Quick wins and slow losses

Posted on December 14, 2019

Filing season

The federal structure that came into being with the birth of the United States was deliberately constrained on multiple dimensions. The new government did not levy income taxes on individuals, and as a result was funded largely through tariffs and excises for the first century or so of its existence.

As the nation matured, finding money for the expanding role of its central government became increasingly tricky. The extensive needs of the Civil War and the costs of the Union Army led to the passage of the very first income tax. It would be temporary, getting repealed a few years after the fighting concluded.

That left the federal government in a secondary role to those of the several states, which continued to be the primary actors.1 Reformers viewed its dependence on consumption taxes as regressive, and the brewing populist discontent characterizing what would be known as the Gilded Age of the late 1800s prompted calls for an income tax on high earners.

There was a hitch, as disputed language in the Constitution’s taxing clause meant the Supreme Court struck down Congress’s first passage of a general income tax. This was ultimately resolved only by amending the Constitution itself, a complicated procedure that by design only rarely succeeds. The Sixteenth Amendment firmly cemented income taxes as the principal national funding source.2 Read more…

Per documentarian Ken Burns the country wasn’t grammatically considered a singular unit until after the Civil War. It was then that people changed from saying the United States “are” to the United States “is”. ↩
This doesn’t faze a small group of tax protestors who continue to deny the Constitutionality of the federal income tax, an argument the courts invariably slap down, sometimes adding jail time for their troubles. Opponents of a proposed wealth tax may have more success. ↩
Unfortunately these individuals have a keen interest in keeping the laws opaque and even growing their complexity, for in such messiness lies their income. ↩
For shareholders who benefited from Boeing’s stellar performance the cultural problems did not prevent significant gains, which may be where some of the problem lies. ↩
Unless you were eating at the Heart Attack Grill, an actual restaurant and temple of gastronomic excess that will bewilder future archaeologists sifting through the rubble of Las Vegas. ↩

Optimal choices, suboptimal outcomes

Captives to circumstance

Posted on December 5, 2019

Save yourself

Imagine a scenario in which the police arrest two people suspected of collaborating in a crime. They are held in isolation and each promised leniency if they will confess and implicate the other. If both stay mum the case against them will be weak, and conviction on lesser charges is the likely outcome. However, if each tells the whole story the government will have the testimony it needs to put both away for a long time.

The twist comes with the conditions attached to the third possibility: should one person reveal the details while his partner refuses, the confessor will get away with the lightest sentence of all, as the prosecution promises to shift the blame almost entirely to the other party.

In this situation each prisoner knows his best chance of reducing prospective jail time is to spill what he knows, regardless of what the other does. Unfortunately for him his counterpart also understands this perfectly, and since he will behave similarly the result will be longer sentences than if both remained silent and deprived the justice system of its needed proof.

This describes one of the most iconic problems in the social sciences, first codified in the 1950s and known since as the prisoner’s dilemma. In short, doing what seems best for you given the circumstances can in the end make you worse off as those around you choose the same thing. Like the tragedy of the commons, pursuing self-interest has consequences that run counter to what you ultimately prefer. Read more…

A few of the world’s megacities are regularly in the news for air that has become so polluted that merely existing there is analogous to smoking an alarming number of daily cigarettes. ↩
In the United States at least, they are in the aggregate choosing the former, which is why talk of a federal single-payer plan is now playing an outsized role in the Democratic party’s presidential nominating process. ↩
Captured in the mafia principle of omertà, requiring absolute non-cooperation with the authorities, and in the less obscure and far pithier version “snitches get stitches.” ↩

How learning changes your thinking

Mind what you know

Strategy

Posted on November 30, 2019

Mental maps

Having been built up over hundreds of years into its current dense and meandering tangle, London’s road network shows few signs of the regularity that characterizes its counterparts in younger countries. Prior to the advent of cheap map technology, anyone wanting to explore unfamiliar neighborhoods would need a detailed atlas to find addresses or landmarks. Finding the desired spot was akin to playing Where’s Waldo, given the thicket of alleys and courts and lanes laid out with no obvious organizing principle.1

One group was notably unfazed by this challenge. London’s black cab drivers developed a well-deserved reputation for their ability to navigate to any points in the metro area with ease, with no reference to guide them. This was not accidental, as to earn their license each had to pass a legendarily grueling test that came to be known simply as the “Knowledge,” a requirement first instituted in the era of horse-drawn carriages.

