Asymmetrical Information

From the desk of Jane Galt:

GM goes down

Brad DeLong looks at GM's problems:

As I see it, GM has three big problems:

It paid its workers in the 1980s and 1990s in backloaded pension and health care benefits so that now workers have cash-flow rights but no control rights over the corporation, and this is an unstable and dangerous corporate control situations.

Oligopoly profits have been built into GM's wages for a long time, and these oligopoly profit components are very "sticky"--they remain even though the
oligopoly profits are long gone.

GM management has bet very heavily on a low price of oil and a high price of SUVs.

Samuelson thinks that these are less important than (4): a culture of management that focuses on maintaining stability rather than taking advantage of change. He may be right.

As I see it, all four of these things are a problem. Either legacy labour costs or lacklustre design and engineering could be enough to swamp the company alone. Only absolutely brilliant management could get GM out of its hole. And GM's management has not been absolutely brilliant.

From the desk of Jane Galt:

Worried about social security?

Believe it or not, our public pension system is actually in relatively good shape. countries everywhere are desperately seeking a solution to the impending demographic crisis.

From the desk of Jane Galt:

Winterspeak points out in the comments to this post that I misread his original piece on returns to education, muddying up his insightful question--whether education has become more profitable because the opportunity cost has decreased--with the (to an economist) relatively uncontroversial point that education does not necessarily improve your skills, only your credentials.

Well, that's the difference between businesspeople and journalists: he looks at microeconomic effects, while my mind immediately jumps to the question of how this should shape policy.

Why does it matter whether education is functionally useful, or merely a signalling mechanism that tells employers you're a good risk? Because if education actually increases people's skills, then society can increase economic productivity by sending more people to college--at least if we assume that there are people not currently attending college who have the cognitive gifts to benefit from higher education.

If, on the other hand, college is merely a filtering mechanism that helps employers sort out potential employees, then the extra returns to sending more people to college are zero: it will only increase the supply of white collar workers, while doing nothing to increase the number of jobs for them to fill. Given that the marginal candidates likely to enter higher education under a programme to promote college attendance are probably those with the lowest level of complementary assets, such as cognitive ability, family ties, and self discipline, to help them find a job after graduation, it seems likely that such a policy would simply deprive marginal college candidates of potential earnings for four years, while doing nothing to improve their income potential--a negative result for both society and the individual.

So which is it? Some forms of education "teach you to think", but to be honest, what an undergraduate English major did was "teach me to regurgitate the political opinions of my professors in essays ostensibly about literature". This is not a skill that I have been called upon to use since in either my personal or professional lives. I learned to think critically in business school, five years later, and only after I'd already acquired substantial logical problem-solving ability through troubleshooting computer networks for years.

From the desk of Jane Galt:

Bubble ethics?

Mark Kleiman says that you won't see stories on the housing bubble in your paper's real-estate section for the same reason you didn't see stories on the stock market bubble in financial papers: the sections need advertising dollars to support themselves.

Now maybe I'm biased--my employer predicted the stock market bubble, and has been loudly harassing readers about the housing bubble throughout the rich world for quite some time. And we sell plenty of advertising. But beyond that, I don't think this is quite true.

The problem with real estate and financial sections is not that they cater to the whims of advertisers; it's that they are extraordinarily vulnerable to survivor bias.

Bubbles generally become apparent to experts years before they pop. Contrary to popular opinion, many people on Wall Street knew that stock prices were irrational long before the bubble collapsed.

So why didn't they say so? Well, some of them wanted to sell fat IPOs to gullible suckers. But many of them did say so, only no one paid attention. The problem with newspapers isn't that they need advertisers; it's that they have incredibly short attention spans. Journalists tend to cover a beat for a few years, and then move onto the next thing; that's how you move up in a media organization. Thus, they tend to check expert's predictions against months, rather than years, of data. And in the short run, bearish experts were wrong.

It is a maxim of traders that "the market can stay irrational longer than you can stay solvent"; that is why few people on Wall Street tried to act on their knowlege that the stock market was overvalued by selling short. They knew it was going to bust, but they didn't know when, meaning that they couldn't be sure they'd be able to cover their short trades long enough to make a profit.

This problem afflicted bearish experts on the publicity side too. Inexperienced business journalists saw some guy claiming that the stock market was going to crash, and then watched the Nasdaq climbing to ever more dizzying heights. Who are you going to believe, him or your own eyes? Moreover, because the crash wasn't actually happening, it was very hard to cover: there's only so many times you can say "the bubble is going to crash and everyone is going to lose a bunch of moola" before your editor demands something fresh. ANd there were a lot of fresh stories about dotcom companies with record first-day pops.

Similarly, experts have been predicting the housing market's demise for quite some time. Journalists, who generally need a hard news "peg" to sell a story to their editor, have understandably overlooked this in pursuit of something that was actually happening right now.

From the desk of Jane Galt:

Public service announcement

The Overstock.com Christmas ad has now replaced the eHarmony commercials as the most annoying thing on television. Pardon me while I repair to the toolshed and hit myself in the head with a small hammer to knock that stupid tune out.

From the desk of Jane Galt:

Why pundits are like businessmen

Louis Menand has an article in the New Yorker which ought to make me, a professional news analyst, despair:

Tetlock also found that specialists are not significantly more reliable than non-specialists in guessing what is going to happen in the region they study. Knowing a little might make someone a more reliable forecaster, but Tetlock found that knowing a lot can actually make a person less reliable. "We reach the point of diminishing marginal predictive returns for knowledge disconcertingly quickly," he reports. In this age of academic hyperspecialization, there is no reason for supposing that contributors to top journals--distinguished political scientists, area study specialists, economists, and so on--are any better than journalists or attentive readers of the New York Times in reading emerging situations. And the more famous the forecaster the more overblown the forecasts. "Experts in demand," Tetlock says, "were more overconfident than their colleagues who eked out existences far from the limelight."...

The experts' trouble in Tetlock's study is exactly the trouble that all human beings have: we fall in love with our hunches, and we really, really hate to be wrong....

The expert-prediction game is not much different. When television pundits make predictions, the more ingenious their forecasts the greater their cachet. An arresting new prediction means that the expert has discovered a set of interlocking causes that no one else has spotted, and that could lead to an outcome that the conventional wisdom is ignoring. On shows like The McLaughlin Group, these experts never lose their reputations, or their jobs, because long shots are their business. More serious commentators differ from the pundits only in the degree of showmanship. These serious experts, the think tankers and area-studies professors, are not entirely out to entertain, but they are a little out to entertain, and both their status as experts and their appeal as performers require them to predict futures that are not obvious to the viewer. The producer of the show does not want you and me to sit there listening to an expert and thinking, I could have said that. The expert also suffers from knowing too much: the more facts an expert has, the more information is available to be enlisted in support of his or her pet theories, and the more chains of causation he or she can find beguiling. This helps explain why specialists fail to outguess non-specialists. The odds tend to be with the obvious.

The problem as I see it is that the market for punditry has skewed incentives. There is no reward for being boring and right, nor any punishment for being novel and wrong. But there are big rewards, in the form of book contracts and lecture fees, for being novel and right. Pundits are thus tempted to act like executives with fat option packages. Executives with stock options get paid only if the stock appreciates considerably, putting their options "in the money"; but unlike investors, there is no downside for them. They are just as badly off if the stock stays at its current level, keeping their options "out of the money", as they are if the company implodes and the price of the stock drops to 50 cents a share. They are thus tempted to take risky steps which have high upside potential. Similarly, the expected value of an obviously right prediction is exactly the same to the pundit as that of a spectacularly wrong one. They are thus tempted to make risky predictions, hoping that one hits and they strike it rich.

I have myself observed the tendency of journalists to believe that their spectacularly wrong predictions (i.e. my near certainty that Argentina would never default on hte IMF) were merely bad luck, while their correct predictions are evidence of unusual intellectual acumen. Thus, in addition to their likeness to executives with options packages, pundits also closely resemble mutual fund managers, and the people who invest with them.

Statistically, mutual fund returns show little evidence that their managers are particularly sharp; a manager who lead the league last year is no more likely than any other manager to repeat the phenomenon this year. But managers rarely attribute their good years to being in a lucky spot on the bell curve; they see them as the natural result of the wise decisions they made throughout the year. And because there are so many mutual funds out there, some managers by pure chance manage to put together strings of good years, just as others, by almost equally random chance* will have a run of bad years. If you flip a coin a thousand times you will, purely by chance, get some strings of heads and tails that seem non-random to the casual observer, who may be tempted to attribute the strings to the coin-flipper's unusual skill. This is why investors, stupidly, pile into mutual funds that have had a couple good years behind them. They tend to get the same results that you could expect if you decided to put money down on your "hotshot" coin flipper continuing his winning streak.

In other words, a bet on the predictions of famous pundits is a sucker bet. As Daniel Drezner suggests, political bloggers everywhere are undoubtedly congratulating themselves on having been right all along.

*while there's no evidence that good mutual fund managers can beat the market, there are bad managers who consistently underperform it. Luckily for us, they are quickly fired and their funds closed.

