Tuesday, August 30, 2011

Allowing underwater borrowers to refinance could help

Yves Smith and Adam Levitin, for whom I have enormous respect, argue that allowing underwater borrowers to refinance their mortgages at lower rates would not help the housing market very much.  I am not so sure.

Consider a borrower with a six percent mortgage whose house is worth 80 percent of the mortgage balance.  Let's also say that it is four years into its mortgage--so it has 26 years remaining on its term.  If house prices remain flat, it will be 11 years and 9 months before the mortgage balance drops to the value of the house. 

Suppose we were to convert the mortgage to a 4.5 percent mortgage but left the mortgage payment the same.  In the first month, the amount of principal payment would increase by 2.35 fold.  The borrower would be above water in 5 years and 5 months (I have a spreadsheet with the calculations, should anyone be interested).  If house prices rise by two percent per year, the 4.5 percent borrower would be right-side up in less than four years.  Helping borrower see a light at the end of the tunnel could really make a difference (I don't see borrower in Las Vegas ever seeing that light, but not everyone is in Las Vegas).

Personally, I would rather see some principal reduction too, but allowing free refinancings on Fannie and Freddie mortgages could materially benefit the housing market.

Thanks for the Hug

I laughed out loud when I read my friend Linda's (at Lime in the Coconut) comment about the "group hug" I'd received though the comments to yesterday's post.  She's so right.  Thank you all so much for the kindness.  When I wrote the post yesterday, I was feeling as close to tears as I've felt in a really long time (I joked with my assistant Meghan that I was going to jump in her lap for a good cry.)  I honestly didn't write it looking for anything... In a way I use this blog as a journal, usually keeping off the drama/ boring / too personal stuff, but there are times when it comes out anyway.  (After I hit "publish" I thought I sounded like a whiny complainer.)  But I did end up getting something.  So many of you are in the same boat and somehow knowing that we're not alone-  faaaaar from it it- makes me feel better. 

Thanks for the hug.
{pic via pinterest via piccsy}

And there are so many different sides to it.  Many commenters are in completely different careers and it seems they still struggle with the same issues.  There are those moms who do decide to stay home and love it although can't help wondering "what if" just the way moms who go to work wonder "what if?  There are stay-at-home moms who feel like people think they are on easy street.  (Can I just say I can' disagree with this more??  Staying at home with children to me is the toughest job.  (I'm sure it's very rewarding but it is exhausting and those parents deserve a LOT of credit.)  Then there's the guilt that seems to be associated with all sides of motherhood.  One commenter raised a really interesting issue that in her workplace history, there has always been a "mommy" who she felt used her children as an excuse to get out of things and put more work on others.  Another mother commenting mentioned that she realized she had judged those decorators without children. thinking about what would happen to their careers once they did have kids.  I also realized I was judging the people who judged the "mommy" decorators.  (And just to clarify for any of those who asked, this isn't something imagined, I've actually heard of specific decorators using these terms in reference to others in a very negative way.)  My mom (who was a single parent for most of my childhood) said that childcare was always one of the toughest part about raising kids. 

When it comes down to it, I think we all have insecurities and questions ourselves sometimes.  I find that when I get really frazzled/ upset about something with my kids (such as the daycare situation yesterday morning) I start to question myself.  On normal days, things roll off my back & I'm even able to laugh or roll my eyes when I hear about haters, but when I'm emotionally charged like that, it all seems like it's tumbling down.

With Justin's case yesterday, I took him back to his existing daycare, which had turned over most of its teachers & its director over the summer.  We were less than thrilled to be taking him back to the center as we didn't love it last year & were planning on using it temporarily until we could find Mary Poppins, but when I got back to the daycare yesterday, it was worse than it had been the previous year.  The two ladies we looved -who had taken such good care of Justin- happened to be coming in later that day and those that were left seemed unconcerned that Justin was crying for so long.  I'd fully expected him to cry, I just expected he'd be picked up and comforted. 

Anyway, I have two kidinkies up right now so we're off for breakfast, but thanks for the shoulders yesterday.  I promise I'll get back to good stuff later this week.

{NOT a picture of our breakfast - i wish!!- image from the Awkward Bird}

On another note, we are installing a new project tomorrow.  (Thank goodness for my mom babysitting!!) My clients' house underwent a major renovation and all of the pretties are going in tomorrow!!

xoxo, Lauren

If you'd like help creating a home you absolutely love, contact us about our design services.

Algorithms are smarter than people

On the topic of algorithmic trading, I recently posted on some evidence documenting the benefits it brings to markets -- more liquidity, lower spreads and trading costs, etc. On a related topic, Ole Roleberg at Freakynomics has a nice post reviewing some of the evidence that automated decision tools actually make better decisions that real people when confronting many different kinds of problems. As he notes,
There’s a host of studies showing that human judgment is poor at synthesizing and weighting a large number of different types of evidence, and that simple, statistical models can outperform humans on tasks such as predicting recidivism, making clinical judgments (psychiatry and medicine), predicting divorce, predicting future academic success, etc. (for an entrypoint to this literature, see here for a blogpost I found that has some good quotes from J.D. Trout and Michael Bishop).

I guess the point is that algorithmic trading can be good or bad depending on the algorithm – and that the danger it brings is more if the ecology of trading algorithms active in a market is of a kind that could create cascading ripples destabilizing the market: One set of algorithms lowering the price of a set of stocks, triggering another set of algorithms to sell these stocks to avoid loss, triggering another set of… and so on.
This is precisely the point I've made before about the dangers of algorithms -- it's not one algorithm that might blow things up, but potentially explosive webs of feedback running between many.

But I think the superior performance of algorithms at making decisions is itself quite striking and not generally recognized. The article to which Rogeberg links makes the following all-too-plausible remark:
Training of large numbers of experts by universities has probably had the perverse effect of increasing the number of people running around making highly confident but wrong judgements. But the tendency to not notice our errors and to place excessive confidence in our subjective judgements is something that all humans suffer from to varying degrees.
One final interesting read -- again thanks to Rogeberger for pointing this out -- is a profile in The Atlantic of Cliff Asness of the quant hedge fund Applied Quantitative Research. AQR was one of the hedge funds involved in the infamous "quant meltdown" of August 2007 which was driven precisely by a positive feedback loop, in the case one which caused a violent de-leveraging among a number of hedge funds using similar strategies and invested in similar assets. This is one of the few cases in which we have a pretty good quantitative model explaining how these kinds of feedback loops emerge essentially in the same way violent storms (or hurricanes) do in the atmosphere -- through ordinary processes which create the conditions in which explosive events become virtually certain. In the profile, Asness describes the dynamics behind the quant meltdown, which weren't as complex, mysterious or irrational as many people seem to think:
He told the New York Post that he blamed the sudden losses not on AQR's computer models but on "a strategy getting too crowded ... and then suffering when too many try to get out the same door" at the same time.

