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 iSteve Blog / EconomicsTeasers

I had only been vaguely aware of the Elizabeth Holmes saga until recently. My impression from all the magazine covers had been that the celebrated Silicon Valley startup foundrix had invented some revolutionary disruptive new method for testing blood and made the Forbes 400 off her invention.

Back in 2014, this high tech startup’s board of directors was … remarkable. From Fortune:

Little known and privately held, Theranos has assembled what may be, in terms of public service, the most illustrious board in U.S. corporate history. It includes three former U.S. cabinet secretaries, two former U.S. senators, a retired Navy admiral and a retired Marine Corps general.

In 2011, explains company founder Elizabeth Holmes, she realized that changing the way health care is delivered in this country would require the help of great strategists.

That July she finagled an introduction to George Shultz (above), the former Secretary of State, Treasury, and Labor, at Stanford’s Hoover Institution. Shultz had held four cabinet-level positions, counting his stint as director of the Office of Management and Budget, and had also been president of engineering giant Bechtel Group and a director at biopharmaceutical company Gilead Sciences. …

Schultz, Holmes, the late Lee Kwan Yew

Three years later nearly all the other outside directors on Theranos’s board are people who were introduced to the company through Shultz, now 93. They are former Secretary of Defense Bill Perry, former Secretary of State and National Security Adviser Henry Kissinger, former U.S. Senators Sam Nunn and Bill Frist (a heart-transplant surgeon), retired U.S. Navy Adm. Gary Roughead, retired U.S. Marine Corp Gen. James Mattis, former Wells Fargo CEO and chairman Dick Kovacevich, and former Bechtel Group CEO Riley Bechtel.

Why isn’t Prince Bandar on her board?

This sounds a lot like that Strategic Advisory Board for Genie Oil and Gas, which is drilling in the Golan Heights: Dick Cheney, Rupert Murdoch, Bill Richardson, Mary Landrieu, Lord Rothschild, Jim Woolsey, and Larry Summers.

This sounds like a good data mining project for moneyballing investors: which famous name on boards is most often associated with firms with something to hide? Can you detect patterns of board membership that have predictive value?

Maybe statistics would suggest that adding superlawyer David Boies to your Board isn’t a good sign?

David Boies – Director
David Boies is the Chairman of Boies, Schiller & Flexner LLP, an internationally recognized trial lawyer, legal advisor and counselor to boards of directors. Mr. Boies served as Special Trial Counsel for the United States Department of Justice in its antitrust suit against Microsoft; lead counsel for former Vice-President Al Gore in connection with litigation relating to the 2000 Florida vote count; and as co-lead counsel for the plaintiffs in Perry v. Brown, which established for the first time the federal constitutional right for gay and lesbian citizens to marry.

From the WSJ just after Christmas:

At Theranos, Many Strategies and Snags
Elizabeth Holmes’s blood-testing ambition has long collided with technological problems

By John Carreyrou

The night before a big meeting with a Swiss drug company in 2008, Theranos Inc. founder Elizabeth Holmes and a colleague sat in a Zurich hotel, sticking their fingers with a lancet.

They drew drops of their own blood to try the company’s testing machine, but the devices wouldn’t work, says someone familiar with the incident. Sometimes the results were obviously too high. Sometimes they were too low. Sometimes the machines spit out only an error message.

After two hours, the colleague called it quits, leaving Ms. Holmes still squeezing blood from her fingers to test it again.

Ever since she launched Theranos in 2003 when she was 19 years old and dropped out of Stanford University, Ms. Holmes has been driven by ambition that is big even by Silicon Valley standards. Instead of a smartphone app to hail a car or order food, she wants to revolutionize health care with a vast range of diagnostic tests run with a few drops of finger-pricked blood.

Now 31, Ms. Holmes has emphasized a variety of strategies—a hand-held device, tests for drugmakers, drugstore clinics—while trying to turn her dream into a business. She often has collided with technological problems, according to interviews with more than 20 former Theranos employees, company emails and complaints filed with federal regulators.

In Switzerland, she went ahead and pricked her finger in front of a group of Novartis AG executives at the meeting the next day, testing for a protein that measures inflammation, says the person familiar with the incident.

All three of her Theranos devices flickered with error messages, the person says. Ms. Holmes was unfazed, blamed a minor technical glitch and continued to pitch the vast potential of her technology.

At the WSJDLive 2015 conference, Theranos founder and CEO Elizabeth Holmes discusses her company’s proprietary technologies, the FDA’s inspection of its facilities and the assertion that Theranos was too quick to market its products.

Ms. Holmes and several current or former Theranos directors declined interview requests. A spokeswoman for Theranos, Brooke Buchanan, says Ms. Holmes recalls only one machine with an error message, because someone tripped over the cord. A second machine ran perfectly, and the third wasn’t used, the spokeswoman says. A Novartis spokeswoman wouldn’t comment.

Since a Wall Street Journal article in October, Ms. Holmes has defended the Palo Alto, Calif., company’s laboratory work and promised to publish data proving the accuracy of its more than 240 tests, ranging from pregnancy to diabetes.

She said earlier this month that customer volume was higher than ever. The company has said it performed millions of tests, with highly positive feedback.

For now, though, Theranos has stopped collecting tiny samples of blood from patients’ fingers for all but one of its tests while it waits for the Food and Drug Administration to review the company’s applications for wider use of the small proprietary vials called “nanotainers.” As a result, Theranos is using traditional lab machines for most of its tests.

But it turns out that back in 2003 she only came up with the idea that it would be awesome to invent some revolutionary new method for testing blood that wouldn’t require a big needle. (Getting rich off a replacement for the needle isn’t a wholly original idea, either. In the 2000 movie Boiler Room, a fictionalized version of The Wolf of Wall Street shenanigans, the boys are pushing a penny stock firm said to have invented a replacement for the hypodermic needle.)

The various devices that Theranos’s engineers have come up with since then evidently haven’t worked well enough to get FDA approval, so Theranos has apparently been using its large sums of investor money to have the blood tests it does at drug stores processed the old-fashioned way. (And / or deliver not very reliable results.)

This kind of fake-it-until-you-make-it strategy is hardly unknown. I suspect numerous successful companies went through just such a ploy of promising a revolutionary cheaper technology and then delivering on contracts using an expensive old fashioned technology until making the new tech work.

Of course, so did lots of ultimately unsuccessful companies.

It’s also not uncommon in Silicon Valley for entrepreneurs who are funded for their original idea to get repurposed into working on something else when the original idea proves a dud, but the investors still like the founders’ personalities.

Obviously, she’s good at impressing important men. That’s a remunerative skill, even without being an inventor. The interesting question is why didn’t she get redirected away from a field, biotechnology, in which she had no particular technical skills to one in which her abundant people skills would be useful?

But perhaps the Elizabeth Holmes’ reality distortion field was so strong that all the venture capitalists and famous board members backing her never noticed that she actually wasn’t a genius biotech inventor? Or did it have something to do with everybody who was anybody getting too invested in the idea that it was time for Silicon Valley to have a female Steve Jobs (she wears black turtlenecks like Jobs) to notice?

P.S., Back in October, Holmes was named to the Board of Trustees of the Center for Strategic & International Studies:

CSIS Names 9 New Members to its Board of Trustees
OCT 1, 2015
WASHINGTON, October 1, 2015—The Center for Strategic and International Studies (CSIS) is pleased to announce that Erskine Bowles [Clinton Administration chief of staff], William Daley [Obama chief of staff], Stanley Druckenmiller [formerly Soros Management Fund], Martin Edelman [real estate legal rainmaker active in Persian Gulf gigadeals], Elizabeth Holmes, Ronald Kirk [black mayor of Dallas, US Trade Rep], Leon Panetta [got Osama as CIA boss, then Sec of Def], Bob Schieffer [Face the Nation], and Frances Townsend [chair of Homeland Security Council under Bush] have joined the CSIS Board of Trustees.

 
• Category: Economics • Tags: Elizabeth Holmes, Silicon Valley, Theranos 
Almost 7 billion people live in countries poorer than U.S., 6 billion in countries poorer than Puerto Rico

SevenBillion3d-g

Out of the 187 countries represented by spheres, highlighted countries from bottom left to top right include: Pakistan is the pink sphere, Nigeria black, India indigo, Indonesia dark red, China mint green, Brazil blue, Mexico brown, Poland purple, UK yellow, Germany green, and USA red-white-and-blue red.

It’s hard for Westerners to grasp how many people there are in the rest of the world, which is why we often treat frivolously data points that ought to be thought-provoking, such as the Gallup Poll’s finding that 640,000,000 adults want to immigrate. To increase awareness, here’s a graph I’ve created based on the International Monetary Fund estimates for 2015. It shows that almost seven billion people live in countries with lower per capita GDPs than America’s $56,000 (red sphere), most of them much lower.

On the vertical axis is GDP per capita (PPP), while on the horizontal axis is the cumulative world population at that GDP level or lower.

Each country’s population is proportional to the area of its disk.

The IMF doesn’t break out data for Puerto Rico, but it would fall on this graph between Mexico and Germany. One estimate of its per capita GDP is $29,529, while another is $34,938 (due to massive subsidies since the 1950s intended to persuade Puerto Ricans to stay home). In either case, over six billion people live in countries with lower per capita GDP’s than Puerto Rico. Yet, somewhere around 5/8ths to 2/3rds of all Puerto Ricans now live in the Fifty States.

And they’re still coming.