From the desk of Jane Galt:

TiVo talk

Here's what I wrote about TiVo last year:

. . . it's been five years, and TiVo still isn't turning a profit. This is surprisingly common with new technologies; innovators often (even usually) aren't the people who end up making money off the market. They invent their bright idea, and then some established player, one with the complementary assets like distribution channels and marketing departments, comes over and horns in just as it's getting profitable. As the old saying goes, smart ain't the same as rich.

Now comes some exciting news from the Dow Jones newswire:

TiVo Inc. reported a narrower loss for the third quarter and revenue rose nearly 30% as the company reached four million subscriptions helped by its partnership with DirecTV.

For the three months ended Oct. 31, TiVo lost $14.2 million, or 17 cents per share, compared with a loss of $26.4 million, or 33 cents a share, in the year-ago period. Revenue was $49.6 million, up from $38.3 million last year.

For the third quarter, TiVo added 434,000 new subscribers, compared with 419,000 in the year-ago period. A large portion of those new accounts, 379,000, were from DirecTV Group satellite TV subscribers, instead of consumers who purchased TiVo's standalone DVRs.

TiVo, which pioneered DVRs that lets users easily record television shows to a hard drive and pause live TV, is facing tough competition from cable companies as it strives to reach sustainable profitability.

In the second quarter, the company reported its first ever profit -- albeit a small one of $240,000 -- but the company has forecast future quarterly losses as it plans to increase sales and marketing efforts to boost subscriber numbers. On Tuesday, it cautioned that its fourth-quarter loss will be between $17 million and $22 million.

Remember, excitement is relative. A couple years ago, I thought Amazon was doomed too.

From the desk of Jane Galt:

How does education increase earnings?

I'm less sanguine than Winterspeak that education actually increases skills in a productive way. Of course, I was an English major, and if there's any course of study less designed to make you employable, it isn't given in the Ivy League*. But in general, I'd say that very few of my classmates taking a liberal arts course learned anything useful that couldn't be gotten out of a six week course on business writing. Eingineering and science majors, yes, but not the liberal arts majors--who are the majority of our nation's college graduates.

So why do we both sending people to college?

In my opinion, it's very much a signalling mechanism: employers do not value what you learned in school, but they do value knowing that you have the middle class background, the willingness to delay gratification, and the intelligence necessary to complete a degree. For many people, college also provides a social network that helps them later in life. And it may allow them to mature enough to make them worth more than minimum wage.

If what we learned in college were really important, we would expect to see income correlated with the quality of the school. And indeed it is--but if you look at people who were admitted to a highly selective school, but chose to attend a less prestigious one (presumably for money reasons) they earn no less than the students who matriculated at the more highly regarded school. Thus, I think in general, the educational benefits of college are probably pretty trivial compared to the social and signalling benefits.

This is not necessarily inefficient for our society. Education may have non-economic benefits. And the signalling mechanism could well be more efficient than employing legions of unproductive high school graduates. Plus, college students get a lot of utility out of being irresponsible morons for four years. Or was that just me?

Funnily enough, I am now employed in the only job which has ever required the skills I learned in school--and I'm in a job that almost no business school graduates go into. On the other hand, my classmates on average seem to use very few of the skills they learned. Go figure.

*The joke when I was graduating college ran something like this:

Q: What did the English major say to the Engineering major after they graduated?

A: You want fries with that?

Sadly true.

From the desk of Winterspeak:

Returns to Education

Kash over at Angry Bear had the nerve to say that education increases earnings. The data on this is pretty clear -- he includes an excellent chart showing that those with just a high school degree earned a median income of $26K in 2003 compared to those with some professional degree, who earned $82K. He also notes that:

This reward to education has grown over time. For example, a Census Bureau summary of major economic trends in the US over the past half century reported that the median income of workers with at least a Bachelor’s degree was only 35% higher than those with only a HS diploma in 1963. By 1997 that premium had risen to 88%. And in 2003 the earnings gain from having at least 4 years of college was over 100% of a HS graduate’s earnings, according to the data cited above.

His commentators get really mad, arguing that higher education is mere credentialism and that these higher wages are not due to any additional skill that higher education signals or produces, but that society rewards people based solely on which bits of paper they have, not what they can actually do.

Although there is certainly some credentialism in higher education, I don't buy the argument that it runs rampant in an economy as competitive as the US's. A country that is comfortable outsourcing work to poorer parts of the world clearly cares, at least a little, about what people can do, and not just where they graduated from.

I would also add that the falling expected wages of a high school diploma have also greatly reduced the cost of a college education. While college tuition has outpaced inflation for several decades, the gap between what a HS diploma holder and college degree holder can hope to earn has widened dramatically. The opportunity cost of going to college is now much lower than it used to be, both in foregone wages while in school and in the wages you would have earned had you not gone to school at all.

The question is whether or not the reduced opportunity cost of getting a college degree makes up for the increase in the cost of the degree itself, making college more of a bargain today than it was in the past. I'm too lazy to calculate it all out, but if anyone wants to take a swing at things in the comments, they are welcome.

From the desk of Jane Galt:

A vote for terrorists is a vote for freedom

Mark Kleiman says "What to do when terrorists win elections is a genuinely hard problem." But is that true? After all, much of the support for terrorist networks comes from disenchantment with the existing political regime--whether that regime is Israel's government, the PLO, or the Iraqi interim coalition. The best way to undercut that support is to let people see that, despite their promises, the terrorists do not in fact improve the lives of those who vote for them. To the extent that they do improve the lives of those who vote for them, thus undercutting my argument, I submit that this will be because they are spending less time blowing things up and more time worrying about sewers and schools.

Not that I think that the Muslim Brotherhood would necessarily do a better job running Egypt than Mubarrak. But having to please voters with tangible results, rather than rhetoric and explosions, can only exert a moderating influence on them.

I'm far more concerned with what happens to the process. Theocracy (or any other ideological group that gets elected to power) worries me most to the extent that it changes the rules so that the group can't get unelected: excluding women or minorities from the franchise, rigging the electoral system, or doing away with elections altogether. As long as the process remains Democratic, I'm of the opinion that the rest will eventually (albeit possibly very slowly) work itself out. And in the case of Egypt, the Muslim brotherhood could hardly make things less democratic. An actual free election that brought the Muslim Brotherhood to power would, in my opinion, be far superior to the current system, notwithstanding its effect on our foriegn policy in the short term.

From the desk of Jane Galt:

Oh Canada!

So Canada has given its government the boot, just scant months after the election that put this government in power. This is hardly surprising, since Canada's minority governments have an average lifespan of 14 months.

This morning on Fox News I heard an anchor trying to make this "relevant" to Americans by pointing out that Bush would not be endorsing Prime Minister Martin for reelection, since he has been a thorn in the side of Mr Bush's administration for quite some time. My goodness, who cares? I mean, have y'all been to Canada lately? The Canadians are not exactly anxiously waiting to know which way George Bush thinks they could vote. In fact, if Mr Bush really wants to scuttle Mr Martin's chances, the best way to do so would be to saturate television networks near the Canadian border with advertisements enthusiastically encouraging Canadians to vote Liberal in teh strongest possible terms.

This will probably not happen. But I doubt that Mr Martin will manage to secure a majority for his government; he's managed to pretty conclusively alienate both the Quebecois and the western provinces, plus anyone in Ontario and the Maritimes who cares about the rather sordid corruption scandal that got the Liberals into this political mess.

Not that that means, as American conservatives seem to be hoping, that the Conservatives will finally get back into power. Canada's conservative party is a messy alliance of two opinionated wings that barely managed to mount a serious challenge to the Liberals in the face of the worst political scandal to hit Canada in decades. Best bet is that there will be another minority government, and another vote of no confidence that brings that government down, until the Canadian people get over their disgust will all of their politicians.

From the desk of Jane Galt:

Donation function

Alex Tabarrok proves scientifically, using economics, that you should donate a lot of money to your favourite bloggers:

Why are we asking for donations? MR is never going to be a paying venture but donations help us to cover our costs. More importantly, donations help to solve a serious economic problem. Efficiency says that goods with zero marginal cost should have a zero price but without prices not only is the incentive to produce diminished but so is information about what to produce. (See Coase's 1946 classic, The Marginal Cost Controversy, JSTOR). Donations allow prices to be set at MC while at the same time providing a (noisy) signal about where true economic value lies. In particular, Tyler and I know that we can appropriate more of our marginal product from professional work than we can from blogging yet it is conceivable that our marginal product is higher in blogging. Thus, to decide how much to invest in this venture we markup donations to get an estimate of our social value and we put positive weight on social welfare in our utility function.

Needless to say, we at Asymmetrical Information would love to spend some time analyzing the social welfare in our utility function.

From the desk of Jane Galt:

Special note

Would whoever bought the six-quart Kitchenaid mixer email me and tell me if it's as beautiful to use as it is to look at?

From the desk of Jane Galt:

Shameless begging: Home electronics edition

My kitchen gear recommendations are here

As you may know, now is the time of year when I engage in an absolutely shameless attempt to encourage you to earn me money from my Amazon.com associates account, under the thin pretense of suggesting things you can buy your loved ones for Christmas. I am poor, and my student loan officer is hungry, and the people at the workhouse will only give me one serving of gruel a day. . . this brazen commercialization of The Birth of Our Lord is the only way that I can afford to buy myself the books with which I enrich my mind so that I can offer you keen insight and witty commentary on a quasi-daily basis.