Monday, August 29, 2011

Top 10 Least-Polluting U.S. Metros

From the Urban Land Institute:

Top 10 Least-Polluting U.S. Metros: As greenhouse gas (GHG) reduction policies

gain momentum at the federal and metropolitan levels, a new study about urban

areas’ GHG emissions levels could have implications for real estate


It is stirking that LA is among the best 10, and is not materially different from Portland and is even a little better than Boston and Seattle. To be fair, the climate here is mild in both winter and summer (while it can get hot during the day, it almost always cools into the 60s or lower at night), and this allows us to avoid cranking up furnaces and air conditioners. But Portland and Seattle have pretty mild climates, too.

One could argue (and some have), that LA has accomplished this by being anti-business, hence driving polluters--along with their jobs--to other states. This may be correct, but ultimately, everyone is going to have to control carbon emissions. Perhaps this will give LA a first mover advantage.

"Mommy" Decorators

This morning we planned to have our kids start back up at daycare & a new school.  As you might remember from last year, it's kind of a tough time.  Our boys are 4 years old and 20 months old and finding the right kind of care that's best for us all has been tough, both emotionally and on the wallet.  This morning I went to drop Justin off (our 20 month old) at his old daycare and after I left the room I watched as he stood there and wailed for 5-10 minutes.  The caregiver had set him down the second I left the room and as I waited to fill out forms in the main office I could hear my baby crying his lungs out.  I peeked in and still no one was holding him...  I watched as a woman picked him up for a minute or so and then I came back again and he was standing there, balling alone.  They were crazy busy and I could see that there was so much going on, but still, it just felt wrong in my gut.  I told the director as much and left.  They tried to be nice but it just didn't feel right. 

...SO now I'm at home with Justin and no childcare, the day off, and a search for Mary Poppins. 

{Oh Mary...  we need you!!}

Being a working parent & having your own business has its own set of challenges.  I've actually heard people (without kids) talk down about working-designing-moms as if their businesses are somewhat of a joke.  I'm sure you're familiar with the terms "mommy decorators" or "mommy bloggers."  Does being a parent truly take away some sort of credibility in the design world?  Or does also being a blogger in addition to being a decorator mean that you don't deserve to be where you are?  (Clearly I don't think so, but sadly I've heard about people making this implication in general...  )

It's at times like this though- when I'm dealing with childcare issues and sit typing with a toddler on my lap- that I honestly start to wonder if these people are right???  I feel lucky to have gotten a shower in & to be dressed in normal clothes.  It's sometimes hard not to lose all confidence and wonder what in the world I'm doing or trying to do.  Am I just a "mommy" decorator faking it in the real world of suited interior designers? 

I'm clearly in a low spot right now to be even going on this rant, but I wish anyone thinking this way knew & understood all of the effort it takes to be where they are at 9 AM.  They might show up fresh & ready to rock, whereas the parent has been up for hours, having fed, bathed & dressed her kids for school and dropped them off and that's if everything went smoothly.  What exactly am I asking for? No it's not sympathy, but maybe a little understanding.  Because anyone who has to have someone else look after his or her children so he or she can go to work, is very serious about his or her career.  I think it's easy to quick-judge people and put them in a box.    (it's CLEAR that  I am ranting.. running from one working parent issue to the next.  please forgive me...  But I have to say, it is making me feel better ;)

Anyway, I'm off to go pick up Christian from his new school.  Fingers crossed all went well.   Sorry about the sort of down & out post. 
I'd love to hear your thoughts though as bloggers & readers on the "mommy blogger" / "mommy decorator issue."  Has anyone experienced what I'm talking about?

xoxo, Lauren

If you'd like help creating a home you absolutely love, contact me about our design services.

Friday, August 26, 2011

My Dad's Dining Room: Finally {Almost} Finished!

You might remember this project from way-back-when but my dad's dining room at the lake cottage started out looking like this:

The room was actually taken down to its studs prior to this picture being taken but I don't have any shots of that. 

Over the years, we added the table & light fixure & built-in cabinetry.  It's finally almost totally finished (with the exception of maybe a rug for the cooler months and shades on the windows) so I wanted to share a few pics I took:

{The boys use the table more than anyone for coloring & projects and of course eating (ie making a HUGE mess with food for Justin.)

I wanted the kitchen & dining room to feel simple & practical and carry a bit of nostalgia for my Grandma (who died 20 years ago but is still somehow a driving force in my family) with it.  It cleans up so easily & there's no stress with messes.   (Crayons came right off of the chairs- don't worry Dad!) 

I used my Live Paisley linen in dusty blue on the curtains because of the colors of my Grandma's china (now displayed in the built-in cabinetry)

Here's a very crooked picture of the cabinetry:

{I forgot to get a straight photo of this spot with the new hardware on- oops!- atleast you get the idea}

This cottage has been in our family since 1958, with the dining room & open kitchen at its heart.  So many meals have taken place here and for my family, eating is a BIG deal.  In reality, any room is just the backdrop for the life that's going on there, but it makes me so happy that the backdrop here finally feels right.  My Grandma & Nanoo loved this house and truly made it into a home.  My Grandma had a very disctinct style:  She loved flowery details and was pretty frilly, but also a very simple woman.  Function & practicality were always first.  I like to think of the house as an updated, tiny-bit-more-masculine version of my Grandma and I think she'd love it if she could see it now.  

{Queen Anne's lace on the table thrills me to no end...  seriously.}

One of my favorite things about visiting the old house is picking flowers from our field and bringing them inside.  My grandma always used to ask me to pick flowers & bring them in when I was a little girl.  It's such a simple thing, but when we go out & pick flowers, I'm in Heaven. 

Also, I've received a lot of questions about my textile line & how to order, so I just wanted to clarify a little bit. In September, I will be selling the fabrics online (in my new online store - Pure Style Home) for those who don't live in Virginia or those who don't have access to the Design Center of Northern Virginia.  It's an online store where you will be able to view all of the fabrics & colorways, and purchase sample memos & yardage right there at the site if you need to.  (I'm waiting until September to debut the line because the fabrics have not yet been photographed so without, pictures, there's no way for me to really sell them online.  My good friend & photographer Helen Norman and my family & I are doing a photoshoot at Helen's farm for the fabrics in a couple of weeks and I can't wait to share them with you!!  Not only will we be photographing the fabrics themselves but we're putting them in lifestyle settings that embody the feeling I hope that the fabrics convey: classic fresh, simple & carefree, and in some cases a little vintage or bohemian.)

If you are in the DC metro area, you can view my fabric line at the Design Center of Northern Virginia.

Thanks for the support & have a great weekend!!  (Can you believe summer's almost over?? wa wa wa)

xoxo, Lauren

If you'd like help creating a home you absolutely love, contact me about our design services.

Thursday, August 25, 2011

What does Warren Buffett know?

When I first read this morning that Warren Buffett had invested $5 billion in Bank of America, I was puzzled.  I didn't know how Buffett could figure out the costs of likely mortgage repurchases from securities issued by Countrywide/Bank of America.