Poland, with a slightly lower GDP than Puerto Rico, represents a non-impoverished country that has been flooding wealthy London with jobseekers who underbid from Brits from the North. With Poland at least there’s some hope that the immigrants might actually return home someday. In contrast, nobody (except Puerto Ricans) seems to think Puerto Ricans will ever go home.

But the take-away lesson is that six billion people live in countries poorer than Poland and Puerto Rico.

By the way, Qatar, host of the 2022 World Cup, is literally off the chart at $144k per capita GDP, by far the highest in the world in the IMF tables. If helping out refugee Arabs is the world’s highest priority, why hasn’t the 2022 World Cup in Qatar been moved (to, say, 2010 host South Africa) and the $200 billion Qatar had budgeted to throw itself a party been freed up to help Qatar’s fellow Arabs and Muslims?

Under the fold is the data for this graph (downloaded from the IMF):

Country GDP Per Cap K Population (Mil) Cumulative Pop
Central African Rep. $1 5 5
Dem. Rep. of Congo $1 82 86
Malawi $1 18 105
Liberia $1 4 109
Burundi $1 9 118
Niger $1 18 136
Eritrea $1 7 143
Mozambique $1 27 170
Guinea $1 12 182
Guinea-Bissau $1 2 183
Madagascar $1 24 208
Togo $2 7 215
Comoros $2 1 216
Ethiopia $2 93 308
Burkina Faso $2 18 326
Kiribati $2 0 327
Sierra Leone $2 6 333
Rwanda $2 11 344
Mali $2 16 361
Haiti $2 11 371
Solomon Islands $2 1 372
Benin $2 11 383
Afghanistan $2 32 415
Uganda $2 39 454
Zimbabwe $2 13 467
South Sudan $2 12 479
Senegal $2 15 494
Vanuatu $2 0 494
Nepal $2 28 523
Tajikistan $3 8 531
Chad $3 12 543
Tanzania $3 49 592
Papua New Guinea $3 8 600
Lesotho $3 2 602
Micronesia $3 0 602
Cameroon $3 23 625
Djibouti $3 1 626
Kenya $3 44 670
São Tomé $3 0 670
Côte d’Ivoire $3 23 693
Marshall Islands $3 0 693
Tuvalu $3 0 693
Kyrgyz Republic $3 6 699
Cambodia $3 16 715
Bangladesh $4 160 875
Yemen $4 28 903
Ghana $4 27 930
Zambia $4 16 945
Sudan $4 38 984
Mauritania $4 4 987
Honduras $5 8 996
Pakistan $5 190 1,186
Nicaragua $5 6 1,192
Moldova $5 4 1,196
Tonga $5 0 1,196
Myanmar $5 52 1,248
Lao P.D.R. $5 7 1,255
Timor-Leste $5 1 1,256
Samoa $5 0 1,256
Uzbekistan $6 31 1,287
Vietnam $6 92 1,379
Nigeria $6 179 1,557
India $6 1,276 2,834
Bolivia $6 11 2,845
Cabo Verde $6 1 2,846
Republic of Congo $7 4 2,850
Guyana $7 1 2,851
Philippines $7 101 2,952
Armenia $7 3 2,956
Angola $7 25 2,981
Guatemala $8 16 2,997
Georgia $8 4 3,001
Swaziland $8 1 3,002
Morocco $8 34 3,036
Bhutan $8 1 3,037
El Salvador $8 6 3,043
Ukraine $8 43 3,086
Belize $8 0 3,086
Fiji $9 1 3,087
Paraguay $9 7 3,094
Jamaica $9 3 3,097
Bosnia $10 4 3,101
Sri Lanka $11 21 3,122
St. Vincent $11 0 3,122
Indonesia $11 255 3,377
Dominica $11 0 3,377
Egypt $11 88 3,466
Namibia $11 2 3,468
Ecuador $11 16 3,484
Tunisia $12 11 3,495
St. Lucia $12 0 3,495
Albania $12 3 3,498
Peru $12 32 3,530
Jordan $12 7 3,537
Grenada $12 0 3,537
Mongolia $12 3 3,540
South Africa $13 55 3,595
Serbia $13 7 3,602
Dominican Rep. $14 11 3,613
China $14 1,375 4,988
Colombia $14 48 5,036
FYR Macedonia $14 2 5,038
Iraq $14 37 5,075
Algeria $14 39 5,114
Thailand $15 69 5,183
Maldives $15 0 5,184
Turkmenistan $15 6 5,189
Costa Rica $15 5 5,194
Montenegro $16 1 5,195
Brazil $16 204 5,399
Libya $16 6 5,406
Venezuela $16 31 5,437
Barbados $16 0 5,437
Palau $17 0 5,437
Botswana $17 2 5,439
Suriname $17 1 5,440
Iran $17 79 5,519
Azerbaijan $18 9 5,528
Belarus $18 9 5,537
Bulgaria $18 7 5,545
Mexico $18 121 5,666
Lebanon $18 5 5,670
Mauritius $19 1 5,672
Turkey $20 78 5,749
Panama $20 4 5,753
Romania $21 20 5,773
Croatia $21 4 5,777
Uruguay $21 3 5,781
St. Kitts and Nevis $22 0 5,781
Argentina $22 42 5,823
Antigua $23 0 5,823
Chile $24 18 5,841
Gabon $24 2 5,843
Russia $24 144 5,987
Kazakhstan $24 18 6,004
Latvia $25 2 6,006
The Bahamas $26 0 6,007
Malaysia $26 31 6,038
Hungary $26 10 6,047
Poland $26 38 6,085
Seychelles $26 0 6,085
Greece $27 11 6,096
Equatorial Guinea $27 1 6,097
Portugal $28 10 6,108
Estonia $28 1 6,109
Lithuania $28 3 6,112
Slovak Republic $29 5 6,117
Slovenia $31 2 6,119
Cyprus $31 1 6,120
Czech Republic $31 11 6,131
Trinidad $33 1 6,132
Israel $33 8 6,141
Malta $35 0 6,141
Spain $35 46 6,187
Italy $36 60 6,248
New Zealand $36 5 6,252
Korea $37 51 6,303
Japan $38 127 6,430
Oman $41 4 6,434
United Kingdom $41 65 6,499
Finland $41 6 6,504
France $41 64 6,568
Belgium $44 11 6,580
Iceland $45 0 6,580
Denmark $45 6 6,586
Canada $46 36 6,621
Germany $47 81 6,703
Austria $47 9 6,711
Sweden $47 10 6,721
Australia $48 24 6,745
Taiwan $48 23 6,769
Netherlands $48 17 6,786
Ireland $51 5 6,790
Bahrain $53 1 6,791
Saudi Arabia $53 31 6,823
United States $56 321 7,144
Hong Kong SAR $56 7 7,151
Switzerland $59 8 7,160
San Marino $62 0 7,160
United Arab Emirates $65 10 7,169
Norway $67 5 7,174
Kuwait $71 4 7,178
Brunei Darussalam $72 0 7,179
Singapore $85 6 7,184
Luxembourg $93 1 7,185
Qatar $144 2 7,187
Syria
The Gambia
Kosovo
EndFragment
 

With the federal government working up a new housing ploy, I figured it’s timely to dredge up the 2008 short story I published in The American Conservative:

 

Unreal Estate

Memorial Day Weekend, 2005

“So, this guy joins a monastery where he’s not allowed to talk.” Travis, your brother-in-law, is telling a joke. He’s told it to you before. “After five years, the head monk tells him he can say two words. ‘Tiny room,’ the guy answers.”

“That reminds me,” Travis continues, “You kids have been engaged, like, what? Two years now? That’s great. No rush to get married, not with the market the way it is in West LA. Who can afford to marry and settle down in LA? I couldn’t. Georgie Cooney can’t afford to get married in LA.”

While you’re trying to figure out whether Travis means actor George Clooney or boxer Gerry Cooney, he’s already onto his favorite topic, “Still, isn’t it time to buy a place of your own? I mean, West LA’s a great place to meet somebody, but, c’mon, are you going to entrust your kids — and I know how much my wife’s little sister wants some (you know how women are, they can’t keep a secret) — to the Los Angeles United School District?”

You have this conversation, if you could call it a conversation, each time you visit your brother-in-law’s house. Travis lives out in the Santa Clarita Valley, an hour or two north of West Los Angeles. You get on the 405 at Pico, head over Sepulveda Pass, down through the Valley, onto the 5 and up through Newhall Pass into LA County’s northern exurbs.

You’re sitting on the edge of the Travis’s deck, overlooking a canyon lined with oaks and sycamores. It’s hotter out here than back in West LA, where your $1900 per month one bedroom apartment doesn’t have air conditioning because it seldom gets over 82. It’s hot out here, but it’s not bad. There’s a breeze blowing with a hint of the far-off ocean.

Travis says, “I’d be all for you staying in LA if you were an entertainment lawyer or something where you need to be working with the stars. But you manage a drug store and Emma’s a nurse. People buy drugs and get sick everywhere.

“I bought this place in 2000 for $255,000,” Travis says, repeating a number you know by heart now. “Here we are, five years later, and the Schmidts next door just sold their’s for $810,000. So I’m up, what, six, seven hundred thousand? The home equity loans have paid for some nice vacations, I’ll tell you. My house is my ATM.

“I know what you’re thinking,” says Travis, who generally does know what you are thinking.

“You’re wondering why I’m the lucky bastard who turned 32 in 2000 and decided it was the right time in my life to get out of an apartment in LA and buy a house back when houses in California were cheap. Meanwhile, you’re 32 in 2005, when they’re expensive. Well, they seemed expensive then, too. But I took the plunge anyway.