If you're going to do your Christmas shopping on Amazon this year, just click the handy links provided by me or another of your favourite bloggers (mine's over there at the right, if you scroll down a little!), and at absolutely not cost to yourself, you can send a little commission our way. We get the commission even if you buy something other than the product we linked, though the commission is higher for direct links.

However, even if you don't order through Amazon, all the stuff I'll suggest here is stuff that I genuinely love, so do consider purchasing for yourself or your loved ones offline. And if you do buy something I recommend, please, please, please email me to let me know how it went over.

And if you don't like anything you see here, please feel free to peruse last year's selections, though there is some overlap.

1) Tivo. Yes, it really is better than the other DVRs, and not just because it has the cute little TV character bouncing all over the place. The interface is better and more intuitive, the suggestions work better, and you can now set it up to play music or pictures, something I'm planning to take advantage of at the brunch I'm giving this year on New Year's Day.

I love my Tivo with such a passion that when my last Tivo died, I composed a poem in honor of its demise. It is not a good poem, to be sure. But it comes from the heart.

Tivo has changed my television watching life. When I'm over at my parents, I have trouble wrapping my mind around the fact that I can't rewind to recover a missed sentence, pause to answer the phone, or call up a treasure trove of stored movies and documentaries when the current offerings do not appeal--as they so often don't. I do not have premium cable, and yet I am never at a loss for something to watch. Ironically, I spend less time watching television, because I don't spend aimless hours cruising the channels and waiting for something to entertain me.

The link I posted is to the one I have, the eighty hour, which I've found more than adequate for my needs, even at "best" recording quality. There's also an introductory forty hour model, which is what I had before; I found it a little skimpy, but it's still pretty good, and with all the discounts they're offering you can often get your hands on one for as little as $50. On the other end, there's a Toshiba combination DVR and DVD recorder, which I've heard fantastic things about, but which is just a little bit beyond the budget at Stately Galt Manor.

2) Averatec 3360-EG1 laptop computer Never heard of them? Neither had I until my father bought one. Three months later he bought me one, ostensibly as an early Christmas/Birthday present, but really as a way of persuading me to give him his damn laptop back.

It's thin, light, and so far, it works swimmingly. The caveat is that I have a big honking Dell desktop; I use this guy only for writing and cruising the web. Computer games or big statistical sets are pretty slow on this guy, so I wouldn't get it as a desktop replacement if you need serious processing power.

But if you don't need serious processing power, take a look at these guys. You get a ton for your money--built in wireless, a nice screen, good battery life, and so forth. It's neatest feature is a little button that turns the wireless card off and on, so that it doesn't suck power when you're not using it.

Now, of course, my technical support requirements are pretty slim; I just need someone to send me the correct part in a reasonable time frame. For this reason, I am unbothered by their scanty 1 year warranty. But if you're reasonably technically adept (i.e. you trust yourself to open a laptop case and poke around inside it with a screwdriver), and on a tight budget, I highly recommend it. You could buy a third-party warranty and still come out ahead at this price.

3. Home microdermabrasion kit. This one, obviously, is for the ladies. Not that you guys don't need microdermabrasion to give your skin a more even and youthful appearance, but no matter what I say, you're not going to try it, so I'll leave you to your scaly dermis.

My mother ordered this for fun, and I spent my vacation at my Grandmother's house giving her and my aunt facials. Not to sound like an infomercial or anything, but it actually did make them look younger, and it really made their skin beautifully soft and smooth. (I did not try it on my skin, which tends to erupt in a hideous rash when anything harsher than Evian is applied to it.) It takes 4-8 minutes a day, and you're supposed to use it five days in a row the first time you use it, followed by a week off, and then regular maintenance uses 2-3 times a week. My mother says it's well worth the small effort.

4) Linksys Wireless Router Give the gift of wireless this Christmas season. To yourself, if no one else. Honestly, I know, you don't think you want to take your laptop to the couch so that you can cruise the web while lying flat on your back and watching Grosse Pointe Blank, but trust me, you do. And while you may not be aware of it, you also want to be able to take your computer into the kitchen, where you can call up a recipe from Epicurious while browsing through the refrigerator to see what ingredients you have. You want to lie in bed on a Saturday morning, Instant messaging your sister about your crazy mother, and when a brilliant idea occurs to you just as you are drifting off to sleep, you want to be able to grab your laptop and jot it down in a word document before you collapse into slumber. You have all off these deep needs lurking inside you, waiting to be unleashed by a wireless router. Give into them. No good can come from repressing your innermost feelings.

Plus, if you have a Tivo, you can get this wireless USB adapter and hook your Tivo up to the network without messy cables or taking up the phone line.

5) Rio Karma MP3 player If you have to have aniPod . . . well, my Dad splurged on the 60 GB, and he raves about it. I've used iTunes, and it's great, although I don't purchase music because it won't transfer it to my MP3 player. But the Rio Karma is a lot cheaper, and it has some features the iPod doesn't.

For starters, it fits snugly in a cupped hand, and is set up so that it can be operated without looking at it--volume on one side, scroll on the other, and the play button conveniently located for your thumb to move it. It's so ingeniously designed that a left-handed friend picked it up and said "Why did you buy an MP3 player made for lefties?"; even though it's not symmetrical, it has the same snug fit and easy operation no matter which hand you put it in.

The software and docking station are easy to use, and the transfer rate is fast. Best of all, it can play an entire album without pausing, meaning that if you listen to opera or classical, you can get the entire act or movement. The iPod chops them up into tracks, which is deeply annoying to serious buffs.

It doesn't have the sleek white design of the iPod, but hey, are you playing music, or looking at it?

6) Sennheiser noise canceling headphones It was with deep trepidation that I purchased these to go with my Rio. But the first plane trip I took them on erased all doubts. The headphones emit a sound that cancels out airplane noise. I created a special playlist for sleeping to (no Public Enemy or Nine Inch Nails) and was borne blissfully away on the wings of Morpheus, happily oblivious to both engine noise, and my fellow passengers. They're bulkier than earbuds, but oh! the sweet peace. They're also fantastic for the subway. And they're surprisingly lightweight and compact; they fold for storage. The only downside is that they require AAA batteries to produce the noise cancellation, but it's a tiny price to pay.

7) Minolta DiMage G600 My previously high-end digital camera is this year's mid-list offering. But I still adore mine. It takes really beautiful pictures, even if you're a complete photographic moron, as I am. But it also has enough shutter speed, light monitoring, and Fstop adjustment to content my camera-mad coworker, who has an SLR but keeps this one for snapshots. Other than more zoom, I can't imagine a feature I'd want that it doesn't have. The only downside is that you tend to spend precious vacation hours posing and re-posing for snapshots, until the picture in the display window matches the vision in your mind.

8) Panasonic cordless phone I won't bore you with the saga of me and my cordless phones. Suffice it to say that when my old Panasonic, which took me to Chicago and back with years of faithful, perfect service, died, I entered the world of cordless phone hell. If the battery didn't die, the reception fizzled, even when standing three feet from the receiver (and you can't get much farther than that in my apartment). Or the voicemail light didn't work. Or . . . but I said I wasn't going to bore you, didn't I? Anyway. Love this phone. Love it. Love, love, love it. No answering machine--voicemail is cheaper and easier. Couldn't be happier.

9) Vonage I just couldn't be happier with their service. For $25 a month, I get unlimited local and long distance, voicemail, caller ID, three-way calling, my voicemails emailed right to my desk when I'm at work, and about a zillion other features I can't even remember. They also have great rates to Europe, which I call fairly often for work. And it's insanely easy to use. Only two potential downsides are 9/11 calling--they can't automatically pinpoint where you are--and that if your cable internet goes out, so does your phone. But if you have a cell phone, switching to Vonage is a slam dunk. It's incredibly easy to set up, and their tech support has been great. Best of all, you can travel with it; I took my Vonage phone to London, plugged it into my cable modem, and presto! it worked just as if I were back in the US. I gabbed for hours with friends across the Atlantic at absolutely no cost to myself. It also works in hotels with broadband, enabling you to buypass the outrageous fees they charge you for phone service.

10) Civilization IV Yes, it's as good as everyone says it is. Yes, I have wasted countless hours conquering the Aztec empire and building the Great Library. Do it anyway. You know you want to. [/evil grin].

From the desk of Jane Galt:

Public Service Announcement

I'm giving a New Year's Day brunch this year. If you're going to be in New York, and you know me, please drop me a line to let me know. I make some of the finest pancakes in this Republic of ours, and I'd love to see you.

From the desk of Jane Galt:

The sky is falling!

Well, no, but the yield curve may be inverting, which is almost as bad.

What does an inverted yield curve mean? It means that the yield on short term debt is higher than the yield on longer term debt. Historically, this has been a harbinger of recession, and for good reason, since the markets are telling you that they have very dim expectations indeed for the future.

From the desk of Jane Galt:

Stephen Moore is slamming John McCain

He writes:

Yet Mr. McCain holds the most eclectic set of economic policy positions of any politician I've ever met. He seems to defy political typecasting, reveling in the role of maverick. He voted against the Bush tax cuts ("Way too tilted to the rich"), while supporting antigrowth initiatives to combat global warming ("Climate change is just a huge problem that really needs to be confronted"), and is the lead sponsor--with Sen. Ted Kennedy--of a guest worker program to allow immigrants to enter the country legally. Any one of these landmines could blow up in Mr. McCain's face in conservative red state primaries in 2008. His 2000 presidential bid was capsized by Christian conservative primary voters in South Carolina. He readily concedes that "sometimes I have run-ins with the right-wingers in the party."