I thought perhaps that Buffett had hired an army of analysts to go through the securities and figure out their value.  But Nicholas Santiago (h/t Yves Smith) has the more likely explanation:

3. Warren Buffett has made a career of investing in troubled companies for the sake of the economy. The last time he made an investment such as this one was back in 2008 with Goldman Sachs Group Inc.(NYSE:GS). It is important to remember that Goldman Sachs was bailed out by the tax payer in what was called the TARP program. Buffett knows that the U.S. taxpayer will bail him out if he is wrong and Bank of America stock does go belly up. 
[Disclosure: I own a few shares of Berkshire-Hathaway B-shares]. 

A Roadmap to Obesity

In this post, I'll explain my current understanding of the factors that promote obesity in humans.  


To a large degree, obesity is a heritable condition.  Various studies indicate that roughly two-thirds of the differences in body fatness between individuals is explained by heredity*, although estimates vary greatly (1).  However, we also know that obesity is not genetically determined, because in the US, the obesity rate has more than doubled in the last 30 years, consistent with what has happened to many other cultures (2).  How do we reconcile these two facts?  By understanding that genetic variability determines the degree of susceptibility to obesity-promoting factors.  In other words, in a natural environment with a natural diet, nearly everyone would be relatively lean, but when obesity-promoting factors are introduced, genetic makeup determines how resistant each person will be to fat gain.  As with the diseases of civilization, obesity is caused by a mismatch between our genetic heritage and our current environment.  This idea received experimental support from an interesting recent study (3).

Read more »

Robert E. McCormick and Robert D. Tollison on the NCAA's Subversion of the Academy

This is worth reproducing (with the kind permission of the authors) in its entirety:

Two great American institutions are about to crank up. Freshman and their older classmates will soon start returning to campuses for fall classes. Soon thereafter or about the same time, fans will fill stadiums and the 2011 college football season will begin. These two events come together almost naturally and have for over 100 years. The former may be one of the best examples anywhere of competition among universities and colleges, but the latter is surely one of the best examples of a cartel. Recent athletic resignations and firings at Ohio State, Georgia Tech, and now most recently the University of North Carolina demonstrate that the corrupting influences of the NCAA cartel on the academy have reached the highest levels of our public universities. Doubtless there are few people on earth who care less about the University of North Carolina in Chapel Hill than us (since it is a prime competitor in intercollegiate sports), but in spite of this, the time has come to stand up and be counted on the athletic scandal that has engulfed UNC-CH and so many other institutions of higher learning in our country (including Georgia Tech and Ohio State). UNC-CH is not just a university, it is regularly rated as one of the top five public universities in the United States.

What is the root of the problem here? We assert it is the enormous economic rents, or free money, that have been created by the NCAA cartel. Moreover, no college or university can be expected to withstand the ill-gotten gain that lurks underneath the NCAA banner. The NCAA is a cartel of the major athletic universities in the United States that sets wages, playing conditions, and other aspects of intercollegiate athletics. Most prominently of these is a restriction on payments to football and basketball players. These two sports create billions of dollars in local and national revenues via gate receipts, TV contracts, and ancillary merchandise, not to mention millions of dollars annually at member schools in donations by alumni and other supporters of athletic programs.

Coaches sign multi-year multi-million dollar contracts while players get tuition, room and board, and recently, only because of an important court case (White v. NCAA), some pocket money to cover the cost of living. Big chunks of these revenues also go to support other men and women athletic teams on campuses, swimming, track, golf, soccer, and the like. None of this would be possible but for the overarching cartel agreement between all of the major U.S. colleges and universities operated under the umbrella of the NCAA.

Both of us have long held, along with numerous other economists (such as Gary Becker and Robert Barro), that the NCAA’s cartel harms the market, the world, and the athletes, but now we are prepared to claim more. To wit, this crisis in athletics puts the American system of higher education at risk.

Despite our earlier disclaimer, UNC-CH is an incredible academic institution, a virtual colossus of graduate education, research, and professional education. Yet with all its storied history and social importance, the school has put its institutional credibility and brand name at risk by succumbing to the perverse incentives created by the cartel, a cartel whose primary function is to maintain a fa├žade of amateurism on the one hand while aggressively pursuing commercial profits on the other. Never mind the morality of the arrangement. Focus instead on what this temptation has done to the University, and remember that this has been happening at lesser schools for a long time. Now that it has reached the ranks of most elite universities, it is hard to argue that any school is immune from becoming ensnared in the inevitable trap that lies in the huge gulf between amateur inputs (the lowly paid players) and professional outputs (massive TV contracts, alumni donations, and ticket prices).

Hear us clearly, we are NOT arguing to pay players. We are lamenting the diminution of the reputation of a top ranked public university and the warning signal that it sends about the dangers of the incentives created in this case. We believe in amateurism, deeply. But we believe that it should apply broadly to the coaches, the fans, and all the rest of the participants in intercollegiate sports. If amateurism is a shrine, then let us all worship it. The fans should get to see the games for nothing or nearly so (the costs of facilities and game day services). The coaches should be faculty or volunteers as they are in Little League and in local neighborhoods. It is not amateurism, but the business of intercollegiate athletics is a growing cancer bound to infect other storied American institutions of higher education.

Where does the fault lie? It lies plainly on the shoulders of the NCAA cartel. We propose that our school, Clemson, and the rest of the schools in the ACC leave the organization, sit down, take stock and decide whether the Ivy League approach is better for the ACC (no athletic scholarships) or whether the players should receive reasonable compensation. We do not take a position on the issue. Each league within the NCAA should do the same, and we doubt that they will all choose the same course. Some will go the Ivy route, others the payment route. And that is as it should be. There should NOT be one authority in control of almost all collegiate athletics in the United States. Competition is salutary, and it should prevail both on and off the field.

Cartels are a bad bargain. They raise price to consumers, reduce output and social welfare, and enrich one class of participants at the expense of another, creating envy and strife. The NCAA cartel is especially perverse because it disadvantages young people (often from challenging backgrounds) to the advantage of adults. And worse, it is morally corrupting to these same young people, compounded by the fact that it derives from the same university institutions society has charged to nurture them to adulthood.
At present, coaches, even those trying to live by the rules, daily confront moral dilemmas and choices. But the nature of the restrictions creates two sets of rules (written and unwritten), and our young college students, both the athletes and their classmates, are not being taught to play by the rules. They are being taught, “everyone cheats, we got caught, it is no big deal.” Paying under the table is okay. Having tutors write term papers is okay for athletes who are working their rear ends off to practice especially if they are good and the team is winning.

