Signals v Causes: The American Nightmare?

An effective political and election strategy has been to identify the signal of the American dream (e.g. home ownership, college education, preschool) as a cause of the American dream — or the American dream itself, and then promise to make it easier for people to achieve it.

Hopefully, we are learning that this actually undermines the incentives and feedbacks that made those things signals of the American dream in the first place, turning them into nightmares.

It turns out that getting a college degree doesn’t cause the American dream. Rather, all the hard work and gumption that use to go into getting the relatively more scarce and useful college degrees of the past was truly what set those kids apart and put them on the path to prosperity and independence.

Change the college degree from a sorting out mechanism to an easy path and the college degree no longer is a reliable signal of those hard workers to employers. Then the nightmare ensues.

As this Wall Street Journal editorial describes:

A lot of these borrowers can’t generate the income to service this debt, especially when so many of them can’t get decent jobs. The left-leaning Center for Economic and Policy Research recently noted that among recent college graduates age 22-27, a full 45% were underemployed in 2013, meaning they were either unemployed or doing jobs that typically don’t require a four-year college degree.

Of course, it doesn’t help that politicians have also mucked with the incentives of the innovation economy, reducing its capacity to create job opportunities for these folks.

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Failing sucks, get over it

The Wall Street Journal published an adaptation of Admiral William McRaven’s commencement address to the University of Texas about life lessons learned at Navy SEAL Training that is worth a read.

Here are a couple prescient lessons.

Get over failing:

Several times a week, the instructors would line up the class and do a uniform inspection. It was exceptionally thorough. Your hat had to be perfectly starched, your uniform immaculately pressed and your belt buckle shiny and void of any smudges.

But it seemed that no matter how much effort you put into starching your hat, or pressing your uniform or polishing your belt buckle, it just wasn’t good enough. The instructors would find “something” wrong.

For failing the uniform inspection, the student had to run, fully clothed, into the surfzone and then, wet from head to toe, roll around on the beach until every part of your body was covered with sand. The effect was known as a “sugar cookie.” You stayed in that uniform the rest of the day—cold, wet and sandy.

There were many students who just couldn’t accept the fact that all their effort was in vain. That no matter how hard they tried to get the uniform right, it was unappreciated.

Those students didn’t make it through training. Those students didn’t understand the purpose of the drill. You were never going to succeed. You were never going to have a perfect uniform.

Sometimes, no matter how well you prepare or how well you perform, you still end up as a sugar cookie. It’s just the way life is sometimes.

If you want to change the world, get over being a sugar cookie and keep moving forward.

More on failing, don’t afraid of “the circus”, in fact it’s how you respond to failure that may build your success in the future:

Every day during training you were challenged with multiple physical events. Long runs, long swims, obstacle courses, hours of calisthenics—something designed to test your mettle.

Every event had standards, times that you had to meet. If you failed to meet those standards, your name was posted on a list and at the end of the day those on the list were invited to a “circus.”

A circus was two hours of additional calisthenics designed to wear you down, to break your spirit, to force you to quit. No one wanted a circus. A circus meant that for that day you didn’t measure up. A circus meant more fatigue, and more fatigue meant that the following day would be more difficult—and more circuses were likely.

But at some time during SEAL training, everyone—everyone—made the circus list. Yet an interesting thing happened to those who were constantly on the list. Over time those students, who did two hours of extra calisthenics, got stronger and stronger. The pain of the circuses built inner strength—built physical resiliency.

Life is filled with circuses. You will fail. You will likely fail often. It will be painful. It will be discouraging. At times it will test you to your very core.

But if you want to change the world, don’t be afraid of the circuses.

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Incentives matter: Equal play time in youth sports

Do young rec players play chaotically because they are inexperienced and immature or because of equal play time rules?

Like many youth sports coaches, I’ve discovered that there is no better reward than game time to promote the application of fundamentals and sportsmanship.

I “herded cats” while coaching in a rec league with equal play time rules. It was tough to teach the kids what seems like the simplest parts of the game and they repeated basic errors for far too long.

