. With house prices have gone the last few years, more than a few have been caught with little skin in the game and thus are literally stuck in their houses if they don’t have lots of cash (~23% percent of Utahns are underwater as are ~60% in Nevada; see here).

Other benefits of putting down 20% include the fact that you don’t have to pay private mortgage insurance (~$100/month) and you can lock in a lower rate by refinancing if interest rates go down (saving you thousands over the life of the loan). Yes, by putting a small amount down, you could juice your returns through leverage, but if prices don’t move your way, you could end up having to pony up $20,000 or $30,000 (or more) when selling the house. I know which of those two scenarios would have the biggest effect on my happiness. Perhaps if people realized they have to pony up $40,000 (for a $200,000 house) or $60,000 (for a $300,000 house) to properly purchase, we wouldn’t have such homeownership euphoria in this country.