Students are being taught that ends matter, but means do not. Our educational system is built upon honor, integrity, and the search for truth as bedrocks. Yet these same foundations are washed away on a regular basis by phenomenal dollars made available by the cartel. What is a young person to believe? That it is wrong to crib on a test or plagiarize a term paper, but okay to lie to the NCAA investigator? That it is right and proper to offer a helping hand to those less fortunate or in need, but wrong to do so if they have signed an athletic scholarship? Our universities need to stand for our culture, and our culture should not be about lying, half-lying, deviousness, and cheating.  There is only one way to end cheating- resolve the conflict between amateurism and professionalism, either by making both sides professional or both sides amateur. But the current situation is unsustainable and puts institutions of higher education at risk.
We contend that the moral fiber of the university is one of its most powerful social virtues. It helps bring young people to adulthood with a care and concern that things are done correctly and on the up and up ethically.

There is a clear positive implication of our argument. Cheating teaches cheating, and it is a mistake to think that our kids will not watch what we do instead of what we say. The scandals that now infect the best universities in the land will almost surely lead to more and more academic dishonesty and disregard for the basic traditions of the academy if something does not happen to reverse course. Cheating in the athletic department begets cheating in the classroom and perhaps generally  in life. This is a prediction of our argument albeit a depressing one.

It is critical to note that we are big fans of the coexistence of athletics and academics. Our  research speaks loudly and clearly on this. We support athletics as part of university education and think the two together make for the best organizational arrangement. Our cry is NOT about athletics, but about the NCAA cartel that creates the rents and free money that shred the moral underpinnings of our home, the academy.
A la Ronald Reagan, we say tear down the wall around truth and dignity. Clemson, UNC, Georgia Tech, and all the rest should refuse the financial inducements offered by the NCAA. Return to amateur intercollegiate sports, or pay the players. Nothing less than the integrity and quality of our universities is at stake.
The passage that really hits home to me is: "Students are being taught that ends matter, but means do not. Our educational system is built upon honor, integrity, and the search for truth as bedrocks. Yet these same foundations are washed away on a regular basis by phenomenal dollars made available by the cartel. What is a young person to believe?"

Wednesday, August 24, 2011

Efficiency versus stability


I had an opinion piece published today in Bloomberg Views looking at the relationship between market efficiency and stability, a topic which hasn't received much attention in the economics literature until recently. The point of the essay was to explore two distinct recent studies which suggest that adding more derivative instruments to markets tends to make them less stable, even if they do push markets toward the ideal of market completeness and efficiency.

I wanted to make available here some further technical information on the two studies I mentioned, but as publication arrived very quickly and I've been pressed with other deadlines I haven't yet managed to write the post as I wanted. However, I can at least offer some information with the idea of updating it very shortly (later today, Thursday 25 August).

I've given some extensive discussion of the first study I mentioned, by economists William Brock, Cars Hommes and Florian Wagener, in an earlier post.

The second study by Matteo Marsili is quite technical and relies for parts of its analysis on ideas and techniques imported from physics. I will tomorrow try to give some simplified discussion of the gist of this argument. What makes this particularly fascinating is that it works fully within the confines of standard general equilibrium models, and examines how market stability should evolve as the market approaches the ideal of market completeness. Agents are assumed to be fully rational, there are no problems with asymmetric information, etc. Even here, however, Marsili finds that the equilibrium becomes more and more unstable as the ideal is approached. Efficient markets are also unstable markets.


Marsili's argument is one he has been developing in a series of papers (with various co-authors) over several years. This paper from last year offers what is perhaps the most concise argument. It looks at a market with informed (fundamentalist) traders and non-informed (noise) traders, and shows, first, that the market becomes efficient as the number of informed traders grows. They are assumed in the model to have different kinds of private information about market outcomes, and the market becomes efficient, roughly speaking, once there are enough traders to cover the space of outcomes so all private information gets aggregated into market prices. The paper then introduces a non-informed trader -- a chartist or trend follower -- and shows that this trader has a maximum impact on the market precisely at the point at which it becomes efficient. The conclusion is very much against standard economic thinking:
[The results suggest} that information efficiency might be a necessary condition for bubble phenomena - induced by the behavior of non-informed traders...
Another paper from two years ago approaches the problem from a slightly different angle. This study looks explicitly at how the proliferation of financial instruments (derivatives) provides more means for diversifying and sharing risks and takes the market to an efficient state. However, it finds that this state is what physicists refer to as a "critical state", which is a state characterized by extreme (essentially infinite) susceptibility to small disturbances. Any small noise stirs up huge fluctuations. Again, efficiency trails instability in its wake. As the paper asserts:
This suggests that the hypothesis of Arbitrage Pricing Theory (the notion that arbitrage works to keep market in an efficient state) may not be compatible with a stable market dynamics.
This paper also makes the important point that market stability really ought to be thought of as a public good because well functioning markets do help everyone. But like most public goods, private individuals acting in their own interests will not likely provide it.

Finally, the paper I discussed in the Bloomberg article is from last year and analyses a model set up specifically so as to include the finance sector. It is very much akin to standard general equilibrium models, and includes essentially two components:

1. There are investors who aim to take their current wealth and preserve it (or make it grow) into the future. They do this by investing in various instruments provided by a sector of financial firms. These investors are assumed to be rational and have full information and they invest their wealth optimally over the set of possible investments.

2. There are financial firms who create the investment instruments and take on risks in supplying them. They also act optimally, and they hedge their risks by trading between themselves. Again, the firms are rational and have full information.

Marsili then studies what happens to this world of investors and financial firms optimally making decisions as the number of different financial instruments grows. The first result confirms expectations -- the financial firms are ever more successful in hedging their risks and they can provide the financial instruments more cheaply. Investors can therefore invest more effectively. The market becomes efficient.

But there are also two unexpected consequences. As Marsili describes them,
As markets approach completeness, however, two "unintended consequences" also arise: equilibrium portfolios develop a marked susceptibility to idiosynchratic shocks and/or parameter uncertainty and hedging engenders divergent trading volumes in the interbank market. Combining these, suggests an inverse relation between financial stability and the size of the financial sector...
In other words, the character of the optimum portfolios for both the investors and the financial firms becomes hugely sensitive to tiny shocks to the economy. As the efficient state is approached, these agents have to work ever harder to adjust their holdings to remain in the optimal condition. The market only remains efficient through an ever faster and more vigorous churning of investment positions. This shows up in the hedging done by the financial firms, where the volume of trading required to remain optimally hedged actually becomes infinite as the market reaches efficiency.

All three of these papers show much the same thing -- efficiency bringing instability along with it. But this latter paper may be the most interesting as it shows directly how the size of the financial sector also naturally explodes as this efficient-unstable regime is approached. The effect sounds suspiciously like what has happened in the past 30 years or so with massive growth in the financial industries in most developed nations.

What I find really remarkable, however, is that all of this comes from the very models that economists have been using for a long time to make arguments about market efficiency. Why did it take a physicist to look at what happens to stability at the same point? This seems bizarre indeed.

Tuesday, August 23, 2011

Two cents (or maybe a nickel) on Texas.