But, I hadn’t considered that it was the equal play time that caused it. I chalked it up the kids’ immaturity and inability to see the bigger picture consequences of their actions. For example, some players just didn’t seem to think they needed to mark-up, even though they had been repeatedly burned by leaving their man open.

Once we grew out of the equal play rules, I did what came natural and made lineup choices to reinforce the fundamentals.

If a player stopped doing the basics, like marking up, I would sub them out and let them know why. If someone applied the fundamentals — whether or not they were good at it — they stayed in longer. My philosophy was, win or lose, game time was meant for players to practice what we taught them.

I didn’t realize how effective this was until a recent kerfuffle on my team caused me to second guess those lineup choices and go back to equal play time rules.

A parent mistook my subbing order as ‘unfair punishment’ for his son missing practices. He left the game with his son and quit the team. I wasn’t punishing his son. I was giving the people who had attended the lesson the past few weeks a chance to practice it.

I’ve learned in the past that to teach team-play concepts, you need everyone on the field to have gone through the lesson or it’s harder for everyone to learn it. I’m sure that parent wouldn’t want his son taking a math test over a lesson he missed at school without first covering that lesson.

I found over the next couple of games, though, that I was a second guessing a lot of my lineup choices because I wanted to avoid another incident like that. I kept questioning, “how will his parent interpret this?” I found that second guessing distracting and stressful, so to avoid it I went back to equal play rules so no parents could complain that their kids weren’t getting play time.

Over the next few games I watched the team devolve from playing the best I’d ever seen them play, to playing the undisciplined, individual, sloppy playground ball that was characteristic in their rec years.

A parent made the comment — They looked like 6 year olds in rec. She was right.

That got me to thinking.

Not only had the kids quickly devolved from applying fundamentals that they had progressed on over the two previous seasons, but most became unresponsive to our coaching, as well.

That parent’s comment made me realize that they had lost the most effective incentive that encouraged them to apply fundamentals and listen to coaches — play time. They got to play whether they played like we were teaching or not, and over the course of a couple of games they (sub consciously) figured this out.

Game time became “theirs”. Rather than doing what was best for the team, they wanted to make something happen for their own glory during their time. And, of course, when half the team are being glory hounds, they don’t do the basic, boring stuff like marking-up and the team implodes.

This experience made me wonder if equal play rules are the main reason kids play sloppy in rec ball. Perhaps they’d learn the fundamentals faster by having the direct consequence of staying in the game or not based on their application of fundamentals.

So, the next time you see a sports team implode, consider that it may not be that the team is just performing poorly. Perhaps what you are seeing is a result of distorted incentives.

Good links

A short, but insightful graduation speech.

A longer and insightful discussion of wealth and how different views of where it comes from can affect the words we use.

From the first:

4. Everyone responds to incentives, including people you want to help. That is why social safety nets don’t always end up working as intended.

From the second:

Europeans and Americans “claimed” a higher portion of global output only because they produced a higher portion of global output!  What these Europeans and Americans “claimed” simply would not have existed had they not produced it.

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Taxpayer-subsidized grins

Tyler Cowen, of Marginal Revolution, links to a piece about the increase in spending on college athletics.

Anyone involved in youth sports in the last decade might have noticed the emergence of large, multi-level sports clubs, playing in multi-million dollar sports complexes all designed to host large quantities of organized competition for young players to become seasoned masters in their sport and attract the attention of college recruiters.

Having your kid get “signed’ to a college team — no matter how small the college, or how un-followed the sport — is the new crowning achievement of childhood that brings ear-to-ear grins to the faces of parents.

Take away taxpayer-provided college athletic subsidies and that crowning achievement of childhood and the industry that has sprouted to help parents achieve that ear-to-ear grin goes away.

Arnold Kling also comments on college athletic spending.

Parasites, yep

From Charles Krauthammer’s column, Obamacare’s War on Jobs:

In the traditional opportunity society, government provides the tools — education, training and various incentives — to achieve the dignity of work and its promise of self-improvement and social mobility. In the new opportunity society, you are given the opportunity for idleness while living parasitically off everyone else.