On the other hand, he's a fierce defender of free trade and a champion of school choice. "The day that members of Congress will send their kids to the public schools in Washington, D.C., is the day I'll know we've fixed education in America." Then he asks: "How can my colleagues say they are against vouchers or charter schools when they won't send their own kids to the schools in the town where we work?"

. . .

On a broader range of economic issues, though, Mr. McCain readily departs from Reaganomics. His philosophy is best described as a work in progress. He is refreshingly blunt when he tell me: "I'm going to be honest: I know a lot less about economics than I do about military and foreign policy issues. I still need to be educated." OK, so who does he turn to for advice? His answer is reassuring. His foremost economic guru is former Texas Sen. Phil Gramm (who would almost certainly be Treasury secretary in a McCain administration). He's also friendly with the godfather of supply-side economics, Arthur Laffer.

But Mr. McCain is no antitax supply-sider himself. He grandstanded against the Bush capital-gains and dividend tax cuts and even co-sponsored an amendment with Tom Daschle to scuttle the reduction in the highest income-tax rates. Why? "I just thought it was too tilted to the wealthy and I still do. I want to cut the taxes on the middle class." Even when I confront him with emphatic evidence that those tax cuts have been an economic triumph and have increased revenues, he is unrepentant and defends his "no" vote by falling back on class-warfare type thinking: "We have a wealth gap in this country, and that worries me."

I see nothing in this litany to worry me. While I endorsed "starving the beast"--cutting taxes in the hopes that this would restrain spending--it doesn't seem to have worked. Taxes can go up now, or they can go up later, but given that the government is apparently incapable of cutting spending, they're going up sometime. It seems to me uncontroversial to say that the wealthy, who have experienced most of the income gains of the last 20 years, should be the ones who get the higher taxes--though I would like to see the capital gains and dividend taxes kept low, while marginal income rates are increased. Moreover, if Stephen Moore tried to persuade me that the Bush tax cuts had caused revenues to increase, I would have done a lot more than genially ignored him.

Likewise, climate change seems to be a real problem, and it is to the deep shame of conservatives that they cling to increasingly tenuous science to pretend that it ain't so, rather than addressing what sort of tradeoffs we should make between growth and the environment. The more hysterical claims of the environmentalist movement may be, even probably are, risible. But the fundamental fact is that we're tampering with a complex system that we don't understand very well, and which could kill all or most of us if it goes wrong. Conservatives are supposed to be against that sort of thing.

And while I have ambivalent feelings about guest worker programmes, they're not facially absurd.

What frightens me about McCain is not the specifics of his policy ideas; it's that he's a meddler. On this, Stephen Moore and I agree:

He views himself, I believe, as a kind of modern-day Robin Hood, a defender of the downtrodden and tormentor of the bullying special interests, which is endearing and unquestionably a big part of his broad political appeal, but often leads to populist and parasitic economic policy conclusions like higher taxes on the rich and attacks on "huge oil profits." He wants to be the caped crusader against corruption. The buzzword for the McCain Straight Talk Express in 2008 will be reform: "I want to reform education, reform Medicare and Social Security, reform lobbying and campaigns. Reform immigration. Reform. Reform. Reform."

I'm uncomfortable with a president who looks for a villain to pillory every time people are unhappy. Moreover, the senator's evident belief that any and all ills can be fixed with a sufficiently complex law make me wonder why one would vote for him instead of the democrat saying the same thing.

Professor Bainbridge cites Russell Kirk:

Change and reform, conservatives are convinced, are not identical: moral and political innovation can be destructive as well as beneficial; and if innovation is undertaken in a spirit of presumption and enthusiasm, probably it will be disastrous.

Senator McCain gets high marks on those conservative voting scorecards, but in a deeper sense he seems to me to be not very conservative at all.

From the desk of Jane Galt:

What if they gave a summit and nobody came

Soft power has limits:

When President George W. Bush launched his "greater Middle East initiative" for Arab democracy a couple of years ago, many Europeans complained he was ignoring what the European Union had achieved over the past 10 years with its neighbours around the southern and eastern rim of the Mediterranean. But, as the EU takes stock at a 35-nation summit today of this decade-long partnership, one has to ask, what achievement?

For the so-called Barcelona process has shown the limits of the soft (political) power that Europe likes to vaunt and contrast with US hard (military) power. The EU gives �1bn a year in aid, and more in loans, to its Mediterranean partners, but has stimulated little political reform in return.

One reason is that EU influence over its neighbours depends largely on whether the latter stand any chance of joining the EU. Of the 12 original Barcelona partners, Cyprus and Malta are inside the EU and Turkey is in the waiting room, but the rest have zero chance of joining. Another reason is that events have changed the political agenda. The EU and its Mediterranean partners have let human rights take second place to measures to counter terrorism and illegal immigration, as shown by the recent ugly scenes of sub-Saharan African migrants being thrown first out of Spanish enclaves in Morocco and then out of Morocco itself.

The New York Times adds:

Many of the North African and Middle Eastern leaders who had agreed to come to the meeting announced last week that they could not attend. Their absence weakens European claims that their approach to the Muslim world - based on economic development, dialogue, strengthening the rule of law, and other forms of soft power - has greater credibility with the region's leaders than what they see as the Bush administration's more aggressive approach.

The problem, as I see it, is that Europe has very limited "soft" tools in its box. It cannot offer significant military assistance, and while it does dispense aid around the region, the US's aid to Israel and Egypt dwarf the EU's efforts. Moreover, trade, one of its most potent tools, is being taken away from its diplomats by a population frightened of competing. And any goodwill it might have generated with its donations is, one presumes, being rapidly eroded on the famed Arab street by the European population's obvious hostility to muslim immigrants.

So the US, where anti-muslim bias seems to be much less prevalent (due in part, no doubt, to the fact that we have a lot fewer muslim immigrants--but I don't see Mexicans rotting for generations in ghettoes without jobs or hope), probably has some weapons in the soft toolkit that we could be deploying and aren't. But there are real limits to how far one can get with soft power.

From the desk of Jane Galt:

Communism really does suck

Alex Tabarrok reminds us just how much:

The total for the communist democide before and after Mao took over the mainland is thus 3,446,000 + 35,226,000 + 38,000,000 = 76,692,000, or to round off, 77,000,000 murdered. This is now in line with the 65 million toll estimated for China in the Black Book of Communism, and Chang and Halliday's estimate of "well over 70 million."

This exceeds the 61,911,000 murdered by the Soviet Union 1917-1987, with Hitler far behind at 20,946,000 wiped out 1933-1945.

For perspective on Mao's most bloody rule, all wars 1900-1987 cost in combat dead 34,021,000 -- including WWI and II, Vietnam, Korea, and the Mexican and Russian Revolutions. Mao alone murdered over twice as many as were killed in combat in all these wars.

Now, my overall totals for world democide 1900-1999 must also be changed. I have estimated it to be 174,000,000 murdered, of which communist regimes murdered about 148,000,000. Also, compare this to combat dead. Communists overall have murdered four times those killed in combat, while globally the democide toll was over six times that number.

From the desk of Jane Galt:

They got Al Capone for tax evasion . . .

And now Augusto Pinochet has been arrested in Chile on charges of tax evasion.

From the desk of Jane Galt:

Getting ready for Thanksgiving

If you're still looking for something to serve, I have some suggestions for excellent recipes: side dishes, cranberry bread, and homemade pumpkin pie.

From the desk of Jane Galt:

Measuring prosperity

Sorry I haven't posted for a while, but there have been a lot of demands on my time. You probably didn't realise this, but occasionally I see people in the offline world, and it seems that the last few weeks of November are when everyone wants to see ol' Janie. As a result, my morning blogging time has been used up by the need to catch up on sleep.

Anyway, I've been meaning to post for a while on Kevin Drum's argument that instead of looking at GDP growth, we should keep our eyes on the growth in median wages. I don't think that that's a bad idea, or really a good idea . . . I think that excessive emphasis on any one metric leads to distorted economic thinking, and don't agree with Mr Drum's assertion that you can't have a society getting worse off as long as median wages are growing; people at both tails could be getting dramatically poorer without altering the trajectory of median wages. WHile I realize that for some people, the wealthy getting poorer is a feature rather than a bug, this would still decrease net utility in our society. Unless our society gets a lot of net utility from watching rich people suffer, and while this may be true, judging from our tabloids, I'd prefer not to believe that we as a nation are that petty.

But more deeply, I don't see either of these metrics as a very good guide to policy, because I don't believe that there is very much the government can do to influence them, for good or ill.

Oh, we have a good idea, on a gross level, of what governments should not do to really screw up the economy. Governments should not create massive hyperinflation, they should not nationalise industries, they should not implement regulations that allow industries to function as cosy little cartels, they should not block trade with other nations, they should not enact currency or price controls, they should not indulge in confiscatory taxation. (Note to conservatives: 35% marginal tax rates do not count as confiscatory for these purposes. Nor, for that matter, do 45% or even higher rates.)