Texas is doing well relative to the country.  Its jobs creation rate is second only to North Dakota, a state whose population is smaller than Austin's.  It has large in-migration because of jobs, and as one blogger points out, wages are rising faster in Texas than [most] other states, so one cannot credibly make the argument that its success is entirely a "race to the bottom outcome."  The fact that Texas only relies a little more than average on construction for its employment base shows that its job performance is not the result of an unsustainable housing construction boom of the Arizona, Florida, Nevada and Central California variety.

In an ideal world, we would run some regressions explaining Texas' growth, but we haven't sufficiently up-to-date data to do that.  We do know that some things matter in general for growth: climate (which I don't think even Rick Perry is claiming credit for); fraction of the population with a BA, and, if I may refer to work I did five years ago, availability of air transportation.

Texas does well in two out of three indicators: since World War II, people and jobs have moved to warmer places such as Texas, and Dallas is a hub for two airlines and Houston is a hub for one.  Texas is below average, however, in the share of adults with BAs and graduate degrees.

So why is Texas doing well?  First, it has managed to maintain its state and local government spending far better than most other states, and has not had the negative stimulus arising from massive layoffs. Over the past decade, government job growth in Texas has outpaced private sector job growth by about 2 to 1.

Second, Texas has among the most stringent consumer protection laws in finance in the country--likely arising from a long-standing Western mistrust of bankers.  As a consequents, consumers were essentially forbidden from using their homes as piggy banks.  As Mike Konczal shows, this means Texans have far less debt to pay off (it also shows how we in California are still in the soup).  So "heavy-handed" regulation helped keep Texas out of trouble.

Finally, it is simply easier to develop everything in Texas--housing, businesses, etc.  This is the one part of the conservative view of Texas that I buy--as one Los Angeles planner said to me, it takes 18 months in LA to do what it takes six weeks to do in Dallas.  LA doesn't even have by-right zoning.  It is here where I think Texas has an enormous advantage for business development over California.

That said, California has a greater share of people with BA's than Texas.  Part of the reason why may be that well-educated people, who can afford to live in a place that takes environmental protection seriously, do so.    There is actually some good reason for California's stringent environmental rules--the air quality here, while much better than it used to be, is still not good enough.  Of the ten cities with the worst air quality in the country, six are in California.  But the cities with the worst air quality outside of California are Houston and Dallas; someday voters in those cities are going to demand better.  I do think California can do a better job of protecting its environment while making business development easier, but that is the subject of another post.

Monday, August 22, 2011

Queen Anne's Bouquet

I've got more pictures of my new fabrics/ curtains!  (I'm sorry if you're sick of them by now, but I am so insanely excited that I can't stop.)  In my bedroom at the cottage (my dad's) I decided to hang my newest design Queen Anne's Bouquet on either side of the doors to the balcony: 

I had them lined in blackout lining although I typically prefer unlined linen or a light lining for an airy feel, but the sun streams straight through the doors in the morning & we wake up around 5:30 or so every morning because of it, so function over form won out here. 

Here's a close-up of the fabric, which is a "bouquet" I drew of one of my favorite wildflowers:

The room is very much unfinished.  Although I do have a pretty white quilt I and a pair of lamps I love.  I had the ceiling paneled in pine and I haven't yet decided what I want to do with it.  My original thoughts a few years ago were to try out some type of limewash, but now I'm really undecided and have lots of thoughts floating around about it.  I do think I want to keep the walls white (a new white though) as for my own personal bedrooms, I really prefer white.  (It goes best with all of my colorful clothes strewn about! ;) ;)   

{Yeah, I know the recessed light kind of kills it, but like I said, I didn't win every battle here.}

As we make more progress here I'll be sure to share.

And many of you have asked about when the fabrics will be available for sale & how to buy them (thank you!)...  I am truly working as fast as I can to get these babies available.  There will be about fifteen different designs in the first collection with 2-7 colorways per design. (For a total of 60 or so different fabrics.)   I am still working on the final designs and we're photographing the entire collection at the end of the month so I plan to have them online soon after.  Like I mentioned before, I was a little surprised when I first started looking into the cost for the fabrics.  I've learned that high quality linens are much more expensive to make when they aren't mass-produced and we've priced the fabrics accordingly.  (Approx $120/ yard) In my own home I have my fabrics on pillows only right now ;)

When I first started designing textiles, I really had no idea where I wanted to take it.  I began more on a whim just because it excited me.  I have to say that I am now head over heels for it and am gaining more confidence with it.  I originally thought I'd have artists do the designs but now I've started doing them myself and it's really satisfyling.  I'm not an artist by any means and drawing & painting doesn't come naturally to me AT ALL, but I have actually been able to create some things that I really love and that speak to me.  I haven't quite decided yet how I want to sell these fabrics or where I want to take it, which I know sounds like an odd way to start a business.  (And I agree.)  I normally set very concrete goals for my self & my business and follow planned out steps to get there, but not this time.  The textile industry is very new to me & until I can figure out how I want to navigate the waters, I'm taking it slow.  There are those who design patterns and sell them to fabric companies for money (which is sooo not where I'm going... these designs are really personal to me and I am so not disattaching myself from them)  there are those who do books for other companies (for example Windsor Smith's collection for Kravet) and then there are those who sell fabric under their own company  and have their collections sold in showrooms (Kathryn Ireland for example also sells her fabrics at John Rosselli Showrooms) and then there are a tons of small companies who sell on their own.  I really haven't decided where I want to go with this or which way is best for me/ my family.   

The fabrics are currently only being shown & sold in one showroom in Virginia.  (And if you're a designer in Virginia, you can contact the Design Center of Northern Virginia for trade pricing.)  Like I mentioned, thery're being photographed at the end of August, so until then, I have no way to sell them without any pictures.  I will be sure to post as soon as they're online.

xoxo, Lauren

If you'd like help creating a home you absolutely love, contact me about our design services.

Sunday, August 21, 2011

The next credit crisis -- in education?

From The Atlantic comes a chart showing an incredible rise in the level of student debt over the past decade or so. The total outstanding debt among US students has grown by a factor of more than five over this period.

 Daniel Indiviglio brings out the crucial point to appreciating just how explosive this rise has been. The figure shows two curves, red for student loan debt, blue for overall household debt. The latter itself went through a rather explosive growth from 1999-2008, yet doesn't come close to matching the rate of growth in student loans:
See that blue line for all other debt but student loans? This wasn't just any average period in history for household debt. This period included the inflation of a housing bubble so gigantic that it caused the financial sector to collapse and led to the worst recession since the Great Depression. But that other debt growth? It's dwarfed by student loan growth.

How does the housing bubble debt compare? If you add together mortgages and revolving home equity, then from the first quarter of 1999 to when housing-related debt peaked in the third quarter of 2008, the sum increased from $3.28 trillion to $9.98 trillion. Over this period, housing-related debt had increased threefold. Meanwhile, over the entire period shown on the chart, the balance of student loans grew by more than 6x. The growth of student loans has been twice as steep.
The number of students has remained more or less constant over the same period. Indiviglio goes on to ponder what happens when the bubble bursts, but there isn't an obvious endgame.

