Monthly Archives: November 2008

Random Thoughts on… Moral Hazard

An argument for studying economics is that one will leave school with an extensive knowledge of concepts and theories that are applicable in the real world.  An argument against studying economics, however, is that these theories are typically limited to a world where we assume all participants make rational decisions.  Given that Kath and Kim is still on the air, universal rationality is doubtful.

One economic concept, however, has stuck with me after college.  Moral hazard occurs when “an individual or institution does not bear the full consequences of its actions, and therefore has a tendency to act less carefully than it otherwise would,” thus “leaving another party to bear some responsibility for the consequences of those actions.”  For example, there is a moral hazard associated with life insurance.  After purchasing insurance, individuals may decide to take greater risks with their life.  twilightThey may be keener to go skydiving, try bungee jumping, or enter a crowd of teenage girls in line for Twilight.  After all, these individuals are now insured, so we can rationally understand (from the individual’s point of view) why they would be more likely to participate in dangerous activities.  However, from the point of view of the insurer, braving crowds of crazed middle schoolers pining after vampires is not recommended. 

We face moral hazards every day.  On an individual level, athletes anecdotally have had a drop-off in production following the signing of a guaranteed, long-term contract.  We act differently in a hotel room than when we’re in our own homes.  In my intro economics course, Larry Summers summed it up in a guest lecture: “You don’t wash a rented car.”   

In that same line of thinking, government bailouts may cause big companies to take more risks, with anticipation of being saved if they fail.  This can lead to even more trouble, as evidenced by the mortgage crisis (mortgage lenders that securitized their junky loans, backed by Fannie and Freddie, became more lax in lending).  Part of the Fed’s rationale for letting Lehman Brothers go under was because it feared creating a moral hazard if it had stepped in again, especially after its role in the Bear Stearns deal. 

impalaBut still, it’s hard to quantify the size of a moral hazard.  And there are times when the negative risks of the moral hazard outweigh the potential benefits of, say, a government bailout.  In the case of the auto industry, I’m not sure what would be best.  All I know is that I’ve been driving a rented car for the past ten months, and I’ve gotten it washed.  Twice.

 

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The Relative Poverty of Teachers in the U.S.

Yesterday, I read a blog post from a friend about teacher vacancies in Washington D.C. The public school chancellor there recently made it a priority to cut out unqualified teachers. This initiative, however, has resulted in an increase in the number of teacher vacancies in D.C. public schools.

My first thought was that teachers, like everyone else, are responsive to the market. With better qualified teachers, there must also be better pay. Perhaps there just aren’t enough “qualified” candidates that are willing to work in urban areas of DC and take a teacher’s low salary (on average, less than $45,000 in the U.S.). So, it got me thinking… just how important is teacher pay? And what effect does it have on student achievement?

To take a stab at this question, I decided to look at differences in teacher pay between countries, using data from a 2008 report by the OECD (If you want to see the data below in Excel, email me for the consolidated reports from the OECD).

It’s often been reported that across the U.S., we spend the most money per student. From the OECD report, we see that this is true: the U.S. spends over $12K per student, versus $8K in other OECD countries.

educspending

However, higher per-student spending in the U.S. is not translating into higher teacher salaries. On an absolute scale, American teachers with 15 years experience make less money than similar teachers in 11 OECD countries, including the U.K., Germany, and Ireland. Not surprisingly, U.S. test scores are lower than 9 of the 11 countries where absolute teacher salaries are higher abroad than in the U.S. (with Luxembourg and Spain being the only exceptions).

educteachsal

educscores

What’s more interesting is that even after 15 years of experience, the average teacher in the U.S. is making less than the average GDP per capita — something that we only see in a handful of other countries (just 8 OECD countries have teachers making less than 100% of GDP per capita after 15 years, vs. 25 countries where veteran teachers are better compensated than the average worker).

educteachsalratio

Finally, not only are teachers in the U.S. poorly compensated relative to their international counterparts, but they also work the most. American teachers spend close to 1100 hours per year teaching, vs. ~800 hours for teachers in other OECD countries.

educteachhrs

Of course, there are many reasons for our mediocre test scores in the U.S., and this analysis is incomplete given that we’re just looking at correlations through graphs. We also need to consider such drivers as cultural differences, student motivation, parent involvement, and the payoff of an additional year of schooling. But teacher pay is obviously a hot topic, and although we can’t determine causation through these charts, it would be interesting to see how U.S. test scores would fare if our teachers were paid comparably to educators in other countries.