But other than not screwing things up, there's very little the government can do to increase growth. And there's nothing that the government can do to increase median wages that isn't on our list of bad things you shouldn't do to the economy.

Just as conservatives prefer to believe that the Reagan tax cuts resulted in the economic growth and increased tax revenue of the eighties, despite the fact that the tax cuts coincided with recovery from the worst recession of the postwar period, liberals like to believe that leftish economic policies resulted in the extraordinary wage growth of the 25-year period following the end of World War II. Unfortunately, the numbers don't back this up. The growth in wages largely tracks the growth in productivity, which was not due to government policy, but to changes in technology and the labour force. While union bargaining power can increase the wages going to union workers, as I understand it there's little indication that this increase is taken from capital's share of national income, which means that whatever unions generated in the way of surplus wages for their workers seems to have come out of the pockets of other workers, or consumers.

So why have median wages been stagnating even though productivity began increasing in the 1990s? Two reasons: increasing labour supply, and increasing costs for benefits. While median wages have stagnated, total compensation hasn't. In essence, workers have been consuming all of their income increases as health care.

At the same time, new entrants have flooded into the labour market, not just here, but abroad. The world labour force is currently undergoing a massive expansion as the result of the entry of India and China's citizens, who number approximately 1/3 of the entire population of the earth. At home, women have entered the labour force in dramatic numbers (an increase which has now stopped). And technology is "entering" the labour force by displacing workers. Just think how many fewer secretaries there are now that the typing pool has disappeared.

Those technology improvements raise productivity. But they don't do so evenly; they have raised wages mostly at the top, unlike the mechanical revolution, which increased the productivity of low-skilled assembly-line workers. Difference in skills account for most of the divergence between the top and the bottom of the income distribution. (Yes, CEO salaries are largely related to how cozy they are with the board, not how skilled they are. But there are only about 1,000 people in the country running companies large, and cozy enough, to get truly outrageous pay packets. This is a minor annoyance, not a national disaster.)

The government could shoot illegal immigrants on sight, force women out of the labour market, curtail trade, and slow the pace of technology growth so as to reduce the return on skilled labour. But these are not good things for the government to be doing. Making the country as a whole poorer in order to reduce income inequality doesn't sound to me like a good idea. I realise that many liberal commentators claim that they can do this without sacrificing growth. But I don't see how.

From the desk of Winterspeak:

Elasticity of Bankruptcy

The US government recently passed a new, tougher, personal bankruptcy law that makes it harder to escape repaying your debt. Those for the change argued that current bankruptcy provisions were being abused, resulting in more filings and higher interest rates for the rest of us. Those against the change argued that nobody chooses to become bankrupt -- it just happens through bad luck -- and increasing the penalty is needlessly punitive.

Just before the law passed, the number of bankruptcy filings rose sharply. Now that the law is in place, the number of bankrupcies filed has fallen by 90%.

The spike in bankrupcies was clearly people rushing to file before the tougher regulations took hold, and the lull after is due to 1) fewer people filing (not worth it) and 2) fewer people to file (they all filed last month). Both of these support the idea that bankruptcy is a calculated and timed decision, and that changes to the benefits around filing for bankruptcy would impact whether or not people did so.

If bankruptcy was primarily driven by unforseeable bad luck that left people with no choice, individuals would not be able to be as strategic about filing as they have been.

From the desk of Jane Galt:

Risk vs. return

James Hamilton has a post that illustrates why it's as important to look at risk as return:

Of course, if you play that game long enough, eventually the market will make a big enough move against you that your capital used to meet margin requirements gets completely wiped out, giving you a long-run guaranteed return on your investment of -100%. But over the 1992-99 period, Lo's hypothetical fund dodged that bullet and ended up turning in a whopping performance.

Lo gives a variety of other examples of funds that could go for a long period with very high returns and yet entail enormous risks. They all have this feature of pursuing investments that have a high probability of a modest return and a very small probability of a huge loss. By leveraging such investments, one can achieve a very impressive record as long as that low probability disastrous event does not occur. It is certainly possible that some strategies along these lines would, unlike Capital Decimation Partners, earn a higher return than the market on average if you stuck with them forever. However, you should view that higher return as coming at the expense of much higher risk.

My discussion of Lo's hypothetical hedge fund should not be construed as a specific critique of any currently operating actual hedge fund. But suppose that all you know about a fund is that it has earned exceptional returns every year for the last decade, and you don't have access to information about the specific trading or asset holding strategy that netted those returns. Is it a good investment for your money? My advice would be no.

This is pretty much exactly what happened to Long Term Capital Management, which, as you may recall, nearly took the US financial system down with it when its bets on the bond market blew up. Caveat emptor.

From the desk of Winterspeak:

Psychology and Markets

Standard classical economics is modeled on forward looking, rational utility maximizers. By definition then, classical economics struggles to explain bubbles and funks, periods of irrationally high or irrationally low asset prices that correct themselves with a *pop*.

Part of the problem is that it is very difficult to know whether a price is right or not. For example, I thought Google was totally overpriced when it IPOd at $100, and its quadrupled in the 14 months since then. It is currently trading at a P/E of 90, which is really really high. It seems even more overpriced to me now but had I shorted it back in '04 I would have lost my shirt.

At least with Google people can fantasize about them launching brilliant new highly profitable products, but what captures the imagination to justify the crazy run-up we've seen in real estate prices? What magical thing is going to happen in the future that justifies a doubling of price in five years?

Seperating out real, informed predictions about the future, from short-term speculative greed and risk taking, from genuine sentimental fantasy is very difficult, and maybe a fools errand. But the individual that does some math and declared an asset overvalued is not ignoring psychology, he is considering it directly.

I've written extensively about housing (here, here, here) and the fact that I think it is currently in a bubble, so I very much enjoyed this post by Prof. Piggington:

I suppose that one could note my emphasis on data and assume I am some sort of impassive misanthrope whose only glimmer of pleasure comes from long nights spent manipulating my beloved database tables as my long-suffering wife looks resignedly on in aching loneliness. Our hypothetical reader believes that such a person—perhaps our reader now pauses to wonder whether such a joyless automaton can even be considered a person at all—could never understand the role that psychology and emotion play in buying a home.

There is but one purpose served by all those fun-filled charts and graphs in the Bubble Primer (the series of articles in which I lay out my case that San Diego housing is both way overpriced and at risk for a steep correction). That purpose is to use the process of elimination to zero in on the causes of the home price runup. One by one, we look at the actual numbers and see that none of the usual suspects—population, housing stock, income, rates, nice weather—can explain the magnitude of San Diego's recent home price growth. And when you rule out all those potential demographic and economic causes, only one thing remains: psychology.

The psychology, to be specific, of a speculative financial mania.

Standard economic theory says that systematic mispricing (which is what a bubble is) presents a free profit opportunity and so can be arbitraged away. But the illiquidity of housing, plus the difficulty of shorting, or hedging, strongly limits the ability to arbitrage mispricings. What can one do in a housing bubble except wait it out if one does not own, and sell and rent if one does?

Robert Shiller, whom I met at Chicago, has some very interesting ideas our financial instruments that are actually useful to individuals, and one of them is indices and futures on residential housing. Not only are these more liquid instruments amenable to short positions (bets that prices will decline) but they will also let people who do not yet own a house, and want to be longer on real estate but don't actually want an entire house, to buy some fractional ownership.

Since everyone needs to live somewhere, I argue that we are born into this world short housing and buying a house merely moves us to neutral. You need to buy "extra" house (more house than you need) or a second house to actually be long real estate and profit from price appreciation. I would recommend that all young people put their savings into residential futures upon graduation -- people should have a diversified portfolio and we enter this world naked, screaming, and very short housing.

From the desk of Jane Galt:

Copper crisis

If you haven't been following the brouhaha in London's copper market, you really should; it reads like a tabloid tale:

THE story sounded more appropriate for a spy novel than a sober financial broadsheet: rogue copper trader goes missing, as the Chinese government denies he ever worked for it. Yet in this case, truth has turned out to be at least as strange as fiction. Liu Qibing, a trader for China's State Reserve Bureau (SRB), which accumulates stockpiles of commodities for the nation's needs, has disappeared, leaving his employers on the hook for massive short positions in copper on the London Metal Exchange (LME).

Because the orders are likely to have been parcelled out among various brokers, it is difficult to assess the scope of China's problem. But most seem to think that Mr Liu's short-selling (sales of copper he did not own in the hope of buying it back later at a lower price) has left China short of the metal by some 100,000-200,000 tonnes--which is unfortunate, as it is due for delivery in December. Nor is it clear how Mr Liu was able to make such a big bet that prices would fall, since the SRB is saying little. Indeed, as rumours of Mr Liu's folly began to spook the markets, the organisation seemed to be denying any such person worked for it, even though he is well known to other LME traders; this fuelled speculation that the SRB would refuse to cover the trades. Others say that it has forced Mr Liu to go on leave. No one has heard from him for weeks.
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On Tuesday November 15th, copper hit a record $4,174 per tonne on anticipation of massive buying by China's government to cover the short positions (see chart). The contracts are thought to have been undertaken in April, when copper traded between $3,100 and $3,200 a tonne; that would translate into a loss of roughly $100m-200m if prices are at current levels when the copper must be delivered. China has been trying hard to cool prices to more manageable levels. Over the past few days, it has taken the unusual step of announcing sizeable sales of the metal on the domestic market, and late last week it announced that it had 1.3m tonnes of copper on hand, a figure roughly 1m tonnes higher than most independent estimates, according to the Financial Times.