The disturbing thing is what lies behind this sudden expansion; it isn't the high-minded aim to make education possible to ever more people but the chance to make an easy profit on loans guaranteed by the US government. An earlier article in The Atlantic documented fast rises in tuition as universities aim to suck up their share of the easy credit, and of course there's been an explosion in for-profit college companies such as the Education Management Corporation. That company appears to be to the education bubble what Countrywide was to the housing bubble -- a facilitator pushing clients into loans regardless of need, solely to make a profit. As the New York Times recently reported, the Justice Department has joined in a suit against Education Management Corporation, charging it with defrauding the government "...by illegally paying recruiters based on the number of students they enrolled." Get 'em signed up regardless of need or ability to pay. Sound familiar?

As the NYT article noted,
For-profit schools enroll about 12 percent of the nation’s higher-education students yet receive about a quarter of all federal student aid; their students account for almost half of all defaults. In general, these institutions get more than 80 percent of their revenues from federal student aid. 
Good money to be made here, apparently. So you may not be surprised to hear who's behind the Education Management Corporation. According to the NYT, it is 40% owned by Goldman Sachs.

Cost and benefit

I listened to a colleague of mine on Friday discuss how nothing adds to our carbon footprint like flying-and I have little doubt that he is right.  Mark Twain one wrote,  “Travel is fatal to prejudice, bigotry, and narrow-mindedness.”  I am pretty sure that is right too.

Seed Oils and Body Fatness-- A Problematic Revisit

Anthony Colpo recently posted a discussion of one of my older posts on seed oils and body fat gain (1), which reminded me that I need to revisit the idea.  As my knowledge of obesity and metabolism has expanded, I feel the evidence behind the hypothesis that seed oils (corn, soybean, etc.) promote obesity due to their linoleic acid (omega-6 fat) content has largely collapsed.

Read more »

Triumph of the Rentier City?

I am teaching a senior honors seminar this fall.  Among the readings is Ed Glaeser's new book, TheTriumph of the City.  It is a perfect book for smart undergraduates--it is well written, thoughtful, and thought-provoking.  It is also packed with fun facts.

Early on in the book, Ed celebrates the resiliency of Manhattan, noting that "[b]etween 2009 and 2010, as the American economy largely stagnated, wages in Manhattan increased by 11.9 percent, more than any large county."

This passage brought to mind Vernon Henderson's pioneering work on large cities and favoritism.  He writes:

This enhanced role of government in the urbanization process over the years has resulted in a corresponding bias, where certain regions and cities are heavily favored in terms of capital and fiscal allocations, giving favored regions a cost advantage. 
New York is wonderful, but it has been given an enormous cost advantage in the aftermath of the financial crisis.  It's institutions received cheap capital in the form of TARP; a near zero Federal Funds Rate also amounts to a large subsidy for financial institutions.  Banks can currently make profits just by playing the yield curve.  These profits have helped restore Wall Street bonuses (and hence incomes of everyone else in Manhattan), but that doesn't mean they reflect productive activity.

I don't want to make too much of this: TARP was necessary, and the low Federal Funds rate is necessary too.  New York is a great and resilient city.  But it is also home to many too big to fail institutions, and thus has political and financial advantages that, say, Chicago and San Francisco lack.

Friday, August 19, 2011

Weather on Google Map

Last week Google added weather layer to its official version of Google Map. Information is coming from weather.com and includes current temperature, humidity and wind data as well as 5 day temperature forecast. Weather icons on the map represent today’s forecasted conditions and background map is simplified when weather layer is selected to make icons more visible.

There are many sources of local weather information with global coverage so, the addition of this data layer should have been expected sooner or later. Weather information is extremely popular – these days any larger portal has at least a weather widget if not the entire weather forecasting and publishing arm (eg. Yahoo7 and weatherzone.com.au). Weather apps are amongst the best sellers on iTunes. My simple weather widget is the most popular “page” on aus-emaps.com - with over 800,000 pageviews per month.

The goalpost has moved again as weather information became another commodity item. Listing a current temperature and/or forecast is an expected norm from any news or local community focused portal or blog. Tabular listings of detailed weather information are increasingly being supplemented with maps showing all sorts of details, including animated clouds, rain intensity, lightning strikes etc. (as per example from weatherchannel.com.au below). So, mere presentation of information will no longer be a distinctive feature. Intensified competition will only foster innovation and specialisation – to the benefit of all users!

Related Posts:

Weather widget take 3

Free weather widget upgrade

Weather map

Lake House Peek

We got the curtains up in my dad's lake house this week and it made such a difference.  We still have a lot of work to do but it's really starting to feel good.  Curtains always seem to make a house a home.  It suddenly feels warm & lived in (in a good way.)   As you might remember, I had curtains made from my new textile line for the house and for some of these patterns, it was the first time I'd actually even seen them. 

My dad's a fisherman & I played around with a few of his things on the walls:

{Sometimes I like a touch if kitcsh and I hung my dad's old wooden fish on a nail}

I used my "Live Paisely" linen in antique beige for the living room curtains.  My dad built a fireplace out of massive stones and I brought the curtains right up to fireplace to soften it a bit and create a little more drama:

{Sorry for the grainy pictures...  The room was dark when I took these pics.}

Like I mentioned before, my dad's renovation of our family's lake cottage has been a sloooow process but it's now almost finished.  {Let the decorating begin!!}  The main areas are done and just need paint (I'm going a little bluer in the living room above and some walls have never even been painted} and the new basement is being drywalled this month.  The existing living room furniture is headed down to the new basement (sometimes I think basements are where furniture goes to die) and I'm bringing in new upholstery.  I think I'm most excited about adding new lighting to replace empty sockets & builder grade fixtures.

Like I've mentioned before, my dad and I have butted heads like CRAZY on this house.  He wants me to design it but deep down inside he thinks he's a very gifted decorator and fights me every step of the way.  He has a little old Italian lady inside him (maybe my grandma??) and mixed with his macho man attitude, it makess for very over-the-top more-is-more granny decorating:  Crown moldings can never be large enough (even when the proportions are wrong for a room) and everything needs to "POP."  Shiny is always better and any sign of age on something means it's junk.  (aaaaaahhhhh)   We fought like cats & dogs about the massive $10,000+ oak Thomasville media untit & bedroom set he owned & bought in the early 90s.  TVs don't even fit in the hole anymore but he refuses to part with it because he spent so much on it.  (The piece is now in storage...  another place I htink furniture goes to die. ;) 

My dad is my toughest client by faaaaaaaaar.  Anyway, he's always thrilled when I do something to the house & I think (hope!!) that he's finally starting to trust me & won't undo everything when I leave this time.  It always ends with "you were right," but decorating this way can be kind of expensive because I have to undo a lot.  (Why not just give up you ask?  I really don't know...  I guess it's because I love this house so much & it has so much potential.)