Prospective cabbies study the layout of London for years, memorizing tens of thousands of streets and establishments. During this period they pore over maps for hours and wind their way through the streets on scooters, committing what they see to memory. They are required to visualize paths between restaurants or theaters or shops, or any other random point of interest a rider might choose that’s within a quarter mile of 320 predefined routes. Read more…

Or Where’s Wally for the non-American reader, which is the original name of the series, incidentally created by a Brit. ↩
There is no permanent failure, as test takers can persist in the series until they pass or quit trying. Perhaps some metaphor for life is baked in there. ↩
Note there’s an official City of London, which is a small historic part of what the world generally knows as London. Through various amalgamations it has become mostly symbolic as a political entity. Cabbies study the bigger conurbation. ↩
The Knowledge doesn’t come cheap, as black cabs are usually more expensive than their ridesharing counterparts. ↩
Although in their role as anonymous confidants, drivers might still need to soothe the occasional rider. ↩
A plot device of the Pixar movie Wall-E, in which humans have become sedentary and gluttonous consumers chained to entertainment that meets their every need, rendering them into passive blobs. ↩
No doubt most of the agita among London’s taxi drivers stems from the costly years of investment they put into learning the Knowledge and the erosion of their path to recouping it. ↩

The collective action problem and true costs

See the big picture

Posted on November 21, 2019

List price

Observers who dig even a little into government policy in areas like tariffs or taxes might note some peculiar features. Regulations are often crafted to provide benefits to a favored constituency, while the corresponding costs are borne by the broader population in some opaque way that individuals can’t discern. As a result everyone ends up paying slightly more for healthcare, or cars, or chocolate bars, while the folks who sell those things get some economic protection.

Yet the sum of those costs can far exceed the gains being captured by the target group. For example, tariffs on certain raw materials like sugar might end up saving a few existing jobs, but at a total annual cost that’s much higher than the salaries of the workers being protected. In effect they impose an implicit tax of $100 so that someone can receive a benefit worth $50. Why not instead just give the beneficiaries $50 directly, have the rest keep the remaining $50 in their pockets, and in the process let everyone be better off?1 Read more…

The current state is not Pareto-optimal, since there are ways for all sides to simultaneously improve their position. ↩
Actually it was more of a purchase of Chrysler, leading to the contemporary joke: “How do you say DaimlerChrysler in German? Daimler.” ↩
Not the complete picture, as the stock market crash would have had something to do with it. The demerged Chrysler eventually fell into bankruptcy. ↩
Or maybe two, depending on founder Adam Neumann’s wife Rebekah’s complicity in all that went down. ↩
Don’t shed a tear for WeWork’s billionaire backers, as they’re definitely rich enough to bear the consequences. ↩
The wannabe conference-room-Jesus ended up with at least three commas for his troubles. #WeDontNeedToWork. ↩
The executive search firm Egon Zehnder has a business model that attempts to head off self-dealing by giving all staff of the same tenure the same lockstep compensation. ↩
Part of the reason why the vaunted Swiss model of local participatory governance works is you’re less likely to advance a pet project if you have to personally explain it to Lukas and Hans afterwards. ↩

Revealing your hidden value

Change the customer

Posted on November 13, 2019

It’s what’s inside that counts

Most users pay little attention to the innards of their digital devices, focusing entirely on sleek external lines and sharp screens and understanding little to nothing of the circuit boards packed with components that make them work. For the typical computer these include a main processor, storage, and short-term memory, plus several chips that allow for communication. These are masterpieces of engineering, reflecting decades of accumulated advances, but few care about that. They just want the product to perform as expected. The technical wizardry enabling it isn’t important.1

For Intel, this was a problem.

The company was an early leader in the design of central processing units, which coordinate a computer’s activities and are largely responsible for overall performance. Yet when deciding to buy the average user didn’t comprehend clock speeds or data throughput, nor were they particularly concerned with the brand name printed on a chip they would likely never see.