“I also know you’re thinking you don’t have $810,000. Who does? That’s what they got mortgages for. And you’re good with numbers so you’ve already figured out what a 20 percent down payment on $810,000 is. It’s, like … a lot.

“Okay, coupla things you need to bear in mind.

“First, Emma’s told me about how your dad always talks about the years saving up for the 20 percent down payment he made when he got that 30 year fixed rate mortgage on his little place in Sherman Oaks. “That’s ancient history. Dude, nobody puts down 20 percent down anymore, no matter how iffy they seem.”

Travis’s voice has gone up a third of an octave. When he’s talking about the Lakers or whatever, he’s laidback. But when he gets going on real estate, which is more and more often over the last couple of years, he lets his inner Dennis Hopper out.

“These days, somebody arrives in California from Gautelombia and wants to buy a house, do you think they make him document his credit history? It’s in Spanish, and who knows how many million pesetas were worth a dollar in 1985, and besides, the courthouse in El Carrumbo collapsed in an earthquake anyway, so he doesn’t have a paper trail. Documents? He’s undocumented. He don’t need no steenking documents! He just pays some extra points on his rate, but that’s all on the backend. Everybody’s happy.

“Don’t you watch the news? The President says down payments are un-American because they keep minorities from buying houses. But you don’t have to be diverse to get a zero down loan. IndyMan is happy to hand them out to everybody.

“Second thing, Santa Clarita seemed like a long way out when I moved from Venice in 2000. So, maybe you got to move a little farther, like out to Palmdale, Lancaster. Antelope Valley’s the new Santa Clarita!”

You’re not quite sure how it happens, but ten minutes later, you’re standing on his driveway admiring the rims on Travis’s Lexus SUV, which are bigger than the tires on your Corolla. Soon, you’re rolling northeast on the 14, past the slanting Vasquez Rocks where, according to Travis, lots of Westerns were filmed, but you only remember them from Bill and Ted’s Bogus Journey. The highway turns north away from the mountains through the high desert. A sign says you are heading toward “Edwards AFB.”

“Edwards Air Force Base!” exclaims Travis. “T he Right Stuff, man! That’s where Chuck Taylor broke the speed barrier in 1957. This is All-American country out here,” he says, gesturing vaguely at the brownish-gray sagebrush. “Granted, it’s a haul from the jobs in LA, but with Iraq calming down now that they captured Saddam Insane, soon they’ll be pumping like crazy from those Iraqi oilwells and the price of gas will be back down to a $1.00 per gallon.”

You pass another sign. This one reads, “San Andreas Fault.” Travis doesn’t seem to notice.

Once off the highway, you see at least one person standing at every intersection twirling or jiggling a giant arrow pointing to an open house. “Human Signs,” nods Travis. “Like back in the Depression when guys would walk around wearing sandwich boards reading ‘Eat at Joe’s.’ But this is the opposite of a depression. Real estate commissions are six percent, so, on a $400k house, that’s $20k, which pays for a lot of twirling.”

Stretching off to the horizon are half-built houses and recently finished ones. Eventually, you follow one particularly active arrow to the Cypress Creek Estates. “Yeah, I know,” says Travis, “The nearest creek is 20 miles south and the nearest cypress tree is 100 miles west in Santa Barbara. But that’s not the point, the point is that everybody in Guatelombia grew up watching Baywatch and has wanted to move to California ever since. Do you know how many people there are in the world? Well, I don’t either, but, trust me, it’s a big number. There’s an endless supply of people who want to live in California. And their brothers, too! Do you think Bush is going to shut the borders? The President says, “Family values don’t stop at the Rio Loco.’”

Travis’s voice gets intense. “They’re coming, man, and nothing can stop them. It’s the American Dream!”

“Same with the money,” he continues, in a more relaxed tone. “When the Chinese get a check from Wal-Mart for a billion bucks for their latest boatload of plastic crud, they ask the smartest guy in Peking where to invest it. He calls up the smartest lad in London, who tells him, “Lend it to people buying California real estate. It’ll be safe as houses.” Nobody cares where they lend in California, just so long as it’s in California. You should see the prices they’re getting this year for dumps in Hawaiian Gardens, Bakersfield, Pacoima, Compton. Compton.

“See, in Abu Dubai, nobody knows nothing about Hawaiian Gardens, other than it’s in California. Over in Arabia, Sheik Rattleandroll thinks, ‘It’s like “Hawaii” and it’s full of “Gardens,” so how bad could it be?’

“Although, you’d figure,” muses Travis, shaking his head, “That by now, even an Arab would’ve heard of Compton.”

“There’s no stopping them. And the same with normal American people moving to the exurbs. Every year, kids get out of college and move from Mom and Dad’s house in the boring ‘burbs to an apartment in the sexy city. They love hanging out in Hollywood. But after ten years or so, they’ve found somebody. The one. They start looking at the price on those cute little cottages around the corner from their favorite restaurant on San Vicente. The price has seven digits. And it doesn’t start with a “one.” They wonder, “How does anybody buy in the city?” They finally realize: people do it family style. If they’re American and they buy on the Westside, then you know that Mom and Dad gave them a half mil, at least. If they’re Armenian, they have mom and dad move in with them, along with cousin Aram and his uncle-in-law. But Americans can’t live with their relatives. We go nuts. So, it’s out to the exurban frontier for us. It’s a perpetual motion machine.”

You pull up in front of an attractive Mediterranean-style model house. Two stories, 3,150 square feet, the sheet says. It seems enormous — both compared to your apartment and to its lot, with its miniature front yard consisting of a tiny sapling and a tinier sodded lawn. It’s hotter than in Santa Clarita, so the walk from the Lexus to the front door through the grit-laden wind has you sweating. “It’s breezy out here, but that’s good, it lowers the wind-chime factor,” observes Travis.

Then you’re hit by the blast of air conditioning, and you’re standing in the Great Room, with a 20’ ceiling. “Sure, it seems kind of big, but that’s the crucial element,” explains Travis. “What are they asking, $450k? That’s not a cost to you, that’s an investment, like joining a country club. The sticker price keeps out the riff-raff. You don’t want every peon in Guatelombia who grew up dreaming about Baywatch moving in next door to you, do you?

“What you want is like … well, look at Valencia High School near my house. It’s diverse. It’s … What does the LA Times call the neighborhood when there’s a gang shooting in South Central? … It’s vibrant. But Valencia High School is not too vibrant, if you know what I mean. Valencia’s like mostly white, some Asian, the black kids’ parents are all celebrities. The son of what’s his name, Wesley Snipe Dogg, rushed for 2,500 yards last year. The Latino kids are all from solid home-owning families, no accents, everybody’s dad is a contractor or something. You can’t afford to buy in my neighborhood if you aren’t in a cash business.”

One stair creaks loudly as you ascend to the lavish master bedroom suite on the second floor. “The construction’s just settling in,” assures Travis. “This house is only, it says here, nine months old. The owner is flipping it. Probably moving to a 4000 square foot house with the $50k he’s going to make and do it again. With a no down payment mortgage and a low teaser rate for the first two years (which you deduct on your 1040, by the way), that’s about a … a million percent return on investment. Can you get that kind of interest on your CDs?”

“In fact, I think I’m going to pick up one of these babies, too, and sell it in six months. We’ll be neighbors! Sort of. The mortgage company get a little snottier about down payments and interest rates when you tell them it’s an investment, so I’ll just check the “owner occupied” box. The broker doesn’t care. He gets his commission, then Countrywise bundles it up with a thousand other mortgages and sells it to Lemon Brothers. The Wall Street rocket scientists call this “secretization” because nobody can figure out what anything’s worth. It’s a secret.

“Lemon sells shares in the package all around the world. The Sultan of Brunhilde ends up owning a tenth of your mortgage. Do you think the Sultan’s going to drive around Antelope Valley knocking on doors to see if you’re really living there?”

“Maybe you’d like to come in with me on it, buy yourself a one-eighth share?”

 

Thanksgiving, 2005

The sky over the Antelope Valley is blue, your Marathon Sod minilawn is green, the temperature is 68, and your bride and her sister are cooking the turkey in your new granite counter-topped kitchen. Travis and you are standing in your driveway in Cypress Creek Estates, admiring the house you two own next door. Travis is explaining, “So, after ten years, the head monk, the abbatoir, tells the new guy he can say two more words. And the guy replies, ‘Roommate snores.’” By the way, this couple from Hermosa Beach counteroffered me $477k on our little investment. I told them I’d think about it. Nice people, they’d make good neighbors for you. But, I don’t think I’m going to sell it yet. I’m going to wait for an even $500k. There’ll be no problem getting that next spring. Yeah, it’s a nice neighborhood. Quiet.”

That it is. You don’t have all that many neighbors because about a third of the homes on the street appear to be unoccupied, owned by speculators waiting to flip them. And the people who do live on your street tend to start their commute to LA before dawn and get back after dark. It’s quiet, except on Sunday, when a stream of looky-loos pour through for the open houses.