Reagan had a similar radio address once. A vampire once demonstrated his wisdom by recognizing he was a parasite and it didn’t make much sense killing his host. And Lady Thatcher once pinpointed the problem with parasites that don’t realize they are parasites. They eventually kill the host and die (though she didn’t quite say it like that).

Why the bottom 50% should look within

Economist Tyler Cowen wrote a column in the New York Times, entitled Why Emerging Markets Should Look Within. Here’s a couple of key sentences:

While they [emerging market nations] have all been affected by global economic tides, these nations are facing crises because of problems in their national governance. And if we look elsewhere around the world, we find that governance has been re-emerging as a major factor behind success or failure in many emerging nations.

With all the discussion about income inequality, it made me think that the same could be said about the bottom 50% on the income scale.

It’s assumed that the bottom 50% are victims of larger economic forces that are beyond their control. It’s assumed those forces are holding them back and more government intervention is needed to level the playing field (while the magnitude and failures of past interventions are swept under the rug).

But, there’s very little discussion on what the bottom 50% can do about the things over which they have control.

Sure, there may be larger forces that hold some people back. One of the shocking lessons of adulthood is how much bureaucracy there is, even in market-driven enterprises, and how little merit counts. Also, attempts to shunt the bureaucracy often have the opposite effect.

But, I’ve also been shocked at how little we expect from people who we feel may be victims of such forces. Personal choices matter. Education, savings, responsibility, politeness and learning from your mistakes matter. Being able to overcome obstacles, being resourceful and having good character matter.

The most potent way to help the bottom 50% improve their lot may be to encourage them to focus more on what they can control, instead of waiting for solutions from the government. But, it seems to be in bad form to ask the bottom 50% to look within.

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Pope II

Here I wrote about the Freakonomics podcast with Jeffrey Sachs which covered the Pope’s anti-capitalism remarks.

Shortly thereafter, in Taleb’s book, Antifragility, I was surprised to read what I think is a more thoughtful response to the Pope’s remarks and one that supports the Pope’s view.

What surprises me even more is that what Taleb writes about isn’t new to me. It’s a frequent topic of conversation, something that I know well. But, I hadn’t taken it to the logical conclusion.

First, Taleb points out that even the patriarch of capitalism, Adam Smith, was

…extremely chary of the idea of giving someone upside without downside and had doubts about the limited liability of joint-stock companies (the ancestor of the modern limited liability corporation). He did not get the idea of transfer of antifragility, but he came close enough.

And he detected–sort of–the problem that comes with managing other people’s business, the lack of pilot on the plane:

The directors of such companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own.

Let me make the point clearer: the version of “capitalism” or whatever economic system you need to have is with the minimum number of people in the left of the Triad.

“The Triad” is Taleb’s classification of systems as (from left to right) fragile, robust and antifragile; and what he means by ‘left of the triad’ is people who get the downside, as well as the upside, or they have skin in the game.

Taleb contiues:

There is a difference between a manager running a company that is not his own and an owner-operated business in which the manager does not need to report numbers to anyone but himself, and for which he has a downside. Corporate managers have incentives without disincentives — something the general public doesn’t quite get, as they have the illusion that managers are properly “incentivized.” Somehow these managers have been given free options by innocent savers and investors.

He provides an example:

…banks have lost more than they ever made in their history, with their managers being paid billions in compensation — taxpayers take the downside, bankers get the upside [Russ Roberts has been saying this for years]. And the policies aiming at correcting the problem are hurting innocent people while bankers are sipping the Rose de Provence brand of summer wine on their yachts in St. Tropez.

To bring this all together:

We are witnessing the rise of a new class of inverse heroes, that is, bureaucrats, bankers, Davos-attending members of I.A.N.D. (International Association of Name Droppers), and academics with too much power and no real downside and/or accountability. They game the system while citizens pay the price.

At no point in history have so many non-risk-takers, that is, those with no personal exposure, exerted so much control.