Earlier this year, an article in the New York Times highlighted a NYC charter school opening in 2009 that plans to pay its teachers $125,000 a year. With this kind of salary, I’m guessing that teacher vacancies will not be an issue. It seems like the problem in D.C. may be reflective of an overall problem in the U.S. — where we just can’t pay teachers enough to teach. After all, if we’re not rewarding teachers financially, then the number of viable candidates goes down, quality suffers, the system fails, and kids bear the burden.

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Whitney Houston Has a Point: The Children Are Our Future

…And it’s looking like our future is grim.

Recently, I’ve heard myself lamenting quite often about “kids these days”. With such esteemed role models as Paris Hilton, bingin’ Lindsay Lohan, and a semi-literate former President (thank you, Texas), it’s no wonder that fears about the future generation are growing. Here is a cynic’s list of a few concerns I have for young’ns today…

  • Each day, we hear another story about drunk teenagers getting into car accidents, mugging strangers, lighting fires, and/or vandalizing buildings. bustedShows like MTV’s “Busted” chronicle these transgressions, but in typical MTV fashion, the thin veneer of morality is superseded by deference to the teenage delinquents (much like the spoiled brats in “My Super Sweet Sixteen”). So, getting arrested is now permanently in the “cool” category. To rephrase President Bush’s famous quote, “Is our children learnin’?”, we probably ought to ask, “Is our jails big enough?”
  • Also in the “cool” category: There has been a huge swell in the teenage baby-making business. We have seen girls keeping pregnancy pacts and looking for homeless suitors to be their baby daddies. Celebrity teen moms are churning out newborns faster than Levi Johnston can get out of Wasilla. From Juno to Juneau, pregnancy is “in”.
  • And just how are these pregnancy pacts being made? Well, by text message, of course. A side effect of improved technology is illiteracy. As kids spend less time at home and more time with iPhone, the language of MySpace becomes the language of our space (oh, snap). That is, all communication will be through a limited assemblage of letters and numbers: C U L8ER, IM GOING 2 JAIL 4 LIFE (but watch my MTV show at 9).
  • chuckAnd finally, with countless fellatio-themed jams on the radio, and hit TV shows that glorify sex, drugs, and underage drinking, we must blame the media for its omnipotent role in poisoning the young minds of America. Because if it weren’t for lollipops and Chuck Bass, Jamie Lynn Spears would not be pregnant again. Kids these days…

Considering all this, if the children are our future, I’m scared. I’m hoping that Whitney was in one of her bad spells when she made that prediction. To loosely channel Van Halen via The Kinks, where have all the wholesome times gone?

…Then again, I grew up with Monica Lewinsky, Cuban cigars, a stained Gap dress, and the Starr report moonlighting as a supermarket tabloid. Not to mention 90210, O.J. Simpson, Dennis Rodman in a dress, Pam and Tommy Lee, the height of Jerry Springer, the birth of video games, the Michael Skakel case, beanie babies, Furbys, and acid-washed jeans. All weird, and potentially poisonous to the brain. And I think I turned out OK… So maybe we should just let the kids lead the way… and remind us how we used to be.

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Thanksgiving on Wall Street

thanksgivingWith the holiday season rapidly approaching, we are all looking forward to seeing our loved ones.  Thanksgiving is a time to catch up with old friends, hang out with obscure members of the family, and gorge ourselves on mashed potatoes, pumpkin pie, and turkey and tofurkey.  Of course, Thanksgiving is also a time to stretch the truth about how amazing our lives actually are, in order to one-up our cousins and give our parents something to brag about.  So, in order to impress Uncle Jerry and crazy Aunt Lisa, here are some responses that may be better than the cold hard truth.