 

Voice Mail, April 2006

“Hey, it’s Travis. Look, my accountant was crunching the numbers, and he says I’ve got a slight cash flow problem, what with me paying for 7/8ths of an empty house and the market not quite hitting our target price yet. So, he says that we should rent it out for awhile, just until we sell it. The thing is, what with everybody out there buying with no money down, there aren’t that many people left in the rental market. Most of the local jobs are in construction, building houses. (Well, construction and being a Human Sign.) Now, my accountant keeps the books for this contractor, who tells him he’s got some construction workers from this village down south who need a place to live. Real quiet hardworking types. You hablo un poco Espanol, right? If you need to talk to them, talk to their leader, Juan. He speaks Spanish. The rest of them only speak Mixed-Up. It’s an Indian lingo. But you won’t need to talk to them. They’re very quiet.”

 

July 2006

It’s Sunday afternoon. Travis peers down as you pry a flattened disk of lead out of the miniature crater in your driveway. “Well, they are real quiet, hardworking types from Monday through Friday,” he says. “You’ve gotta admit that. I guess they just want to relax on Saturday, have a little fiesta, drink some cerveza, shoot their pistolas in the air. It’s their culture. What are you, prejudiced?”

You look at Travis.

“Okay, okay, I’ll go talk to Juan.”

He comes back 20 minutes later. “Juan is gone, man. That’s what they kept telling me: ‘Juan is gone.’ One of the fellows had his stomach bandaged up. He just got back from the emergency room. I couldn’t quite follow what they were saying, but I think Juan had a bottle of tequila on Saturday night and stabbed this dude. Nothing serious. Just a friendly little argument. C’mon, they aren’t gangbangers, they’re working men … Okay, well, then Juan headed for the Border like OJ in his white Bronco. Juan is gone, and with the rent money they all owed us, too. Oh, man…”

 

Voice Mail, September 2006

“Hey, it’s Travis. I got good news. We’re not going to mess around anymore trying to extract our rent from some mob of illegals. No way, Jose. Instead, we’re going to get paid by check on the first of each month straight from the U.S. Treasury! The Department of Housing and Urban Development. Section 8 rent vouchers. They’re tearing down a housing project in the, uh, LA – Long Beach area, in, uh, Compton, I guess, to be precise, and they’ve got this highly respectable elderly grandmother who needs a place to stay with her family. Really cute grandkids. A few daughters, too. She wants a safe place with good schools to raise them. Actually, she’s not all that elderly. The HUD man said she’s 39. A church lady, you know, pillar of the community, big hat, all that. You’ll like your new neighbors.”

 

Voice Mail, December 2006

“It’s Travis. Okay, okay, I’ll admit that I hadn’t really thought through the part about the daughters having boyfriends, or grandma having boyfriends either, for that matter. But I think this whole Bloods v. Crips thing is being blown way out of proportion. It’s just graffiti. And lots of kids wear red these days. It’s a very In color. And these days all the young people make those goofy signs with their hands. For that matter, how can anybody know for sure that the Chevy that cruises by every night is full of MS-13 gangbangers planning a drive-by on the Bloods next door as payback for the race riots at the County Jail in Castaic? Are you sure you read the tattoos on their necks right? It’s nighttime, how can you be certain that their neck tattoos say ‘MS-13.’ Maybe they just have, like, ‘Mom’ tattooed on their necks. Did you think about that?”

 

May 2007

“So, after fifteen years, the abbadabbadoo tells the new monk he can say two more words, and—Whoa!” Travis flinches when the 120-pound Presa Canario lunges at him. The steel chain securing the dog to the front of the house across the street from your house snaps taut and its massive jaws come up short. “Man,” says Travis, shaken, “That’s one of those dogs that the Aryan Nation breeds to guard meth labs, isn’t it? What’s in that house? A meth lab? No, don’t tell me. I don’t want to know.”

“Look at this neighborhood,” he says, his dismissive gesture taking in the empty malt liquor bottles on the curb, the wheelless car jacked up on a brown front lawn, and the knots of sullen youths playing hip-hop and reggaeton on boomboxes. “All these speculators buy houses, hit a little bump in the road, need some cash, then start renting them out to lowlifes to get by until they can cash in. Property values drop like a rock. It would be no problem if just one investor did that, but when all these speculator jerks do it, the whole ‘hood is hosed.

“Oh, yeah, I came by to mention that in June the mortgage rates reset after two years. Bush put this new guy in at the Fed, Ben Barnacle, and he’s raised interest rates. So that will push up your share of the payment.”

 

Voice Mail, June 2007

“It’s Travis. Sorry to hear about you having to sell both your cars to make that new monthly nut. Taking the bus to work in that heat, man, that’s rough.

“But, that’s all history. I’ve got great news! I sold the house next door. To the Section 8 grandma. Who else would buy it? I only got what we paid for it, but I figure that was the smart play. She didn’t think she could qualify for the mortgage, but I told her to put down as her household income all the money made by all the people who have ever stayed there. What, is Washington Mutant going to be so racist as to question that a woman like her could have an income of $160,000?

“Don’t thank me for getting you out of that monthly payment. It’s the least I could do for you, bro.”

 

Phone call, October 2008

You pick up the ringing phone.

“It’s me, Travis. Long time no hear! Hey, I’m sorry about houses in your zip code being down 55 percent versus last year. Bummer.

“Anyway, I’ve been listening to Senator Omama’s speeches about how he is going to invest hundreds of billions to make America energy independent in ten years. So, I wanted to let you in on the next big thing. Alternative energy! When the Democrats get in come November, alternative energy will be bigger than houses. I’ve got great investments lined up with some start-ups in this emerging growth sector. Like biodiesel trolleys. Al Gore is this close to making a big investment. I just need a little help making the minimum required investment. They don’t need chump change. This is just for the big money boys. So, are you in or are you out?

You say nothing.

“Are you going to quit on me? Remember, quitters never prosper.”

You say: “I quit.”

Travis says: “Well, it’s about time. You’ve done nothing but bitch and moan since I met you.”

 

Charles Murray writes in the Wall Street Journal:

Why the SAT Isn’t a ‘Student Affluence Test’
A lot of the apparent income effect on standardized tests is owed to parental IQ—a fact that needs addressing.

By CHARLES MURRAY
March 24, 2015 7:11 p.m. ET

… The results are always the same: The richer the parents, the higher the children’s SAT scores. This has led some to view the SAT as merely another weapon in the inequality wars, and to suggest that SAT should actually stand for “Student Affluence Test.”

It’s a bum rap. All high-quality academic tests look as if they’re affluence tests. It’s inevitable. Parental IQ is correlated with children’s IQ everywhere. In all advanced societies, income is correlated with IQ. Scores on academic achievement tests are always correlated with the test-takers’ IQ. Those three correlations guarantee that every standardized academic-achievement test shows higher average test scores as parental income increases.

But those correlations also mean that a lot of the apparent income effect is actually owed to parental IQ. The SAT doesn’t have IQ information on the parents. But the widely used National Longitudinal Survey of Youth contains thousands of cases with data on family income, the mother’s IQ, and her children’s performance on the math and reading tests of the Peabody Individual Achievement Test battery, which test the same skills as the math and reading tests of the SAT.

For the SAT, shifting to more than $200,000 of family income from less than $20,000 moved the average score on the combined math and reading tests to the 74th percentile from the 31st—a jump of 43 percentiles. The same income shift moved the average PIAT score to the 82nd percentile from the 30th—a jump of 52 percentiles.

Now let’s look at the income effect in the PIAT when the mother’s IQ is statistically held constant at the national average of 100. Going to a $200,000 family income from a $1,000 family income raises the score only to the 76th percentile from the 50th—an increase of 26 percentiles. More important, almost all of the effect occurs for people making less than $125,000. Going to $200,000 from $125,000 moves the PIAT score only to the 76th percentile from the 73rd—a trivial change. Beyond $200,000, PIAT scores go down as income increases.

In assessing the meaning of this, it is important to be realistic about the financial position of families making $125,000 who are also raising children. They were in the top quartile of income distribution in 2013, but they probably live in an unremarkable home in a middle-class neighborhood and send their children to public schools. And yet, given mothers with equal IQs, the child whose parents make $125,000 has only a trivial disadvantage, if any, when competing with children from families who are far more wealthy.

Why should almost all of the income effect be concentrated in the first hundred thousand dollars or so? The money itself may help, but another plausible explanation is that the parents making, say, $60,000 are likely to be regularly employed, with all the things that regular employment says about a family. The parents are likely to be conveying advantages other than IQ such as self-discipline, determination and resilience—“grit,” as this cluster of hard-to-measure qualities is starting to be called in the technical literature.

Families with an income of, say, $15,000 are much more likely to be irregularly employed or subsisting on welfare, with negative implications for that same bundle of attributes. Somewhere near $100,000 the marginal increments in grit associated with greater income taper off, and further increases in income make little difference.

Let’s throw parental education into the analysis so that we can examine the classic indictment of the SAT: the advantage a child of a well-educated and wealthy family (Sebastian, I will call him) has over the child of a modestly educated working-class family (Jane). Sebastian’s parents are part of the fabled 1%, with $400,000 in income, and his mother has a college degree. But her IQ is only average. Jane’s family has an income of just $40,000 and mom has only a high-school diploma. But mom’s IQ is 135, putting her in the top 1% of the IQ distribution.

Which child is likely to test higher? Sebastian is predicted to be at the 68th percentile on the PIAT. Jane is predicted to be at the 78th percentile. If you want high test scores, “choose” a smart but poor mother over a rich but dumb one—or over a rich and merely ungifted one.

One way of analyzing the effect of “privilege” — wealth and parental investment — on test scores and outcomes as adults would be to check how much an only child is advantaged relative to a child in a larger family.