Now, let’s re-read what the Pope wrote (quoted from the Freakonomics post):

“[S]ome people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world. This opinion, which has never been confirmed by the facts, expresses a crude and naïve trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system. Meanwhile, the excluded are still waiting. … One cause of this situation is found in our relationship with money, since we calmly accept its dominion over ourselves and our societies. The current financial crisis can make us overlook the fact that it originated in a profound human crisis: the denial of the primacy of the human person! … While the earnings of a minority are growing exponentially, so too is the gap separating the majority from the prosperity enjoyed by those happy few. This imbalance is the result of ideologies which defend the absolute autonomy of the marketplace and financial speculation. Consequently, they reject the right of states, charged with vigilance for the common good, to exercise any form of control. A new tyranny is thus born, invisible and often virtual, which unilaterally and relentlessly imposes its own laws and rules.

To me, this reads like leftist dribble, where their intuition leads them, perhaps, in the right direction for outcome, but the wrong direction for cause.

Maybe the Pope is right that there are some fundamental problems in the mixed markets that have emerged.

But, they’re wrong about the cause of those problems. They blame things like “trickle down theories” (Thomas Sowell challenges us to name one economist who used “trickle down“).

But, the part of the Pope’s passage that reminds me of Taleb’s point is:

…expresses a crude and naïve trust in the goodness of those wielding economic power…

Perhaps that is true. And Taleb tells us why:

At no point in history have so many non-risk-takers, that is, those with no personal exposure, exerted so much control.

They don’t have downside.

This includes politicians, apparatchiks in government agencies, economists and — the one that I am really disappointed that I missed because of my biases — managers of businesses who only have upside and no downside. I’ve even noticed that senior managers often have the same characteristics as politicians, but darn if I haven’t carried that through.

So, as I like to say, all problems can be traced to problems with feedback — I think Taleb exposes a couple of real feedback problems in — not free markets — but our mixed market economy. That feedback problem is that too many people “wielding economic power” don’t have downside. Rather they have incentives to game the system for their upside.

How can this be changed? Taleb gives one example that surprised me:

…in some countries such as Brazil, even today, top bankers are made unconditionally liable to the extent of their own assets.

Think about that. Would bankers act differently if they may have to repay the bonuses they received in what are now apparent as the fraudulently fueled good-times?

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Kling’s 3-axis model and income inequality

I’d like to extend a warm welcome to a new commenter at Our Dinner Table, Adam, who pointed me to this article: Rising Riches: 1 in 5 in US reach affluence.

Arnold Kling’s 3-axis model can help us predict what various folks might believe about income inequality and why they will continue to talk past each other.

Liberals operate on the oppressed-oppressor axis. The rich are the oppressors and the poor are the oppressed. They believe something must be done (government action) to ‘fix’ this situation. This view seems to be expressed in the article.

Conservatives operate on the barbarism-civilization axis. Rich people earn their money based on traditional values of strong work ethic and responsible choices. The poor may be more responsible for their position that liberals believe. So, using government to ‘fix’ income inequality erodes the values of work ethic and responsible choices.

This view is also expressed in the article, but by a successful pharmacist who “grew up on food stamps, but now splurges on…Hugo Boss shoes,” which I took as a subtle attempt to discredit his view.

Libertarians (as if anyone really cares what libertarian think) operate on the freedom-coercion axis. As long as the rich didn’t violate anybody’s freedoms to become rich, then all the power to them. Using force to try to ‘fix’ income inequality violates freedom, so is bad.

I fall into a mix conservative/libertarian camp here. Though, I am sure there are some poor people who are ‘disadvantaged’ and not merely victims of their own bad choices and unwillingness to take advantage of the tremendous opportunity this country has to offer (like a free $100,000 education).

I have a question for people who believe the ‘disadvantaged’ explanation.

Have you considered that encouraging responsible behaviors may be a better way to help the disadvantaged than redistribution?

Don Boudreaux, of Cafe Hayek, has some good thoughts on the article in his post, A Barrier to Reducing Income Inequality???