Crazy Aunt Lisa: “So, what are you up to these days?”

You: “Well, I’m working in New York at [prestigious company] as a credit derivatives trader.” 

(Translation:  I’m probably going to be unemployed soon.)

Crazy Aunt Lisa: “Wow, that sounds mighty impressive!  So you work in one of those tall, shiny skyscrapers?  What do you do as a trader?”

You: “Essentially, we run complex financial risk models and look for arbitrage opportunities.  My personal responsibility is to oversee all the trades that come through my desk.  Right now we’re in a bit of a liquidity crunch, as I’m sure you’ve heard, so even though it’s been tough, we are working through it.”

(Translation: I spend most of the day trying to break down the firewall that prevents me from checking my fantasy football stats.  At lunch, I serve as the designated pizza bitch for the traders on the floor who are actually making trades.  A few months ago, I used to carry six or seven pizza boxes back to the office.  Now, given the tanking credit markets, I’m ordering by the slice.  The rest of the day, I take bathroom naps and think about how I spent $120,000 on my education to get to this point: where, after a year on the job, I am a glorified delivery person with a Brooks Brothers suit and the financial modeling skills of an orangutan.) 

orangutanCrazy Aunt Lisa: “My goodness… and at such a young age!  So do you get to see friends a lot, given your busy job?”

You: “Even though the job is demanding, I definitely try and make time to see my friends.”

(Translation: If I didn’t see my friends, I would jump out the window of my shiny office building.)

Uncle Jerry: “How are you all liking New York?  Are you staying out of trouble?”

You: “Oh, of course.  My friends and co-workers are all young professionals, and we are always trying to do something different in the city.  There is so much culture in New York.”

(Translation: Yesterday I woke up sprawled outside my apartment door with the imprint of my floor mat on my cheek.)

Crazy Aunt Lisa: “That sounds like so much fun!  You are just so accomplished already… I hope [your screwup cousin] can follow your lead. Do you know of any job openings there?”

You: “I can talk to the HR rep about it.  Getting into the business is tough right now given the market, but I will check, definitely.”

(Translation: I would not wish this job on anyone.  Not even my screwup cousin.)

Uncle Jerry: “So, do you think this is it?  Found your calling?”

You: “Well I’ve enjoyed the work, and it’s been a great learning experience so far… I’m not sure I want to settle on anything just yet, because I’m still young, but I’ve learned a lot about myself.”

(Translation:  I’m peacing out after two years.  I have no idea what I’m going to do, but I know that it’s not this…)

Crazy Aunt Lisa: “Sounds like you have it all figured out!  To be so young and so driven… what a success!”

You: “Yep, that’s me… Could you please pass the sweet potatoes?  And take some more of my BS… I’ve had too much.”

Crazy Aunt Lisa: “Of course, dear.

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Random Thoughts on… Cutting Back

During the past few months, the S&P 500 has fallen nearly 30%.  Hedge fund managers and i-bankers are losing their jobs.  Gordon Gekko is trading in his Ferragamo loafers for food.  Trendy derelictque fashion lines may soon reflect our dire reality.  We’re squeezed for some cash. 

So, let’s get out our scalpels and start thinking about what we can live without.

Here are some suggestions of what to cut in 2009:

facil1) Impulse Buys: Personally, some past regrets include neon sneakers and the Staples easy button. ¡Que facil!

2) Useless Junk: this category includes bouncy balls, rubber chickens, whoopee cushions, and finger puppets–all of which I have received as gifts in the past.  Therefore, someone is buying this crap.  Stop… for your own sake.

3) Alcohol, Drugs, and Prostitutes: Just not a good idea, especially in a down economy.  

4) Coffee: Starbucks takes about $3.50 of your hard-earned money every day.  Then it takes that cash, stuffs it in a recyclable paper bag, and lights it on fire (its stock is down 15% this month alone).  Why not keep your money and light it on fire yourself?  It would be more fun.