For example, consider my wife v. myself. Harvard social scientist Robert D. Putnam’s new book Our Kids uses a super-simplified definition of class based solely on parents’ educational levels. By Putnam’s standards, my wife, whose mother and father both had masters degrees, would have grown up upper middle class. In contrast, my father had a junior college 2-year diploma and my mother had only a high school diploma, so I’d be lower middle class, I guess.

On the other hand, I was an only child, while my wife has three siblings. So, growing up, I never felt terribly strapped for money nor, especially, for parental time and energy, while my wife’s upbringing was more exigent.

Although you don’t hear about it much now that small families are the norm, back in my Baby Boom childhood, the privileged nature of being an only child — only children were widely said to be spoiled — was a frequent subject of conversation. This was especially true since I went to Catholic schools for 12 years, where very large families were common. For example, one friend, the class clown and best singer (his rendition of “MacNamara’s Band” in 4th grade remains a vivid memory), had eight siblings in his Irish family.

How privileged was I by being one of a family of three rather than one of a family of eleven?

My friend from the huge family has had a long, successful career as a TV sportscaster, along with some TV and movie credits as a comic actor. If you live in L.A., you’ve seen him on TV dozens of times over the last 30 years. So, growing up in a huge family didn’t ruin his life.On the other hand, if he’d been an only child with a real stage mother for a mom, I could imagine somebody with that much presence (his affect is reminiscent of that of the late Philip Seymour Hoffman or of a straight Nathan Lane) becoming a semi-famous character actor with maybe one or two Best Supporting Actor nominations.

Back during my more egalitarian childhood, people didn’t think that much about tutoring and Tiger Mothering, but, to some extent it works.

For example, I have had a pleasant life, but looking back I can see wasted opportunities. After my freshman year at Rice I came home and got a summer job at Burger King. After my sophomore year, I repaired dental equipment. Finally, after my junior year I worked as the assistant to the Chief Financial Officer of a big weedwacker manufacturing company. But what did the Burger King and repair jobs do for me other than teach me not to be a fry cook or repairman? These days I would have plotted to get internships in Silicon Valley or D.C. or Wall Street and had my parents pay my rent.

So, yes, I do think I was privileged to have the extra resources I was afforded by being an only child, even if I didn’t exploit my privileges as cunningly as I could have.

Quantifying how big a privilege that was seems challenging but doable. In fact, I’m sure somebody has done it already, and I invite commenters to link to studies.

It seems to me that measuring the effects of being an only child ought to be the first thing we do when we decide to theorize about Privilege.

By the way, however, there are other factors that may matter more in determining how Privileged you are. For example, my parents happened to turn out to be winners in the Great American Random Lottery of choosing a neighborhood to buy a home in during the 1950s — the demographics of their neighborhood have barely changed since the 1950s.

In contrast, my in-laws had the bad luck to draw what nightmarishly turned out to be one of the shortest straws in America: the Austin neighborhood on the West Side of Chicago. It was almost all white until Martin Luther King came to Chicago in 1966 to demand integration. Being good liberals, my in-laws joined a pro-integration group of neighbors who all swore to not engage in white flight. But after three years and three felonies against their small children, my in-laws were pretty much financially wiped out by trying to make integration work in Austin. And thus after they finally sold out at a massive loss, they wound up living in a farmhouse without running water for the next two years.

Bizarrely, while the once-pleasant street where my wife grew up in Austin looks nowadays like a post-apocalyptic wasteland, a couple of miles to the west is Superior Street in Oak Park, IL where my father grew up in the 1920s. It looks like an outdoor Frank Lloyd Wright museum today. The Wright district was saved by Oak Park’s secret, illegal, and quite effective “black-a-block” racial quota system imposed on realtors to keep Oak Park mostly white (and, these days, heavily gay).

So a not insignificant fraction of White Privilege in 2015 actually consists of whether or not the Eye of Sauron turned upon your parents’ neighborhood or not.

 
• Category: Economics, Ideology • Tags: Charles Murray, College Admission, IQ, SAT 

A friend writes:

A few notes on the implications of China displacing the United States as the world’s number one country over the course of the 21st Century:

1. The Chinese business cycle will become the world’s business cycle (replacing the U.S.). It will be a huge shock the first time a recession hits the U.S. because China goes into a downturn. How might this work? A recession in China slashes Chinese demand for imports. Some of those imports are from the U.S. Others are from other countries, that in turn buy less from the U.S.

However, all of this is a bit indirect. The more likely (and powerful) mechanism is that a financial panic starts in China and spreads. There is plenty of history showing that financial panics typically don’t stop at national borders. The East Asian crash of 1997 was one example. The Great Recession was/is another. By contrast, the Argentine Great Depression of 2001-2003 was mostly limited to Argentina (Argentina is not a global economic power). Note that even in the 19th century, economic crises swiftly spread around the world.

2. China’s incessant demand for commodities drives global commodity prices up, and China’s exports drive the prices for manufactured goods down. Of course, this is already happening. Given that the U.S. is a net importer of commodities (by far) and an exporter of manufactured goods this is bad for U.S. terms of trade. Basically, China is a direct competitor to the U.S. in world trade and China’s growth tends to impoverish the U.S. Note that many economists already believe that the gains from cheap imports from China, have been more than offset by China’s impact on commodity prices (food and fuel).

Tangentially, does it seem like restaurant prices are going through the roof? A Cobb or chef salad at a diner now seems to start at $13.95. And how much am I supposed to be tipping these days?

3. At some point, China may become a political model for countries around the world. Given that China is a one-party state with a mixed economy, this will pain all sorts of folks on the left (and the right). Basically, the western political and economic model will lose credibility in favor of China’s. Of course, this is already happening. Notably, the ability of the West to influence the third-world, has substantially declined because of the willingness of China to provide political and economic support without the strings demanded by Europe and the U.S.A.

An NYT op-ed writer is already denouncing India’s new prime minister Modi for showing an interest in how things are done in China.

4. China may emerge as a dominant military power. History says that military power cannot be separated from real economic power. The dominant military power of each modern period has been the dominant manufacturing power. That meant the UK until around 1900 and the U.S. until around 2000. China is the leading manufacturing power of the world today. The gap separating China and the U.S. will only grow (much) larger over time. Manufacturing is crucial for war for two reasons. First, manufacturing provides the national wealth required to pay for war. Second, manufacturing (the manufacturing infrastructure) provides the means for actually producing the weapons needed for war. Note that services are not a substitute for manufacturing in this context. Services are not (typically) tradable and don’t provide the convertible currency income needed to fight international wars.

More specifically, the U.S. may end up fighting an aircraft carrier war with China at some point in the future. History suggests that the U.S. Navy could lose just quickly as Britain did in WWII. On December 10th, 1941 the Japanese sunk the Prince of Wales and Repulse in just a few hours ending British naval power in the Pacific. Conversely, the U.S. ended Japanese naval power with the destruction of Kito Budai (the main Japanese fleet) in the Battle of Midway. Like it or not, America’s carrier fleet could be destroyed just as quickly and just as decisively [and without nuclear weapons]. In one day (less), both the reality and perception of American global power could essentially evaporate.

5. China may become a dominant setter of technology standards. After all, if China is the dominant producer and consumer of some technology, why wouldn’t China’s standard(s) become the world standard(s). Of course, the dissemination of technology standards is never that simple. The rest of the world is metric, but that hasn’t driven metrification in the U.S. Conversely, the U.S. uses 120 volts, 60 cycle power. Most of the rest of the world does not. Even when the U.S. electric utility business dwarfed any other country, the ROW (Rest Of World) didn’t rush to embrace U.S. standards (120 volts is too low, 60 cycle is correct). All that having been said, China may become influential with respect to new technology standards even if the old ones don’t change much.

6. China may become a dominant source of technology innovations. That hasn’t happened so far. Only a handful of new technologies can be said to have been “invented in China”. However, this is to be expected. The early years of U.S. economic growth were mostly imitative. Indeed, the U.S. was notorious for violating foreign copyrights and patents and refusing to pay for the privilege (Dickens hated the U.S. for years). Japan was widely derided for years (decades) as a producer of cheap copies of American goods. When that stopped being the most profitable model for Japanese firms, they (Japanese manufacturers) invested heavily and successfully in innovative products and moved upscale. The same process can be observed in South Korea and Taiwan now. China will inevitably follow.

The notion that America has some inevitable advantage in “creativity” is popular, but I have a hard time even defining “creativity,” so I don’t put all that much faith in this theory of American dominance.

7. China will almost certainly become the dominant financial power in the world. China is already the world’s largest creditor and holder of foreign exchange reserves ($3.95 trillion). The U.S. is the world’s largest debtor. It’s obvious that creditors gain power and debtors decline. Sadly, the “supply-side” right is so obsessed with tax cuts for the rich and “free trade” (unlimited outsourcing) that they deny what’s self-evident to everyone else. Of course, the welfare-state left is just as unwilling to admit that debt and deficits aren’t free and hobble a nation over time.

8. More subtly, the Chinese language and culture may gain influence worldwide. At some point, Chinese authors, playwrights, movie producers, musicians, and artists may become highly influential globally. Chinese may become the mandatory second language for everyone (as English is now). In my view, the Chinese language is likely to gain global market share (for economic reasons) considerably faster than Chinese artists and musicians.

“Mandarin immersion” grade schools are popular among SWPLs since they act as NAM Repellents, but I haven’t seen much evidence that white people are actually learning to speak Chinese. For example, in 2013, only 520 high school students in America who say they didn’t grow up speaking Chinese got a 5 on the Chinese Language and Culture Advanced Placement test, which is higher than I would have thought, but still not much.