Though these early efforts to take the heat out of the market were unsuccessful, on Wednesday the copper price dropped by more than 2% on news that the SRB was seeking permission to export up to 200,000 tonnes of the metal. But by Friday it had hit another new high, topping $4,200 per tonne, as traders once again began to doubt whether China can, or will, deliver.

Estimates of how much copper the SRB actually holds run from as little as 100,000 tonnes up to 500,000. Most observers think it probably has enough to cover the trades. But that doesn't mean it will; the SRB has said that Mr Liu acted without its authority, which may be a sign that it is preparing to disown the trades, lumbering the brokers with whom he traded with huge losses. But even if the SRB decides to honour the transactions, it will be hard to move such a huge volume of copper to LME warehouses by next month, as required by the contracts. Buying the necessary copper could prove equally difficult, since analysts estimate global exchange stocks amount to only 140,000 tonnes, of which the LME holds 65,000.

From the desk of Jane Galt:

Abortion and viability

Radley Balko's Fox News Column about abortion echoes some of the thoughts that I've expressed here about the messy muddle that contains most people's beliefs about abortion.

This bit struck a mental spark:

Abortion policy, then, is a game of line-drawing. We're looking for the moment at which a fetus reaches the stage of viability, when its right to live becomes more compelling than its mother's right to terminate her pregnancy. Enmeshed in this line-drawing game are deep convictions about morality, and personal and community values, not to mention medical technology, which continually pushes back the point at which a fetus can survive outside the womb.

What happens if viability goes back to at or near the point where a woman is likely to detect the pregnancy? I know that this may not happen, since right now we can't save a baby whose lungs have not sufficiently formed, but I think it's possible that in the future we'll develop some sort of artificial womb-like thing for even earlier preemies than those we now save.

This poses a real problem for women, doesn't it? Because I don't think that many of us would endorse widespread abortion for viable fetuses, which is what common first trimester abortions would then amount to. And yet, whatever the rhetoric the pro-choice side uses about women controlling their bodies, the main reason that most women seek abortions is not that they don't want to be pregnant; it's that they don't want a baby. If nine months of abdominal swelling, acid reflux, and hemorrhoids were an occasional side effect of sex, most of the people I know would probably just endure it rather than have a doctor vacuum out their abdomen with a painful and bloody surgery.

What happens to women once babies can be gestated, in however inferior a fashion, outside the womb? They end up stuck in the position that men are currently in: if you conceive, you're on the hook to support the little darling for the next eighteen years.

As I was writing this, I questioned whether it was really true that women are more worried about the baby than the pregnancy, since after all, if this were true, women could just give the baby up for adoption. I think that this would be valid if we lived in a vacuum, but for most women over the age of eighteen, there's a pretty stiff social stigma attached to giving up your baby. I can much more easily imagine myself telling my colleagues that I was going to be an unwed mother than telling them that I was going to be pregnant, but had no intention of raising the little monster. And for women who are worried about what a baby will do to their lives, abortion is a way to get rid of the baby before you see it, feel it kicking, or hold it in your arms . . . like sending the puppy the kids bring home back to the pound before it can lick your hand. I would certainly fear that once I'd delivered a baby, I'd change my mind.

But I think the real test of what we worry most about is simply that I'd bet most pro-choice women would rather live in a world with an abortion ban, and stigma-free adoption, than in a world with an abortion ban, and artificial wombs. This will raise some interesting questions as medical science improves.

From the desk of Jane Galt:

Absolutely shameless begging: kitchen edition

As you know, now is the time of year when I engage in an absolutely shameless attempt to encourage you to earn me money from my Amazon.com associates account, under the thin pretense of suggesting things you can buy your loved ones for Christmas. I am poor, and my student loan officer is hungry, and the people at the workhouse will only give me one serving of gruel a day. . . this brazen commercialization of The Birth of Our Lord is the only way that I can afford to buy myself the books with which I enrich my mind so that I can offer you keen insight and witty commentary on a quasi-daily basis.

If you're going to do your Christmas shopping on Amazon this year, just click the handy links provided by me or another of your favourite bloggers (mine's over there at the right, if you scroll down a little!), and at absolutely not cost to yourself, you can send a little commission our way. We get the commission even if you buy something other than the product we linked, though the commission is higher for direct links.

However, even if you don't order through Amazon, all the stuff I'll suggest here is stuff that I genuinely love, so do consider purchasing for yourself or your loved ones offline. And if you do buy something I recommend, please, please, please email me to let me know how it went over.

And if you don't like anything you see here, please feel free to peruse last year's selections, though there is some overlap.

Kitchen Equipment

1. Kitchenaid Stand Mixer I suggested this last year. I'll suggest it again next year, and every year until they drag me screaming into my grave. I really cannot tell you how strongly I believe that anyone with even a moderate interest in cooking or baking should purchase one of these. Don't tell me you have no counter space; I have (I'm not exaggerating) one counter approximately 18 x 36 inches for all of my cooking needs. My Kitchenaid lives in a closet and comes out every time I need it. Which is all the time. Every time I go to someone's house, I'm reminded of how bleak a cook's life is without a Kitchenaid: no effortlessly whipped egg whites, no popping unsoftened butter into the bowl and letting the Kitchenaid beat it into a creamy froth, no bread dough expertly kneaded for you while you lounge on the sofa watching television. Other mixers take forever, break down, and force you to stand there with a rubber spatula, scraping down the damn sides so that it all gets mixed in. That's no way to live.

"But Jane!" I hear you whine. "Do you know how much that thing costs? That's ridiculous. Well, the link I gave you is to the top-of-the-line model, the six quart. That's the model I covet (mine is the same, but five quarts instead of six), but sadly will never, ever get because Kitchenaids have approximately the same lifespan as the solar system. You invest a lot of money up front in a Kitchenaid, but you never, ever have to buy another mixer again. And you'll get the use out of it, believe me. The smaller models are no less reliable, though you can't make as much cookie dough or bread in them, and they work a little more slowly--but still orders of magnitude better than any other mixer you'll see. Non-cooks, I know your eyes are goggling at the price tag, but trust me, if there's a cook in your life, they will treasure this gift forever.

2. Kitchenaid hand mixer It's not as useful as the stand mixer, because you have to hold it in your hand and move it around, which is fine for cakes, but makes your arm tired awfully fast if you're dealing with a stiff dough. Mine came with dough hooks, but I'd rather knead the bread by hand than get carpal tunnel trying to drive my hand mixer through a thick wad of bread dough.

That said, if your loved one already has a Kitchenaid stand mixer, or you can't afford something quite that generous, the Kitchenaid professional hand mixer is a very nice gift. I find it invaluable for things like angel food cakes and pancakes, so I can whip the egg whites in one mixer, while making the rest of the batter in the other. With my two Kitchenaids, I can get an Angel Food Cake into the oven in fifteen minutes or less. This model will do most cakes quite as well as a stand mixer, and will considerably ease the task of whipped cream or making cookie dough.

3. Kitchenaid ice cream making attachment This is my new find for this year. It's a bowl you stick in the freezer for twenty-four hours, then slot onto your Kitchenaid with a special dasher attachment.

Why get this instead of a real ice cream maker? Three reasons: money, quality and space. If you already have a Kitchenaid (like all Kitchenaid attachments, this works with all models). The attachments isn't quite as easy to use as a professional "pour-and-go" model, but it won't set you back $500 either. Because a Kitchenaid mixer has such a powerful motor, this produces wonderful, smooth ice cream, much better than the cheap ice-cream makers you'll see in Target. It also has a larger capacity; you can make two quarts in this bowl, where most bargain ice cream makers will only let you make 1 or 1.5 quarts. And because you already have the mixer, you don't have to use up valuable counter or cabinet space to store the machine part with the motor in it.

4. Select-a-spice spice carousel I got this for my sister last year, and it's been a big hit. Basically, it comes with 12 spice containers that slot into the carousel. Each has a dial on it that you can twist to measure exactly the amount of spice you want, in 1/4 tsp increments. A full turn of the dial gives you two teaspoons worth of spice. Once you've got the amount you want, you open a little door in the bottom, and exactly the right amount of spice drops into your recipe, with no spilling or mess. The top also has a door for you to stick your measuring spoons into, if you want or need to, and a separate shaker spout--no more prying that little disc with the holes in it off the cinnamon every time you need a teaspoon of the stuff. You can also stack these, or mount them underneath your cabinets so they don't take up counter space. If I had any place at all to put one, this is where I'd be keeping my spices.