 

5) Dessert: This is a tough one to let go… I might have to offset this by buying fewer rubber chickens instead.  I’m not sure if I can do without molten chocolate cake.

 

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Correct the Injustice of Prop 8? Yes We Can.

On Tuesday, the election of Barack Obama to the presidency marked an historic night that won’t easily be forgotten.  But, democracy also pointed us in a different direction on Tuesday.  Arizona, Florida, and California all voted to ban same-sex marriage

prop8In California, the passage of Prop 8 (a constitutional amendment banning gay marriage) was especially significant, given that it had been the first state to issue marriage licenses to gay couples in 2005.  Throughout the past few months, over $70 million was spent in California on Prop 8 alone.  Supporters of Prop 8 argued that endorsing gay marriage would lead to a breakdown of the traditional family.  More importantly, most “Yes on 8” ads focused on the impact in classrooms, claiming that children would be taught about same-sex marriage.  As an example, these ads often cited a class trip, where first-graders attended a gay wedding in San Francisco.

Education officials and those against Prop 8 tried to combat these misstatements.  California public schools superintendent Jack O’Connell appeared in a “No on 8” ad to dispute the claims that children would be taught about gay marriage.  The “class trip” turned out to be organized by parents as a surprise for the teacher, who was marrying her longtime partner.  But, even while celebrities such as Ellen DeGeneres, Itzhak Perlman, and Samuel L. Jackson made their voices heard against Prop 8, it still wasn’t enough.  A 52% majority of California voters passed the amendment on Tuesday.

Thus, it was a bittersweet day for progressives… we got Barack Obama, but we weren’t able to get equal rights for all.

prop83The popular case against gay marriage/civil unions focuses on the traditional family.  The “Yes on 8” ads running through California were just a small microcosm of a widespread fear that, if we allow gay people to marry, we might just end up with more gay people.  If we tolerate homosexual culture, then we might have more homosexuals one day.  In fact, these arguments sound very much like why we ban prostitution, or why we crack down on drug lords.  By portraying homosexuality as akin to committing a crime, we immediately have a gut reaction against it.  If those first graders were brought to a heterosexual wedding, it’s doubtful that anyone would object.  But because they were brought to a lesbian wedding, they became front-page news and campaign fodder.  Is this necessarily right?  No.  But it’s the culture we live in–a culture that still can’t shake that gut aversion.

Some people might argue, “Well, as long as gay couples still get the same treatment as straight couples, then it’s just an issue of calling it a marriage vs. calling it a civil union.  It’s just semantics.”  Indeed, Barack Obama himself does not support gay marriage, as he favors civil unions. However, according to the New York Times, only “a handful” of states allow civil unions or domestic partnerships that afford gay couples the same rights as heterosexual couples.  On the other hand, more than 40 states now have laws that ban gay marriage (versus two that allow it: Massachusetts and Connecticut).  And on Tuesday, Arkansas passed a law banning same-sex couples from adopting children.  Thus, whether it is semantics or not, there is an inherent injustice when anyone is denied civil rights granted to all. 

obamanewsInterestingly, while the Western world cheered the United States for becoming the first to elect a black president, we can look to their example when it comes to gay rights.  The following countries guarantee civil rights for gay couples: Canada, Britain, Spain, Netherlands, Denmark, Belgium, Iceland, Sweden, Norway, Finland, New Zealand, Luxembourg and South Africa (even given its apartheid past).  France, Germany, and Argentina recognize civil unions but do not include full rights as heterosexual couples.  The United States?  We’ve left it up to the states, and apparently, our states just aren’t ready for it yet.

So, with this in mind, I just want to end with an excerpt from Obama’s speech.  Hopefully a hundred years from now, we can look back and be proud that we corrected the injustice of this generation’s civil rights issue.  One day, I hope we can see the progress we have made: a more open society, a more tolerant culture, and a country that truly treats us all as equals.  