He finally agreed to paint over the newly installed knotty pine beadboard on the front porch ceiling and to tear down the Victorian cobwebs he'd added to the {very simple} house.  He also finally let me paint the porch spindles solid white instead of white with gray beads the way theyd' been for years and even though they "popped" so nicely.  I  removed the new red gingham cushions on the wicker furniture and replaced them with simple tan and put out an indoor-outdoor rug I'd bought years ago and I couldn't be happier:

{And my dad's happy too.}

This house has definitely been a labor of love (and war!) but it's all worth it in the end.   I'll take pictures of the other rooms & share soon!!

xoxo, Lauren

ps- love you dad even though I complain.  You're the best!

If you'd like help creating a home you absolutely love, contact me about our design services.

Business - spin and gimmicks game

In an online business, not everything is gold even if it shines from a distance. A sad reality is that all sorts of spin and gimmicks are deployed by aspiring “entrepreneurs” to create “a success story”, vital in promoting the business to prospective clients and investors. It appears everything is a fair game where big money is involved…

It is not a secret that one of the easiest (not sure if entirely ethical) ways of making money online is selling advice on … making money online. But it is not only a dodgy end of the market where skillful and well connected sales “spinsters” can create mirages of success with smoke and mirrors. Take, for example Groupon, with their claim of “hundreds of thousands” of registered users – acquired, mind you, in a very unethical way where the advertised deals require a sign up, only to reveal that these are really only “examples of future offers”. I bet many of those “hundreds of thousands” feel conned, especially since the is no way to opt out from Groupon’s mailing list, leavening the only solution - blocking emails from Groupon as unwanted spam. I doubt investors are interested in this part of the “business” as long as numbers are rising…

Another example I wanted to highlight today is ourpatch.com.au I referred to in one of my earlier posts. On paper, the “success” of this venture could be an envy of any start-up: run by a serial entrepreneur, on track to earn $1 million in advertising revenue from (merely) 140,000 unique monthly visitors, operating in an attractive niche (regional Australia). It was mentioned in 2009 as one of “The digital dozen - the next big things online”. It also received NSW/ACT Regional Business of the Year award that year and there were high hopes to “…break into the US to take a slice of its US$97 billion local advertising market”. Well, it turns out it was all a mirage…

A frank admission by van Wyk, a key person behind the venture, in a recent interview puts things into perspective. The idea wasn’t his own: “We started the business when somebody phoned and said, ‘I’ve been running this site and all you have to do is copy what I’ve been doing and the rest will be easy’.” – a big score for the spinster who sold him on this concept! The opportunity was never properly researched: “We started the business based on the belief that our model had already been proven in a number of towns… Unfortunately, the model – and the success of the model – had been fabricated.” – hardly an exemplar of how to start and run a business. The spinster was probably long gone by then but it didn’t stop van Wyk to put his own spin on things… earning in the process $695,000 from advertisers (thanks to association with another of his businesses). However, there is a hint in the interview that those advertisers have realised things are not as they seem (no mention of revenue outlook so, the chances are, things are not “looking bright” any more). Publicly admitting a failure is brave but rare so, van Wyk deserves a credit for sharing his story...

A simple conclusion can be drawn from the above examples that business is not a fair game where the best one always wins. Prospective investors seem not to care about ethics too much, as long as they can find dummies who will pay more than they did. So, the lesson is that “talking up” your business, even if it is flaky on the edges, is a vital part of building your brand. Others do it without any scruples. Just try not to overdo it, not to lose all of your credibility if the future doesn’t work out the way you let everybody to believe it will…

Now, talking about the unashamed spin… did you know:

aus-emaps.com is the only online publisher offering an interactive map with the latest 2011 version of Australian postal boundaries. You can’t get it from Australia Post or Google, neither from Bing nor from Sensis… Next time you need a useful map - think aus-emaps.com!

Why you would need such a map is a different story… read more about it in the Australian Postcodes User Guide

Thursday, August 18, 2011

Food Palatability and Body Fatness: Clues from Alliesthesia

Part I: Is there a Ponderostat?

Some of the most important experiments for understanding the role of food palatability/reward in body fatness were performed by Dr. Michel Cabanac and collaborators in the 1970s (hat tip to Dr. Seth Roberts for the references).  In my recent food reward series (1), I referenced but did not discuss Dr. Cabanac's work because I felt it would have taken too long to describe.  However, I included two of his studies in my Ancestral Health Symposium talk, and I think they're worth discussing in more detail here.

Read more »

Coping with chaos -- with false certainty

I was looking today for a paper -- allegedly published in Science earlier this year -- reporting the results of a re-run of the famous Robert Axelrod open competition for algorithms playing the Prisoner's Dilemma. In that competition, the simple TIT-FOR-TAT strategy -- start out the first time cooperating, and then afterward do whatever your opponent did in the preceding round -- won out easily over much more complex strategies. The twist on the new competition (as I've been told), is to allow copying strategies so players can explicitly mimic the behaviour of others they see doing well. Apparently, some very simple (mindless) copying strategies won this new competition, showing how blind copying can be a very effective strategy in competitive games.

But I must have had the wrong reference, because I didn't find the paper in the 8 April 2011 issue of Science. I'll track it down and post on it soon -- this kind of thing obviously has huge implications for strategies used in financial markets, where copying may well out-perform allegedly more sophisticated techniques. But I stumbled over something else in that issue of Science that is worth mentioning, even if briefly (as I don't have access to Science and haven't yet been able to read the full paper).

The paper is entitled Coping with Chaos: How Disordered Contexts Promote Stereotyping and Discrimination. It reports the results of experiments in which two psychologists, Diederik Stapel and Siegwart Lindenberg, tested how the level of environmental uncertainty might influence the tendency of volunteers to make judgments on the basis of simple stereotypes. They took advantage of a rail strike in Utrecht -- during which train stations became much more littered and disordered. Here's the abstract (at least):
Being the victim of discrimination can have serious negative health- and quality-of-life–related consequences. Yet, could being discriminated against depend on such seemingly trivial matters as garbage on the streets? In this study, we show, in two field experiments, that disordered contexts (such as litter or a broken-up sidewalk and an abandoned bicycle) indeed promote stereotyping and discrimination in real-world situations and, in three lab experiments, that it is a heightened need for structure that mediates these effects (number of subjects: between 40 and 70 per experiment). These findings considerably advance our knowledge of the impact of the physical environment on stereotyping and discrimination and have clear policy implications: Diagnose environmental disorder early and intervene immediately.
This is interesting in this limited context of discrimination and how the orderliness of physical environments might influence it, but the effect described seems in fact to be far more general -- it reflects a human longing for order and simplicity whenever faced with too much uncertainty. On the same point, another notable study from 2008 (also in Science) by Jennifer Whitson and Adam Galinsky showed how uncertainty and loss of control makes people more likely to see fictitious patterns in random data. In brief, they had a set of volunteers plays some competitive games in which they could influence how much the volunteers felt in control. For example, they could induce feelings of loss of control and uncertainty by eradicating any link between the players' actions and the outcomes. Then they tested these people on totally random data sets (some looking like stock market time series) to see how much they would perceive fictitious patterns in the random data. Those primed more strongly with the "loss of control and uncertainty" feelings were significantly more likely to see patterns where there were none -- grasping, apparently, for some kind of order in a perplexing world. The paper is available in full at the link I gave above, but here's the abstract:
We present six experiments that tested whether lacking control increases illusory pattern perception, which we define as the identification of a coherent and meaningful interrelationship among a set of random or unrelated stimuli. Participants who lacked control were more likely to perceive a variety of illusory patterns, including seeing images in noise, forming illusory correlations in stock market information, perceiving conspiracies, and developing superstitions. Additionally, we demonstrated that increased pattern perception has a motivational basis by measuring the need for structure directly and showing that the causal link between lack of control and illusory pattern perception is reduced by affirming the self. Although these many disparate forms of pattern perception are typically discussed as separate phenomena, the current results suggest that there is a common motive underlying them.
This seems to fit in very well with the experiments of Stapel and Lindenberg. It reminds me of what Nietzsche said long ago:
"Danger, disquiet, anxiety attend the unknown — the first instinct is to eliminate these distressing states. First principle: any explanation is better than none.”
 Indeed, this seems to be a very general topic on which a great deal is known from psychology. Galinsky's web site lists a forthcoming article which appears to be a review of sorts. I look forward to reading that.