It remains to be seen if China can produce books, movies, songs, etc. that the rest of the world yearns for. Conversely, their no doubt at all about China’s ability to produce globally competitive goods.

A decade ago it looked like the Chinese would become competitive in movies. Zhang Yimou’s film “Hero” was spectacular, but the Chinese film industry hasn’t made much of an impression since.

Lately, Hollywood blockbusters have routinely included a segment filmed in China (with perhaps a shout-out to Russia in the plot), because China and Russia are developing American-style movie-going cultures where youths go to opening weekend movies. For example, Transformers: Age of Extinction opened this weekend with $100 million in America and $92 million in China (with $22 million in Russia). (Here’s my 2011 review of the previous Transformers movie.)

So, Hollywood’s strategy is simply to assimilate China into the Blockbuster Borg. So far, it seems like it’s working to head off the Chinese threat.

The American college admissions system is an important leverage point. The Chinese crave the status of American university degrees, which allows Americans to encourage the Chinese to learn to jump through the various SWPLifying hoops they choose to erect. Or they can just accept the Chinese money and test scores, no questions asked.

 
• Category: Economics, Foreign Policy • Tags: China 

I’ve long been fascinated by the Affordable Housing racket. Josh Barro writes in the NYT:

Abington House, at 500 West 30th Street near the High Line in West Chelsea, is a new luxury residential building and, like a lot of new luxury developments in Manhattan, it’s extremely expensive. The cheapest two-bedroom apartment now listed there rents for $5,850 a month. That gets you only one bathroom; a two-bed, two-bath can run as high as $8,695.

But 78 apartments in the building, or 20 percent of the total, are set aside as affordable housing under New York City’s “inclusionary zoning” program. That means 19 two-bedroom apartments are priced from $687 to $873 — about a 90 percent discount to market rents. Those apartments were granted to 19 households that make from $25,612 to $42,950 a year and won a housing lottery the city held last year.

So that’s a discount of about $75,000 per year or so, presumably for many years. After all, how anxious would you be to move if you were getting $75,000 per year, tax-free, each year for staying in your luxury apartment? So, what’s the net present value of being chosen for an affordable housing unit in this building? A million dollars? What would you do to win a million dollar gift? (I mean, not you, personally, of course, but other people, those dishonest swine.)

The link goes to a Curbed article and the link to the city lottery appears to now be dead. But that’s still the least opaque process I’ve ever come across for handing out these affordable housing goodies.

I’m remind of when I applied my son to a charter school founded by his old teachers. They set up lots of hoops to jump through to apply for the lottery such as parents having to drop off applications in person and find out if he was chosen in person. I show up to find out if he was chosen in the lottery, all nervous, and the man with the clipboard of winners, who used to teach my son math, doesn’t even bother to look at it when he tells me my son got in. I asked him to check just to make sure my son is in, and he laughs at my naivete: of course my son, who got a 5 on the Biology AP in 7th grade, is in. What do the founders of this charter school look like, idiots?

I’ve never seen an article about who gets affordable housing units in the best new buildings. I think we are supposed to believe they routinely go to single welfare mothers from the South Bronx. But if you were paying $100,000 per year for an apartment, how happy would you be about riding the elevator with the single mom’s boyfriends?

Somehow, I suspect affordable housing apartments are more likely to go to, say, the nephew of a City Commissioner of Building Safety or, say, the daughter of another real estate developer who is an adjunct instructor of creative writing at NYU for $3,800 per class, or somebody else whom the paying tenants won’t complain about.

 
• Category: Economics • Tags: Housing 
The econosphere has been abuzz for several years with NYU professor Paul Romer’s plan to bring the benefit of Good Institutions to Central America by building “charter cities” in the banana republic of Honduras. (Here’s Romer’s 2011 TED talk.) As economist Daron Acemoglu has explained, the only thing that differentiates a rich country from a poor country is that the former has Good Institutions. So, what the Third World needs is for American economists to plan for them private chartered cities with world class Good Institutions. It’s a no-brainer.

Thus, Romer worked out a deal with the government of Honduras to turn state of the art development economics theorizing into reality by building three private cities in Honduras.

What could possibly go wrong? Who could object to such a high-minded, altruistic initiative? 

Well, there are always petty carpers everywhere. For example, a Honduran peasants rights lawyer named Antonio Trejo Cabrera disliked Romer’s proposal. The Montreal Gazzette reported yesterday:

Trejo had also helped prepare motions declaring unconstitutional a proposal to build three privately run cities with their own police, laws and tax systems.

In Honduras, however, they have time-honored ways of cutting through red tape and nuisance lawsuits:

Antonio Trejo Cabrera, 41, was shot five times while attending a wedding in the capital, Tegucigalpa, the Peasant Movement of the Valley of Bajo Aguan said in a statement. 

Trejo was a lawyer from three peasant co-operatives in the Bajo Aguan, a fertile farming area plagued by violent conflicts between agrarian organizations and land owners. More than 60 people have been killed in such disputes over the past two years. The lawyer had recently helped farmers gain legal rights to several plantations…. 

Just hours before his murder, Trejo had participated in a televised debate in which he accused congressional leaders of using the private city projects to raise campaign funds.

Meanwhile, Professor Romer has announced (see Marginal Revolution) that he has been frozen out of his oversight role by the government of Honduras, so he’s washing his hands of the whole deal.

An earlier American intellectual who had had big plans for Honduras, the filibuster William Walker, who wanted to add Central American countries to the United States as slave states, died by firing squad in Honduras in 1859. Professor Romer should be glad he’s out of there without enduring the fate of Walker and Trejo. 

It almost seems as if land ownership in Central America is very serious stuff. (Remember the Death Squads of the 1980s?) Maybe it’s hard for American theoreticians to figure out what’s really going on in places like Honduras because the truth is only whispered about among locals for fear of ending up like the brave Attorney Trejo.

Perhaps political power does come out of the barrel of a gun.

This fiasco resembles a miniature version of how the Harvard econ department helped provide intellectual air cover for budding oligarchs stealing much of the assets of Russia in the 1990s. Isn’t it about time for economists to do some soul-searching and collective self-criticism?

(Reprinted from iSteve by permission of author or representative)
 
• Category: Economics • Tags: Political Economy, Real Estate 
Asks Don Boudreau in the WSJ.

My impression was that Friedman was a public admirer of Keynes. (Here’s a brief video of Friedman saying nice things about Keynes.) John Maynard Keynes was, obviously, a genius. Bertrand Russell, who didn’t like Keynes, said of him:

Keynes’s intellect was the sharpest and clearest that I have ever known. When I argued with him, I felt that I took my own life in my hands, and I seldom emerged without feeling something of a fool. I was sometimes inclined to think that so much cleverness must be incompatible with depth, but I do not think this feeling was justified.

None of this means that Keynes was necessarily right in his macroeconomics or that Keynes’ self-proclaimed followers are right about what to do in novel situations two-thirds of a century after his death, just that it’s silly to treat Keynes as less than a heavyweight.

(Reprinted from iSteve by permission of author or representative)
 
• Category: Economics 
Ron Unz has a big article in The American Conservative on a perennially interesting and important subject:

Race, IQ, and Wealth 

What the facts tell us about a taboo subject 

By RON UNZ • July 18, 2012 

At the end of April, Charles Kenny, a former World Bank economist specializing in international development, published a blistering attack in Foreign Policy entitled “Dumb and Dumber,” with the accusatory subtitle “Are development experts becoming racists?” Kenny charged that a growing number of development economists were turning towards genetic and other intrinsic human traits as a central explanation of national economic progress, often elevating these above the investment and regulatory issues that have long been the focus of international agencies. 

Although Kenny suggested that many of his targets had been circumspect in how they raised these highly controversial ideas, he singled out IQ and the Wealth of Nations, published in 2001 by Richard Lynn and Tatu Vanhanen, as a particularly extreme and hateful example of this trend. These authors explicitly argue that IQ scores for different populations are largely fixed and hereditary, and that these—rather than economic or governmental structures—tend to determine the long-term wealth of a given country. 

Kenny claimed that such IQ theories were not merely racist and deeply offensive but had also long been debunked by scientific experts—notably the prominent biologist Stephen Jay Gould in his 1980 book The Mismeasure of Man.

Read the whole thing there.

 
• Category: Economics • Tags: IQ, Race 
Political scientist Elinor Ostrom has died. In 2009, she became the first woman winner in the four decades of the Economics quasi-Nobel Prize. She worked on the question of the various ways people arrange to avoid “the tragedy of the commons” of over-exploitation of common resources, such as fisheries.

Jared Diamond notes that there are three possible solutions to what Garrett Hardin called “the tragedy of the commons,” or the tendency for individuals to over-consume resources and under-invest in responsibilities held in common, leading to ecological collapse.

Government diktat.

Privatization and property rights — but that’s often impractical with some resources, such as ocean fish.

Diamond writes: “The remaining solution to the tragedy of the commons is for the consumers to recognize their common interests and to design, obey, and enforce prudent harvesting quotas themselves. That is likely to happen only if a whole series of conditions is met: the consumers form a homogeneous group; they have learned to trust and communicate with each other; they expect to share a common future and to pass on the resource to their heirs; they are capable of and permitted to organize and police themselves; and the boundaries of the resource and of its pool of consumers are well defined.” 