“This election had many firsts and many stories that will be told for generations. But one that’s on my mind tonight’s about a woman who cast her ballot in Atlanta. She’s a lot like the millions of others who stood in line to make their voice heard in this election except for one thing: Ann Nixon Cooper is 106 years old.

She was born just a generation past slavery; a time when there were no cars on the road or planes in the sky; when someone like her couldn’t vote for two reasons — because she was a woman and because of the color of her skin.

And tonight, I think about all that she’s seen throughout her century in America — the heartache and the hope; the struggle and the progress; the times we were told that we can’t, and the people who pressed on with that American creed: Yes we can.

At a time when women’s voices were silenced and their hopes dismissed, she lived to see them stand up and speak out and reach for the ballot. Yes we can.

When there was despair in the dust bowl and depression across the land, she saw a nation conquer fear itself with a New Deal, new jobs, a new sense of common purpose. Yes we can.

When the bombs fell on our harbor and tyranny threatened the world, she was there to witness a generation rise to greatness and a democracy was saved. Yes we can.

She was there for the buses in Montgomery, the hoses in Birmingham, a bridge in Selma, and a preacher from Atlanta who told a people that “We Shall Overcome.” Yes we can.

A man touched down on the moon, a wall came down in Berlin, a world was connected by our own science and imagination.

And this year, in this election, she touched her finger to a screen, and cast her vote, because after 106 years in America, through the best of times and the darkest of hours, she knows how America can change.

Yes we can.

America, we have come so far. We have seen so much. But there is so much more to do. So tonight, let us ask ourselves — if our children should live to see the next century; if my daughters should be so lucky to live as long as Ann Nixon Cooper, what change will they see? What progress will we have made?

This is our chance to answer that call. This is our moment.

This is our time, to put our people back to work and open doors of opportunity for our kids; to restore prosperity and promote the cause of peace; to reclaim the American dream and reaffirm that fundamental truth, that, out of many, we are one; that while we breathe, we hope. And where we are met with cynicism and doubts and those who tell us that we can’t, we will respond with that timeless creed that sums up the spirit of a people: Yes, we can.”

From Barack Obama’s speech at Grant Park in Chicago, 11/4/08 

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It’s Not Personal, It’s Just Politics

Updated (4/13/09): With Al Franken finally winning the Minnesota Senate seat, thus concludes the saga of the 2008 election.  I wanted to revisit this post from Election Day, November 4.  I remember writing this piece on Monday night, staying up well past 4 AM on Tuesday to gather all my thoughts about the upcoming election (the official timestamp on this is 7:57 AM EST, but I was in Los Angeles at the time).  That night, I had been supremely afraid that regardless of the outcome, our country would be polarized in choosing a new President–I myself had threatened to move to Canada if McPalin won.  It’s interesting to reflect back on the election now, almost five months later.  I recall the heated discussions I had about the candidates’ economic policies.  I remember sending out fiery emails directed at my closest friends.  I even recall talking up an elderly gentleman at a nightclub in LA.  Upon learning he was from Florida, I passionately implored the man to send in an absentee ballot… and I even gave him my phone number (bad idea).  Now that the dust has settled, I think this post still accurately reflects my feelings about politics as a whole: its genesis is unique to us all as individuals, but its consequences–impassioned debate, renewed social interest, and mobilizing for change–are universal.

Until very recently, I had never been that political. Having been too young to remember George H.W. Bush, I essentially grew up during the Clinton administration. Thus, controversy and scandal marred my perception of politics in the formative years of my life. I was thirteen when the Lewinsky scandal broke, and, like many other thirteen-year olds at the time, I developed a rather cynical judgment of politicians. My views were reinforced–and most likely helped–by my parents’ own cynicism. My mother and father had immigrated to this country separately in the early ’70s to attend graduate school at Indiana University. They met serendipitously at IU, finding out that they had once been kindergarten classmates. After marrying and graduating, my parents moved eastward to Massachusetts to raise their young daughter. American politics at the time was foreign to them. During grad school, their perception of U.S. politics had been molded by classmates who had lived through the polarizing ’60s, the civil rights movement, and Vietnam. Government and party were ever-changing characters: at times hero, at times villain. Thus, when my parents became American citizens, they registered to vote as independents. My mother favored candidates with strong morals, and my father favored candidates that pissed off my mother. My childhood was one that was thoroughly apolitical. With regards to politics, apathy towards candidates was almost deemed to be more reasonable than hope.