Also worth a read is this feature in Wired, which discusses some related experiments. Curiously, the article quotes Christina Romer, the former chairwoman of President Obama’s Council of Economic Advisers, on economic uncertainty and it's influence on the opinions of "respected analysts" about where things are going. This was from December 2010:
One sign of heightened macroeconomic uncertainty is that the forecasts of respected analysts are all over the map. According to the Survey of Professional Forecasters conducted by the Federal Reserve Bank of Philadelphia, the difference between the highest and the lowest forecasts of unemployment a year from now is about twice as large as it was before the crisis. And forecasters’ reported uncertainty about their longer-run forecasts has shown no sign of improving over the last year. If professional forecasters are unsure of the future, businesses and consumers certainly are as well.
Then again, this spread in forecasts is a healthy thing. Things were by no means "more certain" before the crisis, it only seemed that way to an army of "respected forecasters" who found comfort in saying pretty much the same thing as everyone else.

Wednesday, August 17, 2011

Even in principle, figuring out a fair tax system is hard

How does one set up a system such that everyone pays their fair share of taxes?  Let us suppose that a "fair" tax is one where everyone gives up the same share of utility to pay for public goods.  One could formulate this such that

U(X(L)-L-t)/U(X(L)-L) = K

The idea is that the fraction of utility one keeps after taxes is the same for everyone.  X is consumption; the amount one gets to consume is a function of effort, L.  To make things easy, we will assume people consumer their incomes, so that income and consumption are the same. Assume that utility function has the shape U' > 0 and U" < 0.  K is dependent on how much society wishes to spend on public goods.

Just this simple formulation presents three problems.  First, the fair rate of progressivity will be a function of the magnitude of U".  For instance, if we assume log utility, U' = 1/(X-L) = U" = -1/(X-L)^2.  This means U" gets very small very rapidly, which also means that the need to increase marginal tax rates in income to maintain the above definition of fairness gets quite small.  We do know that taking money away from people at or below subsistence levels of income will lead to substantial diminution of utility, but beyond that point it is hard to say how sharply progressive taxes need to be in order to be fair.

Second, the correspondence between consumption and effort is not one-to-one.  If the correlation between consumption and effort is less than one--and I will go out on a limb and say that it certainly is--taxing income actually only approximates taxing utility.  The lower the correlation, the worse the approximation.

Finally, defining effort is a problem.  As Matthew Yglesias notes, NYU professors make a lot less money than Wall Street bankers, but their life might well be better.  Perhaps I am wrong, but it seems to me that the -L in a steel worker, coal miner, or line worker is a lot bigger than mine, and so looking at income alone is adequate for approximating utility.

So what to do?  Here is why, despite my liberal leanings, I find a flat tax with a large exemption and a large earned income tax credit appealing.  The rate would have to be sufficient to raise revenue, and would apply  equally to all type of income.  Deductions would be limited.  Such a set up would assure that Warren Buffett would pay no less a share of his income than anyone else.  Bob Hall proposed a similar plan 15 years ago.  I would dress it up with the earned income tax credit.  

Pre War Prescott in The Automobile

1920 Bugatti T22
(A4 Watercolour on Bristol Board)

If you read The Automobile (http://www.theautomobile.co.uk/) you may have spotted that I was mentioned in the write up for Pre War Prescott. If you have not seen the article click on the image below.
Thanks to Peter McFadyen (http://www.petermcfadyen.co.uk/) for the article.

More info on Pre War Prescott can be found here:

Tuesday, August 16, 2011

Postcode Finder upgrade

Last month Australian Bureau of Statistics (ABS) released the latest version of boundaries for use with Census 2011 data, including the so called non-ABS structures: postal areas and suburbs. It also coincided with a major upgrade to Google’s Fusion Tables, prompting me to redevelop the somewhat clunky version of Postcode Finder served from aus-emaps.com.

Postcode Finder is quite a popular tool. However, I was forced to degrade the functionality of the application after a significant hike in the cost of data service. The first version of the application was built with free postal boundaries data service provided by a third party as a Web Map Service (WMS). I wore the initial cost when the supplier introduced charges for the service but could not justify a subsequent hike in fees, opting instead to build my own version with KML data.

I wanted to avoid implementation and maintenance hassles associated with managing my own GIS infrastructure but the compromise was less than optimal solution in terms of performance and useability. Fusion Tables now offer a great alternative to WMS since it comes with own version of an “image service”, capable of real-time rendering of geographic data (eg. note the shading of a searched postcode on the map).

Functionality of Postcode Finder remains very similar to the previous version but there is a significant improvement in performance and useability (not to mention that the application is now built with version 3 of Google Map API as well). I would like to add more boundary layers over the coming weeks but it is not a straightforward task. Unfortunately, Fusion Tables suffer from some limitations in terms of handling complex polygons so, it is all subject to finding some work around, or Google sorting out the issues.

For example, in case of postal areas, I had to generalise boundaries with the Douglas-Peucker Simplification Algorithm (using 10m tolerance which reduced the file by some 30% without noticeable degradation of the boundary details however, unfortunately, not preserving topological consistency between boundaries) but it was still not enough to import postal area 6740 in WA and 0822 in NT into the Fusion Tables. I had to use 50m tolerance for those two polygons to further reduce their complexity. Google applied its own generalisation algorithms on top of it on import. The side effect is less than perfect match of adjoining boundaries at a street level resolution.

All issues aside, I hope you will find the new version of Postcode Finder much more responsive and better suited to a wider range of requirements.

Related Posts:

Mapping social diversity in NSW

Fusion Tables yet to ignite

Postcode Maps and population statistics

Large format PDF Postcode maps