5. Yogurt maker This is a specialty item; probably most people don't eat as much yogurt as I do. But if you do eat yogurt, it's actually really worth it to make your own. Not only is the yogurt much more delicious (it has a mild, creamy, slightly tangy flavour that appeals even to some people I know who don't like yogurt), but it costs about a tenth as much to make your own as it does to buy it in the store. If you're trying to eat fewer simple carbohydrates, as I am, having discovered that they tend to put me to sleep, there's no better breakfast than fresh yogurt and a simple compote made by boiling frozen berries, a quarter cup of water, and a few teaspoons of Splenda into a nice thick consistency. It's like having dessert for breakfast every morning. And making your own yogurt is unbelievably easy: you just combine a quart of milk with 1/3 cup of nonfat dry milk (it's a thickener--you can't taste it) and a container of plain yogurt, whisk it all together, and pour it into the little cups. Then all you have to do is plug it in and leave it for twelve hours, and voila! Fresh yogurt. No preservatives, and if you want flavored yogurt, just toss in some fruit or flavoring. I use mine all the time. (Though I should point out that I ate a lot of yogurt before I bought this machine).

6. Pineapple corer This seems like kind of a silly thing, but if you're like me, and you love pineapple, but you're on a budget, this little gadget is a fantastic thing to have. You can buy a pineapple and make your own fresh sliced pineapple for less than half what it costs to buy the pre-sliced pinapple in the store, without the teeth-gritting agony of trying to slice the damn thing with a knife. You just cut off the top and screw the gadget into the pineapple flesh until you hit bottom, then pull out the corer with a lovely yellow cylinder of pineapple meat wrapped around it. If someone you know--or you--likes fresh fruit, it's a cute little gift for very little money.

7. Calphalon semi-nonstick aluminum frying pan We just bought four of these at a kitchen outlet near my grandmother's, one for me, Mom, sis, and grandma. The problem with nonstick is that if you use metal on it, the nonstick coating scratches off, and the pan becomes basically worthless, because food catches in the little scratches and burns, and you'll never get it clean again. The problem with anodized aluminum is, well, that it's not nonstick, although at least you can take some brillo to it when food does stick. Now Calphalon is making these pans with the nonstick fibers infused into the aluminum, so you can use scratchy things to your heart's content without losing the nonstick properties.

Now, it's not quite as stick-free as traditional non-stick, but when you're paying this much for a pan, you don't want to worry constantly about ruining it. (We didn't pay this much; it's worth scouting around the local outlet mall to see whether you can snag this on sale). But it's a terrific pan--nice and heavy, very even heating, and it keeps heat very well. And it's much less sticky than regular anodized aluminum; we fried hamburgers in it all week with no fat, and the burned bits rubbed right off with a sponge. I'm actually throwing away one of my beloved old pans to make room for this lovely. If you're shopping for someone starting a household, they also have a very nice looking eight piece set. Again, these pans are very pricey compared to what you find at Target, but unlike what you find at Target, they should last for decades.

8. Electric kettle Brits have known about these for years--almost every home in the UK has one--but they're just making their way over to this side of the pond. These don't boil quite as fast as the British models do, because the UK uses 220 rather than 110 volt power, but it will nonetheless boil much faster than anything will on your stove, even if you have a Viking range (as my mother does).

I got one of these for my grandmother last year, because she is blind and forgetful and had burned the bottom out of two teakettles. My gift has been the talk of the town ever since. In the intervening year, I have been asked to procure more kettles for aunts, friends, and my grandmother's paid helper; I'm thinking about going into the business full time. All you have to do to boil the water is press a button on the handle, and it brings the water to a boil in a few minutes, and then automatically shuts off to keep the pressure from building to dangerous levels. It's cordless, so you can then pick it up and bring it right to the table, if you like. If there are tea-drinkers in your family, I think you'll find they really get a lot of use out of this--it's easy enough to operate that even my 91-year old technophobic grandmother can do it easily. I've recommended the one that I got Grandma, because she's liked it so much, but you can find them all over now, and I'm sure there are lots of good models at your local store. If you want something that looks like a traditional teakettle, Cuisinart makes one, though it's twice the price of the TFal model.

9. Decrimping can opener In general, I think electric can openers aren't worth the bother, but I've made an exception for this one. It's a smooth edge can opener; it decrimps the can, rather than cutting through the top. The result is that there are no sharp edges a child or elderly person can cut themselves on (this was another gift for my grandmother), and the top makes a neat little resealing lid you can pop on and put the can in the fridge, if you only use part of the contents. Beats the hell out of wrapping it up in Saran Wrap. And it actually works, unlike most electric can openers; all you have to do is hold it and push a button. If you're strong enough, or poor enough, to want a manual version, Oxo makes one for a little less money than the electric version.

10. Microplane zester Again, non cooks are goggling their eyes, dumbstruck by the thought that someone could actually buy an entire gadget just for removing lemon and orange zest. But once you've used a zester, you'll never go back to the grater. Not only does it avoid the nastiness of scraped knuckles; it removes a perfect layer of zest, with none of the bitter white underpeel to contaminate your cooking. And it's about eight times easier and faster than using a grater. I just can't communicate how you, or that special cook in your life, will rave once they've tried this.

Update A reader suggests adding the Lodge cast iron skillet and talking a bit about knives. I second the recommendation of a cast iron skillet--they're better than anything else for searing, and unlike most frying pans, they go from stovetop to oven beautifully, though they do take more maintenance than most pans.

Good knives also make an enormous difference; you don't realise how enormous until you're standing in the kitchen of a rented London flat on a Sunday afternoon, crying with frustration because the flimsy knives they've furnished the flat with take about six weeks to slice through a chicken breast. I use the high-end Henckels line, and for my money the crucial pieces are a solid chef's knife, one or two good paring knives (four inch and 2 3/4 inch), a serrated utility knife (invaluable for things like tomatoes), a good bread knife and a good six inch utility knife. But you should be sure that whoever you give these to understands that giving them knives to celebrate the coming of The Prince of Peace is meant to be a loving, rather than ironic, gesture.

From the desk of Jane Galt:

Pop quiz

From James Hamilton, oil economist extraordinaire:

EXAM ESSAY QUESTION (answer on separate paper)

Senator Frank Lautenberg (D-NJ) today issued the following press release:

In the four years since the secret Cheney task force met, we have seen gas prices double and oil company profits skyrocket. What went on at these secret White House meetings that may be motivating oil company executives to deny their participation? Now it appears that some Big Oil CEOs might have lied to Congress to cover up their involvement with the White House task force. What are they trying to hide from the American people?

Your assignment is to describe in detail the possible economic mechanisms whereby the actions of this task force might have contributed to a doubling in the world price of oil. Be sure to address in your essay the following issues.

1.) The Cheney task force resulted in the Bush energy plan released in May 2001. Discuss in detail three elements of this plan that led to an increase in oil prices. Be sure to explain how this happened despite the fact that the legislation proposed in that plan was not passed by the Senate and, if passed, would have increased energy supplies.

2.) Even if one ignores the Bush energy plan itself, explain how secret consultations by the task force could have resulted in higher oil prices. Recall that the five executives who were called before the Senate last week represented BP, Exxon-Mobil, Shell, Chevron, and ConocoPhillips. Including all their global operations, these five companies between them produced 10.1 million barrels of oil per day in 2004 (data from Petroleum Review with a tip of the hat to The Oil Drum), which would represent 12% of global production of 83 mbd. Describe the precise actions these companies could have taken that could have led to a doubling of oil prices. If possible, bolster your argument with a numerical example using plausible elasticities and actual production figures.

3.) Develop further Lautenberg's theme that the statements made by those called before the Senate were knowingly false. In particular, refute the claim by ConocoPhillips CEO James Mulva that in 2001 he had been the chief executive of Phillips and that Cheney met with someone from Conoco, which at that time had been a separate company.

4.) Perhaps the most important accusation made by Senator Lautenberg is that the statements by the oil company executives before the Senate committee were misleading. Describe some of the economic harm that can result when someone in a position of power makes statements that could result in a misunderstanding of the facts by the American public.

From the desk of Jane Galt:

Superhero physics

I'm reading a fantastic book right now called The Physics of Superheroes, which I highly recommend for that special geek in your life . . . or for anyone you know like me, who managed to duck high school physics entirely.* It teaches real physics, using various superheroes to illustrate principles like acceleration, thermodynamics, and electromagnetism. The prose is clear enough that a math dunce like me can grasp it, and the superhero examples are enough, I think, to interest even someone who already knows physics. Plus, the gentle fun he drily pokes at the comics he collects makes me laugh out loud.

Max Dillon was a highly skilled but self-centered electrical utility worker. When a coworker was trapped atop a high-tension line, Max was cavalier about his fate until his foreman offered Dillon a $100 reward (in 1963 dollars, worth about $600 today) for rescuing him. Freeing the unconscious colleague and lowering him to the ground with a cable, Dillon then receives an unanticipated bonus when he is struck by lightening while grasping the high-tension lines. Just as in the case of Barry Allen (the Flash), not only did Dillon not die or suffer any burns or neurological damage from this traumatic event, but he in fact gained the ability to store electrical energy that he could discharge at will in the form of lightning bolts. (Young readers during [the 1950's and 1960's] could be forgiven if they reached the conclusion that being struck by lightening, preferably in conjunction with some other hazardous activity, was one of the best things that could happen to them, second only to being exposed to massive doses of radiation.) Dillon's accident, presented in Amazing Spider Man #9 may have changed his body but it left his antisocial attitudes intact. Realizing that he now possessed fearsome electrical powers, he designed a garish green-and-yellow disguise, with a bright yellow lightning-bolt-themed mask and embarked on a life of crime as Electro . . . Personally, if I gained mastery over such a powerful force of nature, I don't think this would necessarily be the costume that I'd choose to wear in public. Perhaps if Max Dillon had not been such a rat, his friends might have gently provided some better fashion advice. But it is exactly such a pattern of bad choices that frequently leads these superpowered miscreants to a life of crime.