They just wanted a system that worked, and brands like Commodore and Compaq built strong identities for providing the newest and best products. As long as no one knew where the processors came from, Intel would remain at risk of being swapped out for a competitor’s product, or maybe having to haggle down margins to stay in the machines if their partners started feeling combative. Read more…

For example, there are several “buses” inside a computer, but these transport data and not people. As with their wheeled counterparts, speed matters a lot for getting you where you want to go. ↩
Depending on your exposure to television you might still remember it. Just think of those five synth notes that played when the Intel logo appeared. ↩
Because Intel was unable to trademark numbers used to brand its processors, the 586 that would naturally have superseded the 486 was replaced by a coined word incorporating the Greek “penta” (five). ↩
It was big enough that in parodist Weird Al Yankovic’s hands the song “It’s All About the Benjamins” became “It’s All About the Pentiums.” ↩
If you’re wondering what Donald Trump thinks about the topic du jour, just remember a tweetstorm is probably brewing. ↩

The power of ridiculous persistence

It all adds up

Posted on November 6, 2019

Twin prime day

One challenge of certain problems in pure mathematics is that their discussions quickly stray beyond what most people can even comprehend, let alone add to. The starting premise may be elegant and easily described, while the next steps involve a jumble of symbols and intertwined theories that geniuses spend their careers trying to unpack. Some of them frustrate the best minds in the field for generations.

The twin prime conjecture is one such problem, and it was consuming the waking hours of an unassuming and unheralded mathematician by the name of Yitang Zhang.1

Zhang was a lecturer in mathematics at a university in New Hampshire, having landed there via a circuitous route after his upbringing in China. This included a few stops bumping around outside of academia, working in accounting and even helping with a colleague’s Subway sandwich shop while he struggled to find a relevant posting. Outside of his formal teaching responsibilities, he was privately grappling with a way to tackle the twin prime problem. Read more…

And some of his sleeping hours as well, since he probably dreamed about prime numbers. ↩
Somewhere down the line these ideas may find their way into cryptographic algorithms to hack current systems or create new ones. ↩
The location of his breakthrough supports the idea that getting out into nature can help your thinking. ↩
Building on his work others have since reduced the boundary to 246, where it remains for the moment, awaiting the next breakthrough. ↩
Next time on Buzzfeed: “Take this quiz and we’ll tell you which unproven theorem in algebraic geometry you are!” ↩
Interestingly the current CEO of Google, Sundar Pichai, reportedly also has an extraordinary memory for numbers. ↩

Getting your time frame right

Good governance

Posted on October 30, 2019

No parking zone

Like other major cities, Chicago has several areas with a dense and vital mix of urban features that attract lots of people. Combine this high demand with compact geography and the natural result is scarce on-street parking. This was managed by adding meters to charge for these spaces, both monetizing and regulating a limited resource. The system collectively generated tens of millions of dollars annually from normal fees plus the fines charged to drivers who overstay their allotted time, wittingly or not.1

In the mid-2000s the size and perpetual nature of this revenue stream proved too tempting for a government facing extreme financial pressures. With a history of politically beneficial but economically unsound decisions, leadership had dug a structural hole in the budget that could not plausibly be filled with increased taxes or other typical maneuvers.

So when the agents of financialization came calling, key Chicago leaders were very receptive to their pitch. Like lottery winners receiving regular payouts or recipients of structured legal settlements who want their money now, the city was offered a deal converting the next 75 years of total parking meter revenue into a single lump sum, which could be used to address immediate needs.2 Read more…

If you’re a thrill-seeker you can always not pay and roll the dice on whether you’ll be caught. ↩
Kind of the principle behind payday lending, in which you can give up a lot in the future for a little benefit now. ↩
One salubrious side effect of pricing being more correctly priced is that spaces are now generally more available, a consequence that could be easily predicted by anyone who scored at least a C in Econ 101. ↩
Or cash out some of their stock options at the higher price. ↩
And if they do, it’s usually the plot of some apocalyptic story involving zombies. ↩
Non-discounted cash flows, but inflation has not been massive in the past 11 years, so whichever way you slice it these investors are making bank. ↩

When what you’ve learned holds you back

Overcome inertia

Posted on October 23, 2019

Keep it flowing

Heart disease remains the leading cause of death for most people groups around the world, despite significant discoveries that today extend life and even restore patients to full function after events that previously would be unsurvivable.