A classic supporting case that that Diamond doesn’t bring up: American shrimp fishermen in Texas were universally denounced as racists in the late 1970s when they resisted the government’s efforts to encourage Vietnamese refugees to become shrimpers in their waters. French director Louis Malle made a movie, Alamo Bay, denouncing ugly Americans fighting hardworking immigrants.

What got lost in all the tsk-tsking is that fishing communities always resist newcomers, especially hardworking ones, because of the sizable chance that the outsiders who don’t know the local rules or don’t care about them will ruin the ecological balance and wipe out the stocks of fish.

The evidence Diamond assembles indicates, although of course he never dares to state it bluntly, that the fundamental requirement for dealing effectively with environmental danger is: start with a population that’s limited in number, cohesive, educated, and affluent.

A quick Google search finds Nobel Laureate Ostrom also cautiously expressing Doubts About Diversity in her book The Drama of the Commons.

… Alesina et al. (1999) find that ethnic diversity is associated with lower public goods funding across the U.S. municipalities because different ethnic groups have different preferences over the type of public good … In the kind of rural societies considered in this chapter … the effectiveness of social sanctions weakens as they cross ethnic reference groups. In this vein, Miguel (2000) constructs a theoretical model where the defining characteristics of ethnic groups are the ability to impose social sanctions within the community against deviant individuals and the ability to coordinate on efficient equilibria in settings of multiple equilibria. With data from the activities of primary school committees in rural western Kenya, Miguel then shows that higher levels of ethnic diversity are associated with significantly lower parent participation in parent meetings, worse attendance at school committee meetings, and sharply lower teacher attendance and motivation. 

If social groups (not solely ethnic groups) are defined as those whose boundaries coincide with the effective monitoring and enforcement of shared social norms … this is one way of understanding the notion cited earlier of cultural homogeneity, a variant of what many authors have called social capital or social cohesion. … Irrigation organizations that cross village boundaries can rely less on social sanctions and norms to enforce cooperative behavior …

There are basically two ways to get people to play nice with a common resource such as shrimp or irrigation water: violence or ostracism. The latter works most effectively regarding marriage — if you don’t play by the rules, nobody respectable will let your kid marry his daughter. But when newcomers who don’t ever want their children to marry your children arrive and start exploiting your irrigation system or fishery (or whatever), then the old non-violent traditions break down, and people start turning to violence or its threat, whether anarchic or government-based (e.g., socialism and property rights are based on the threat of the government’s monopoly on violence). 

(Reprinted from iSteve by permission of author or representative)
 
• Category: Economics 
One century ago today, May 15, 1911, the Supreme Court upheld the federal government’s lawsuit under the heretofore unused 1890 Sherman Anti-Trust Act against the Standard Oil near-monopoly in refining. The company founded in 1870 by John D. Rockefeller was broken up into 34 companies, including ones that eventually became Exxon and Mobil.
Of course, today they are back together again as ExxonMobil.
One of the less expected changes in public life over the last third of a century has been the growing apathy over the subject of antitrust (known outside of America as “competition law”). For example, the proposed merger of AT&T and T-Mobile, reducing the number of national cell phone network competitors from four to three, isn’t popular in the Senate, but it doesn’t seem to be a big news story with the public.

The last time I can recall anybody trying to make a big deal out of antitrust was in the mid-1990s when Pearl Jam, the most popular rock band of the period, sick of the absurd fees that Ticketmaster adds to concert ticket prices, tried to run a successful national tour without venues dominated by Ticketmaster.

Pearl Jam failed. People seemed to take away the message that, well, sure, Pearl Jam might have seemed cool and their crusade public-spirited. But their economic failure just shows that, deep down, they are losers. What’s really cool is having a monopoly.

It’s hard to explain to today’s youth what a big deal trust-busting was just a third of a century ago. Alternatively, it’s hard to figure out why nobody cares much anymore about cartelization.

When I was majoring in economics at Rice in the late 1970s, monopoly was a massive topic. I took a semester-long course devoted to propounding the emerging libertarian line that there was very little to worry about. Competition would tend to rapidly eliminate monopolies. This popular idea of businessmen getting together in smoke filled rooms to agree to keep prices up was a stereotype. I got a very good grade in that course. I believed. 
The young professor making these arguments against antitrust law in the late 1970s saw himself as a rebel against orthodoxy. Today, though, his free market ideas seems to have become conventional wisdom, or at least nobody cares that much to argue against them.
The funny thing was that when I got a job with a young company, however, it turned out that competition, from the perspective of owners and employees holding stock options, was awful. It’s like Adam Smith said, in a genuinely competitive market, it’s hard for a business to make more than the risk-adjusted cost of capital, which is not much fun at all. Why go through the immense amount of hard work to invent a new, better way of doing business if that’s all you’ll end up with? To make good money, the kind of money the stock market demands you make, you need some kind of quasi-monopolistic edge. 
The founder of the company, as strong a competitive personality as you could want, looked at the high fixed cost economics of this submarket of marketing research and quickly sold the firm to our chief competitor for a lot of money. But the Reagan Justice Department shot the deal down because our clients whined so much. That began a price war that quickly drove the third firm in the industry out of business, and kept the two survivors from making decent profits all through the prosperous ’90s. As I had jobs over time with both competitors, I came up with various novel ways to reduce competition, but top management, knowing the government was keeping an eye on them from their earlier merger attempt, was unenthusiastic. So, years of minimal profits rolled on.

This dreary fate did not befall most other industries, though. The Dow Jones average is about an order of magnitude higher than when I started to work in late 1982, because profits are vastly higher. It’s easy to understand the high profits of, say, Apple, but why does Procter & Gamble make so much off toothpaste and detergent these days?

One difference is that in the inflationary 1970s, it was common for members of the public to suspect that rising prices were caused by monopolistic practices. With the prices of manufactured goods stable or even falling in much of the time since the 1970s, however, it’s common to assume that anticompetitive activities can’t be a problem because, say, cell phones or TVs keep getting awesomer. Psychologically, it’s hard to worry much about whether prices should be falling even faster.

(Reprinted from iSteve by permission of author or representative)
 
• Category: Economics 
Here’s a long article by Benjamin Wallace-Wells on Paul Krugman’s personality, such as it is. Economists have been called “worldly philosophers,” but a lot of them come across as being awfully out of touch. For example, this article uses Krugman’s long relationship with Larry Summers to help explain Krugman. By contrast to Krugman, when it comes to being a people person, Summers is practically Oprah. Yet, Summers was a notorious failure in the fairly easy job of being president of Harvard. 
Wallace-Wells does do a good job of zeroing in on Krugman’s best piece of writing:

Back in 2006, when he was writing The Conscience of a Liberal, Krugman found himself searching for a way to describe his own political Eden, his vision of America before the Fall. He knew the moment that he wanted to describe: the fifties and early sixties, when prosperity was not only broad but broadly shared. Wells, looking over a draft, thought his account was too numerical, too cold. She suggested that he describe his own childhood, in the ­middle-class suburb of Merrick, Long Island. And so Krugman began writing with an almost choking nostalgia, the sort of feeling that he usually despises: “The political and economic environment of my youth stands revealed as a paradise lost, an exceptional moment in our nation’s history?…” 

Krugman remembers Merrick in these terms, as a place that provoked in him “amazingly little alienation.” “All the mothers waiting to pick up the fathers at the train station in the evening,” he says, remembering. “You were in an area where there were a lot of quiet streets, and it was possible to take bike rides all over Long Island. We used to ride up to Sagamore Hill, the old Teddy Roosevelt estate.” The Krugmans lived in a less lush part of Merrick, full of small ranch ­houses each containing the promise of social ascent. “I remember there was often a typical conversational thing about how well the plumbers—basically the unionized blue-collar occupations—were doing, as opposed to white-collar middle managers like my father.”

This starting point, which is awfully similar to where I’m coming from (see my post above about Mildred Pierce’s L.A., in which Benjamin Schwarz eloquently describes our shared appreciation of the Paradise for the Common Man), potentially opened up for Krugman the opportunity to develop a more wide ranging critique of What Went Wrong. Was it merely tax cuts? At times, he’s dipped his toe in the heretical possibility that, say, massive immigration wasn’t wholly an unmixed blessing to somebody with his vision of the Good Society, only to quickly run back up on the beach.
Now, obviously, even Paul Krugman is under a lot of career pressures to Not Talk About Unpleasant Topics. But, Wallace-Wells could have pointed out the important effects of Mrs. Krugman, a blue-eyed, long-haired woman who strongly self-identifies as black, has had on keeping Mr. Krugman on the politically correct straight and narrow, and pushing him toward his present view that racism is the root of all Republican evil. There was a period in the 1990s, when Krugman appeared to be developing in an interesting direction intellectually (here’s his excellent attack on Stephen Jay Gould). But the advent of Mrs. K. seems to have coincided with putting the kibosh on his tendencies toward crimethink.
(Reprinted from iSteve by permission of author or representative)
 
• Category: Economics 

Paul Krugman still can’t grasp why years of stupid investments cause inevitable recessions.

Krugman denounces Arnold Kling’s quasi-Austrian explanation of why busts occur. The reigning Nobel laureate proceeds to triumphantly zing Kling with what he thinks is a killer question:

And now as then, the whole notion falls apart when you ask why, say, a housing boom — which requires shifting resources into housing — doesn’t produce the same kind of unemployment as a housing bust that shifts resources out of housing.

Yes, that’s what Dr. Krugman wrote: Why doesn’t a housing boom cause the same kind of unemployment as a housing bust?

A commenter named Scott replies:

You don’t create unemployment by hiring people.