gore-bushThe first election I took an interest in was 2000. For some reason, I was immediately put off by Al Gore and his highfalutin “locked box” rhetoric and “I invented the Internet” claims. The way I considered it, politics was less about the issues and more about the candidates themselves. Al Gore was a stuffy elitist, while Bush was an easygoing, sensible everyman (or so I thought). Times were good, the economy was strong, and America was still a well-respected leader in the world. Had I been old enough to vote, I may very well have voted for Bush back then. Overall, though, neither candidate inspired me to care much about the outcome. When Bush was finally announced as the winner of Florida, I remember having an entirely neutral feeling about it all.

When I turned eighteen, I registered to vote as an independent. My first opportunity to cast a major ballot came in 2004, in a markedly different presidential election than the one four years ago. In the post-9/11 world, we were facing a war, terrorism abroad, and a crisis of national security. My own understanding of American politics and government had matured since 2000. Whereas previously I had based my preference solely on the likability of a candidate, I now realized that there were more important issues at stake. Our country was at war. The power of the president had been expanded. Four years of American jingoism and cowboy politics was enough. Although I did not personally like Kerry as a candidate, I found myself firmly in the company of the anti-Bush moderates.

2004 was disappointing, but it was also a personal revelation of sorts.

martyAfter the election, I found myself becoming more aware of politics. I started to discern the conservative principles within the economics taught by my college professors (“taxes are bad”). I began to notice the bubble of social liberalism that seemed to swell only within the gates of Cambridge. I remember getting into an argument with the president of the Republican Club about the war. I had to break up an emotional discussion about abortion in the dining hall. On spring break in Cancun, six of my closest friends got into a heated battle about affirmative action while drinking margaritas at the pool. At that point, I realized that politics wasn’t just a ho-hum dinner table topic like it’d been treated at my house; instead, for many people, politics were real, inflammatory, emotional, and raw.

I can see now that my background and upbringing laid the foundation for my political predisposition. The experience of my parents instilled tolerance, moderation, and a general skepticism. As I grew older, I came to develop ideals that were shaped by these base values. Throughout my discussions, arguments, and fights, I started to piece together the strata of my own political views. My experiences in college and beyond have further informed my politics.

So, that is my personal journey into the world of politics, which has led me to the 2008 election.

During this presidential campaign, I have had frequent, impassioned exchanges with close friends over our differences in choice for president. (I even berated a friend–a McCain supporter–on the streets outside of Les Deux at 2 AM while eating a street-meat hot dog… low point). Although these fights were trivial at the outset, they often felt inherently personal. After all, we each had our own unique stories that had shaped our ideals. Influences such as family, religion, education, race and wealth informed our politics, to varying degrees. Thus, attacks on our politics seemed almost like personal attacks on our values, experiences, and perspectives on how we see the world. It almost became a tale of us vs. them, of good vs. evil.

obamavoteBut, I often need to be reminded that even though politics can signal differences in values, these differences do not necessarily mean that Democrats and Republicans can’t be friends, lovers, or soul mates. Differences cannot trump friendships or shared experiences.

So with that in mind, even if you’re a hardcore Obamanite, please reach out across the aisle today and shake hands with a McCainiac at the polls. If you’re a Palin fan, hug someone wearing a Barack the Vote shirt. If we do that today, we can unite together as Americans with common stories but perhaps differing opinions. We can present our politics as giving us a menu of choices, not a good vs. evil parable. We can show off our democracy around the world, and get our youth excited about our political leaders. Then regardless of the election outcome, we will all have already won.

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