Research into surgical intervention has been particularly fruitful. A now-common tool in the cardiologist’s arsenal is the placement of a stent, which is a miniature metal scaffold carefully threaded up the arteries leading to the heart and embedded at the site of a blockage, holding the vessel open as if bracing a pipe at risk of collapse.1 Such stents are now used routinely and quite profitable for both their manufacturers and the physicians who have built practices around placing them.

The logic behind the stent appears impeccable: patients complain of chest pain or some associated symptom, imaging reveals a blood flow issue somewhere in the network of cardiac arteries, so the obvious next step is to remedy the blockage—the fact that those involved stand to divvy up a total fee that can reach tens of thousands of dollars is a happy side effect.2 The ubiquity of stenting has made the procedure a default treatment in a range of cases, ranging from full-blown heart attacks to more stable but persistent chest pain.

The only problem with this practice is that careful research has shown that, for certain indications, a stent accomplishes exactly nothing. Read more…

One variant is even coated in medication that slowly seeps into the patient’s bloodstream at the site of the blockage. ↩
To paraphrase the common saying, it’s difficult to get someone to understand something when their income depends on their not understanding it. ↩
Sorry to my 9th grade biology teacher Mr. Erlick who taught me this. I know you were just going with what the textbook said. ↩
Phrenology lives on the expressions “high-brow” and “low-brow”, as those with more elevated foreheads were supposed to be more sophisticated than the lumbering men with more prominent brow ridges. ↩

Retrospective success and what you control

Luck versus insight

Posted on October 16, 2019

The everything store

36-year old Jeff Bezos had already made a name for himself as the founder of a promising young technology firm, but in the year 2000 Amazon was just one of many companies storming the frothy capital markets to achieve improbable valuations. Even at that stage Bezos was circumspect about his success, emphasizing the word “lucky” to characterize his story.

He recognized the confluence of enabling events was largely out of his control—coming of age in the era of computers, the rise of the consumer internet, a stable economic environment, increasing acceptance of digital commerce, plus a career that positioned him to observe these trends.1

At the time Bezos had no idea just how lucky he was. Though reasonably successful, nothing indicated he would eventually become the richest person on Earth on the back of Amazon’s insatiable business model. The path to get there would be neither smooth nor obvious. Read more…

Warren Buffett has discussed the concept of winning the ovarian lottery, which meant he was born in the United States at a time in history when his skills were unusually valuable. ↩
The latter was a company dedicated to selling pet food online, with expensive and memorable marketing campaigns involving a sock puppet. It was incidentally the recipient of heavy investment from none other than Amazon, which sunk money into several ill-fated ventures. ↩
“Alexa, what’s Amazon’s share price?” Over $1,700, and it’s been as high as $2,000. #winning ↩
It turned out the supply of investors willing to pump hundreds of millions of dollars into any concept with an “e” prefixed to it was finite. ↩
No one knows what might have been, though plenty of would-be tycoons have ideas. The founder of Pets.com still believes that business model was sound, though the alternate history is unprovable. ↩
Hence the rise of index funds, which recognize that a small fraction of managers might outperform the market, but its almost impossible to figure out who they will be a priori. ↩
Helped along by a very savvy marketing team, who really milked their moment in the spotlight. ↩
Including a parrot and a camel, neither of whom were as familiar with Die Mannschaft as Paul. ↩
Or kick themselves after the fact for not betting based on his predictions. ↩
Except in those rare cases when someone found a flaw in the game design, as with this American couple.↩

Staying connected to the right outcomes

Work that matters

Posted on October 9, 2019

Fruit salad

Research in Motion was on top of the world. The Canadian technology firm’s keyboard-equipped phones had become a defining part of the corporate zeitgeist. They were standard issue for strivers who could now double-thumb their email responses from anywhere.1 The truly dedicated and fashion-indifferent would even holster the clunky devices on their waists, treating them like a detective might handle his service weapon.

With its tight control of the network infrastructure, the company promised IT departments a level of security and reliability other providers couldn’t match. It helped pioneer push delivery, eliminating the need to check for new messages. Instant notifications presaged the Pavlovian situation that grips people everywhere today, earning its flagship product the nickname of CrackBerry.

At one point global market share surpassed 20%, and by 2009 RIM was considered the fastest-growing company in the world. The consumer-focused phones Apple and Google were introducing were viewed as toys, which couldn’t be a true threat to the BlackBerry’s position atop the technology mountain.2 Read more…