*Yes, that's right, I have never taken physics. "How did you manage that?" My aghast critics demand. "You went to an excellent school?" The answer is that I was in honors science, which instead of teaching "physical science" in 9th grade, then moving onto biology and chemistry, taught biology first, and then chemistry, with the expectation that you would then move onto advanced physics in 11th grade, while you were getting the math to grasp it. But advanced physics was an elective, and I didn't elect. I took Japanese literature instead.

From the desk of Jane Galt:

Questions for doctors:

1) If I can't have birth control pills over the counter, why would the FDA let me have "Plan B" OTC, which as I understand it, amounts to simply taking several birth control pills at once?

2) Could a medical professional tell the difference between an abortion induced by RU486 and a spontaneous miscarriage? In other words, assuming that NARAL's worst fears are realised and conservatives succeed in passing a constitutional amendment against abortion, could doctors identify women who had given themselves an abortion using smuggled meds?

3) Why do I get dizzy during asthma attacks when I am still getting adequate air?

From the desk of Jane Galt:

A monopoly not even a monopolist could love

Daniel Gross notes:

You would think it would be pretty difficult to lose money selling cans of Coke, frozen sandwiches, and bags of chips to train passengers. After all, you've got a captive audience, since passengers don't hop off at stations to buy snacks. You've got a monopoly, since outside vendors don't troll the aisles. You buy standardized, non-spoiling packaged goods in bulk, so you should be able to keep costs down.

And yet somehow Amtrak managed to lose a trainload of cash on its food--excuse me, dining--service

Let me suggest a possible explanation: Amtrak's food is terrible. I mean, worse than airplane food. And not that microwaved dog-food enchilada with the rubber cheese that they used to serve you in the good old days when airlines took an interest in keeping their passangers alive and in possession of all their limbs as they shuttled them from Point A to Point B. I mean worse than the repulsive bag of "southwestern-flavour" pretzels that I was served on a recent flight to Colorado (I believe that anyone who had tried to serve such an item in the Southwest would have been--rightfully--gunned down by the liberty-loving citizens of the region). Worse than the cardboard-and-rubber concoction misleadingly labeled as a "ham and cheese sandwich" I was given during my return flight from London. Worse, even, than the port-wine flavoured processed cheese substance that formed the main content of the "snack" that American Airlines sold me for $3.50 on my last trip to Mexico. Amtrak food can only be adequately compared to the execrable fare that used to await unwary travellers at the highway service stations of my youth.

Given that the average journey on Amtrak is, like, four hours, you have to be pretty desperate to ever buy a sandwich off them. And if you want to buy anything else, you have to wait on a line that is sort of a Platonic ideal of all lines, stretching from the slow-witted bureaucrat behind the cash register off into infinity through some sort of special space-time vortex located around the gent's lavatory. One miserable Christmas, when I was having an asthma attack on the train to Syracuse, I nearly blacked out three times before reaching the head of the line. In the true Christmas spirit, the staff and fellow passengers acted as if I wasn't there.

When you see service this incompetent, you know the government has to be behind it somewhere. Only in a government agency could such practices continue without fear of competition or bankruptcy.

From the desk of Jane Galt:

Disturbing thoughts

As the days go by, I find myself less and less worried about terrorism, and more and more worried about things like Lindsay Graham's proposed bill to strip habeas corpus rights from non-citizens.

By the strict standards of my libertarian-ish beliefs, this is a good thing. But I'm not so sure.

The reason for this mental shift is not because I have carefully studied the issues, and concluded that terrorism is not as great a threat as I once thought. The reason is simply that time is putting ever more distance between me and 9/11.

But this is not a good reason to believe that terrorism is less of a risk than it once was. Terrorism was a HUGE threat on September 10th, 2001, even though it had been 8 years since Al Qaeda attempted anything on American soil.

I can feel myself committing the basic decision error of believing that something that hasn't happened in a while is therefore less likely to happen tomorrow, even though for many events, such as earthquakes, the fact that it has been a while since the last one makes it more likely, not less, that a big event will occur in the near future.

On the veldt, this sort of heuristic works most of the time, which is how it got hard-wired into our brains. But it can be deadly in the modern world.

Is a terrorist attack that sort of event? I have no idea. But that's the problem; my assessment is not changing because I have gotten new information about terrorist attacks; it is changing merely because 9/11 is fading from my mind.

I don't mean to suggest that my current assessment is necessarily wrong; indeed, I'm sure that my analysis of the relative risks of civil liberties curtailment and terrorism was wildly skewed in the days after the World Trade Centre was destroyed. But changing my priorities should be the result of rational analysis, not the simple passage of time.

From the desk of Jane Galt:

The price of torture

I've long endorsed Glenn Reynolds' take on the torture question: if there really is a ticking nuclear bomb in New York City, and the CIA gets hold of a guy who can tell them what they want to know, they're going to torture it out of him whether torture is legal or not. There's no need to legalise routine depravity in order to ensure the correct outcome in rare doomsday scenarios.

Now Alex Tabarrok makes that argument in economic terms:

The problem with making torture legal is that the government will abuse its powers. I do not trust the government, any government, to use this power responsibly. Leviathan must be heavily restrained, especially when it comes to torture.

Here is where economics can make a contribution. By making torture illegal we are raising the price of torture but we are not raising the price to infinity. If the President or the head of the CIA thinks that torture is required to stop the ticking time bomb then they ought to approve it knowing full well that they face possible prosecution. Only if the price of torture is very high can we expect that it will be used only in the most absolutely urgent of circumstances.

The torture victim faces incredible pain and perhaps death at the hands of his torturer. If these costs are to be born by the victim then we had better make damn sure that the benefits are also high and the only way we can do that is to make the torturer also bear some of the costs. Torture must not be cheap.

Amen.

Update Winterspeak, posting at his own blog, disagrees:

I don't think it's so clear. It may be better for the politicians involved to go to some remote town unlikely to be nuked, say anywhere but NYC and DC, and let the nuke go off. In this situation they have zero chance of dying from terrorism and run zero risk of being sent to prison by a journey. Arguing that "torture is illegal and we did not know for sure if we had the right guy" is a bulletproof defense against the charge of not torturing someone when you ought to (not that mandatory torture is any kind of law).

To date, I have not seen people being very understand towards making tough decisions under incomplete information. I have also seen public support for the government grow after a terrorist attack, and shrink when the terrorist attacks stop happening and fade into memory. Given these incentives, a smart government would hide and wait in a ticking bomb scenario, not break the law.

In general, I'd say that given a potential event of sufficient magnitude, the agents will resort to torture whether or not it is legal. But my, or the agent's, definition of "sufficient" may not comport with what Winterspeak thinks is sufficient, and so events such as a hypothetical small town with a nuke may not pass the threshold.

I'm pretty comfortable assuming that anything I think is sufficiently catastrophic to merit torture will also strike the FBI/CIA/etc. that way. But given that I don't actually know any policemen or agents, this assessment is possibly wildly mistaken.

I certainly agree with Winterspeak that the aftermath of 9/11 has revealed that the government, the media, and the public do not seem to have grasped the difficulty of the decisions that people like Bush and Clinton had to make, demanding, with the benefit of perfect hindsight, that our leaders pluck the Al Qaeda needle out of the haystack of shadowy leads with which our intelligence and defense agencies are daily bombarded. I can see how that might raise the price of the marginal case higher than we would want.

From the desk of Mindles H. Dreck:

J.K. Rowling's bleak vision of government

Well, I didn't put it in a law review paper, but I have noted the libertarian interpretation of the Harry Potter books before. I compared it to Atlas Shrugged.

By the way, don't miss Paul Zrimsek's comment in the house-elf part of the comments. Typically pithy and hilarious. Then there's the last commenter who isn't quite ready to offer an 'analyzation' of Rand's 'rhumative' writing.....

UPDATE: Mark Kleiman suggests that the context of the work's creation argues against such an interpretation as Rowling received substantial government support and shows no sympathy for business. The first argument can be used in favor of our interpretation as easily as against. After all, it is hardly inevitable that a recipient of government support will stroke (or bite) the hand that feeds her. But we have gone too far down this contextualist blind alley, it isn't particularly relevant.

As for the second, admiration of business is hardly a necessary condition for a libertarian outlook (although comparing it to Atlas Shrugged, as I do above, might indeed require such a view). Alas, Mr. Kleiman should have revisited the text as opposed to ruminating on Ms. Rowling's economic status. I recall a variety of businesses that come off rather well in Rowling's books, including the Weasley twins' burgeoning joke business, now located and thriving in Diagon Alley along with Gringott's and an assortment of other interesting commercial ventures. They needn't be the size of Microsoft to be commercial. However, to return to the point, Rowling would have to show an anti-commercial streak for this argument to carry any weight.

As others have suggested, the prevailing feel of the Rowling books is anti-bureaucratic. An admiration for individual effort, personal responsibility and individuality shows throughout the