Seriously, Paul basically just asked “Why doesn’t hiring people create the same unemployment that firing does?”

And people take him seriously?

At much greater length, I had reviewed what was wrong with Krugman’s thinking about recessions a year ago.

(Reprinted from iSteve by permission of author or representative)
 
• Category: Economics 

Much of the progress in improved efficiency in the last 50 years has come from reducing inventory. Holding inventory is expensive. You can’t earn interest or dividends on goods you own. Plus, you have to pay to store it, keep track of it, find it, etc.

The Just-in-Time manufacturing process made famous by Toyota focuses on cutting work-in-process inventory — parts get delivered to assembly line stations just before they’re needed. Similarly, containerized shipping has reduced the inventory tied up in transportation because it can be loaded and unloaded faster. At the retail end, Wal-Mart and Costco have radically cut inventory held by retailers through a plethora of techniques, such as using UPC scanners to measure sales and compare them against shipments to keep track of inventory and reorder automatically. (By the way, is “plethora” an inherently comic word and thus should be reserved only for facetious uses?)

The retailers, in fact, have shoved a lot of their old inventory holding costs onto consumers by, for example, selling them cases rather than individual items. Part of the demand for bigger houses and bigger vehicles that has proven so expensive to us as a society comes from consumers taking on more of the burden of storing and transporting goods.

While there has been enormous systematic progress at improving inventory management in the commercial world, there has been very little progress toward Just-in-Time practices in the domestic world. Just as it was fifty years ago, some householders are good at it, some are bad at it. (I’m one of the very, very bad ones, so I notice this lack more). There’s just a lot more inventory of household goods to manage today than there was back then, so the need for more advanced household logistics is much greater.

I can’t in good conscience advise anybody to make a career in this field because I fear it won’t take off for a long time, but it will take off eventually.

(Reprinted from iSteve by permission of author or representative)
 
• Category: Economics • Tags: Business 

My first suggestion is that rather than hand out a new Nobel Prize in Economics this year, they instead take away one they gave to some economist in the past who now looks like a prime nitwit.

If that’s too radical, how about giving the Nobel to an economist who was actually, like, right? How about Robert Shiller who has been banging the gong about the coming housing crash for years?

(Reprinted from iSteve by permission of author or representative)
 
• Category: Economics 

Politicians control developers, so developers control politicians.

(Reprinted from iSteve by permission of author or representative)
 
• Category: Economics • Tags: Political Economy, Politics 

From Bloomberg News:

It was the 26 toilets that triggered alarm among residents of Greenwich, Connecticut. “Who needs that many toilets?” asked Charles Lee, who lives across the street from where Russian millionaire Valery Kogan proposes building a 54,000-square-foot (5,000-square- meter) mansion with that much plumbing.

Kogan, chairman of East Line Group, which operates Moscow’s Domodedovo International Airport, plans to raze the 20,000- square-foot home on the site, which he bought in 2005. Kogan and his wife, Olga, seek to erect a house with two wings and extensive subterranean space, including room to park 12 cars.

“It looks like they want to duplicate the Winter Palace here in Greenwich,” said Leslie McElwreath, 45, who lives one street over. “It’ll be an eyesore.”

McElwreath, Lee and other opponents are urging the Greenwich Zoning and Planning Commission to deny a permit when it votes this evening on what would be the largest single-family home built since the town began reviewing plans in 2001. A hundred and seventy-five people signed a petition against the project.

Greenwich, 27 miles (43 kilometers) north of New York, is the hedge-fund capital of the U.S. More than 60 funds occupy 80 percent of its commercial property, according to real-estate broker CB Richard Ellis. The Greenwich Association of Realtors puts the average price of a home in the town of 65,000 at $2.8 million.

Here in Los Angeles, the Executive Director of the city’s Los Angeles World Airports department, which manages both the vast LAX and the lesser Ontario airports, makes $305,000 annually. I don’t think she can afford to build a 54,000 square foot house in a foreign country. And yet, LA’s airports somehow continue to operate without the boss being paid enough to build a palace. If only we had privatized LAX, then the owner of the company that would run LAX could be building colossal homes around the world to flee to when angry Angelenos finally come after him with pitchforks and torches.

(Reprinted from iSteve by permission of author or representative)
 
• Category: Economics • Tags: Political Economy 

I’m reminded of the spring of 1980 when the economy nosedived (nosedove?), but then suddenly pulled out of it into modest prosperity. It didn’t save Jimmy Carter in November, and we ended up getting hammered by a major recession in 1981-1982 that painfully wrung the inflation of the 1970s out of the economy.

(Reprinted from iSteve by permission of author or representative)
 
• Category: Economics 

Barack Obama spent the mid-1980s trying to politically mobilize the black poor in Chicago, giving him, presumably, lots of first-hand insight into their problems. Yet, the 163 pages he devoted to his community organizer years in his 1995 autobiography, published at the height of the debate over welfare, are strikingly lacking in insight.

For example, he only mentions the world “welfare” twice, both times in neutral to positive contexts. Similar terms such as “food stamps” and “Aid to Families with Dependent Children” aren’t mentioned at all. The notion that “welfare … did create some perverse incentives when it came to the work ethic and family stability” (to quote from Obama’s 2006 campaign book, The Audacity of Hope, of which he says “This book grew directly out of those conversations on the [2004] campaign trail” — i.e., he’s playing back what he heard from voters) simply never comes up in Dreams from My Father.

So, if welfare wasn’t a problem, according to Obama, what was?

I apologize for quoting another slab of Obama’s 1995 prose, which was carefully engineered to be unquotable, but it’s interesting to see the influence on him of what appears to be his mother’s worldview (as exemplified by the title of her 1,067 page anthropology dissertation “Peasant Blacksmithing in Indonesia: Surviving and Thriving Against All Odds“):

As we walked back to the car, we passed a small clothing store full of cheap dresses and brightly colored sweaters, two aging white mannequins now painted black in the window. The store was poorly lit, but toward the back I could make out the figure of a young Korean woman sewing by hand as a child slept beside her.

The scene took me back to my childhood, back to the markets of Indonesia: the hawkers, the leather workers, the old women chewing betelnut and swatting flies off their fruit with whisk brooms. I’d always taken such markets for granted, part of the natural order of things. Now, though, as I thought about Altgeld and Rose-land, Rafiq and Mr. Foster, I saw those Djakarta markets for what they were: fragile, precious things. The people who sold their goods there might have been poor, poorer even than folks out in Altgeld. They hauled fifty pounds of firewood on their backs every day, they ate little, they died young. And yet for all that poverty, there remained in their lives a discernible order, a tapestry of trading routes and middlemen, bribes to pay and customs to observe, the habits of a generation played out every day beneath the bargaining and the noise and the swirling dust. It was the absence of such coherence that made a place like Altgeld so desperate, I thought to myself; it was that loss of order that had made both Rafiq and Mr. Foster, in their own ways, so bitter. For how could we go about stitching a culture back together once it was torn? How long might it take in this land of dollars?

Longer than it took a culture to unravel, I suspected. I tried to imagine the Indonesian workers who were now making their way to the sorts of factories that had once sat along the banks of the Calumet River, joining the ranks of wage labor to assemble the radios and sneakers that sold on Michigan Avenue. I imagined those same Indonesian workers ten, twenty years from now, when their factories would have closed down, a consequence of new technology or lower wages in some other part of the globe. And then the bitter discovery that their markets have vanished; that they no longer remember how to weave their own baskets or carve their own furniture or grow their own food; that even if they remember such craft, the forests that gave them wood are now owned by timber interests, the baskets they once wove have been replaced by more durable plastics. The very existence of the factories, the timber interests, the plastics manufacturer, will have rendered their culture obsolete; the values of hard work and individual initiative turn out to have depended on a system of belief that’s been scrambled by migration and urbanization and imported TV reruns. Some of them would prosper in this new order. Some would move to America. And the others, the millions left behind in Djakarta, or Lagos, or the West Bank, they would settle into their own Altgeld Gardens, into a deeper despair.

If only Andrew Carnegie hadn’t put all those black peasant blacksmiths out of business …

(Reprinted from iSteve by permission of author or representative)
 
• Category: Economics • Tags: Obama 

Eamonn Fingleton has a new book coming out entitled In the Jaws of the Dragon: America’s Fate in the Coming Era of Chinese Hegemony.

That reminded me that about a dozen years ago, I saw Walt Disney’s 1934 Silly Symphony musical cartoon short “The Grasshopper and the Ants.” Even though Disney came up with a happy ending for Aesop’s fable — when winter comes, the hardworking ants take in the profligate fiddle-playing grasshopper and let him be their Musician-in-Residence — it’s stuck in my head ever since as a dismaying allegory for the mid-21st Century economy.

The 8-minute cartoon is now on Youtube and it’s only gotten more relevant for Americans this month: What are all us grasshoppers who aren’t star entertainers going to do for a living in the coming globalized world?

P.S., Ziel has some sharp thinking on the economy at Your Lying Eyes.

(Reprinted from iSteve by permission of author or representative)
 
• Category: Economics 
Steve Sailer
About Steve Sailer

Steve Sailer is a journalist, movie critic for Taki's Magazine, VDARE.com columnist, and founder of the Human Biodiversity discussion group for top scientists and public intellectuals.


PastClassics
The major media overlooked Communist spies and Madoff’s fraud. What are they missing today?
Which superpower is more threatened by its “extractive elites”?
The “war hero” candidate buried information about POWs left behind in Vietnam.