Lies, damned lies, and the financial meltdown

Luther Burbank, visionary, namesake.

A recent article in the Attleboro Sun Chronicle welcomes three new principals to our local school system (“Class Acts”, 9/3/2012). It is a heartwarming article and we all share in the excitement and promise of these promotions. But then, almost an afterthought, we notice something – the three new principals are all female.

There is a little known statistic that approximately half of our population is male. So when three executive positions are filled in the district, mightn’t we expect that at least one would be male?

Curious, we check the district’s website. Of the ten executive positions (nine principals and the superintendent), two are male and eight female. It looks pretty grim for the local guys.

On its face, just based on the numbers, this is highly discriminatory.

But there are lots of good reasons for the disparity. There are cultural and social forces at work that make the pool of female educators much larger than that of males. Females enter the profession at a much higher rate than males. The federal government (National Center for Education Statistics) reports that as of 2008, 76% of all public school teachers were female. So the fact that 80% of Attleboro’s school executives are female is not far off the mark.

It just goes to show that sometimes prima facie (“on its face”) discrimination can be explained by a deeper understanding of background facts.

Meanwhile, there is a small California savings and loan institution named after Luther Burbank, the famed botanist. Luther Burbank Savings was founded in 1983, committed to serving and retaining its customers rather than profiting public stockholders.

The bank is financially conservative and handily survived the financial meltdown of 2008. It did so by avoiding exotic financial vehicles such as sub-prime mortgages and collateralized mortgage obligations. It held the mortgages it issued for its own portfolio and did not sell them off. The funds released to mortgage borrowers came from the bank’s own depositors to whom it owed a fiduciary duty of care. It was successful because it required borrowers to qualify for the mortgage commitments they were about to undertake.

It would seem that this behavior should be congratulated and emulated. If more banks had behaved like this, there would have been no housing bubble and no financial meltdown.

So to honor Luther Burbank, your Department of Justice sued them for maintaining loan policies that had a “disparate impact” on African-Americans and Hispanics. The government observed that loans were made to the minority community at a statistically lower rate than their population.

The bank, admitting no guilt, settled the suit to avoid ruinously expensive litigation. It has loosened its lending standards and its depositors money is now at much greater risk. This is all due to the government’s “disparate impact” theory which says, regardless of fundamental causes, that if statistical variances exist, they must be discriminatory. No analysis of underlying causes is permitted.

If the problem is that minorities fail to qualify for standard mortgages, then we need to address those core issues. Holding a figurative gun to the head of a small community bank and forcing it to take greater risks runs counter to the lessons learned since 2008. And basing this on superficial statistics seems nonsensical at best.

If similar reasoning were applied to the Attleboro School district’s hiring policies, heads would roll.

Learning the ropes

Main-mast, Joseph Conrad, Mystic Seaport

Mystic Seaport Village is a living museum on the Mystic River in eastern Connecticut.  The museum memorializes our rich New England maritime history and several restored wooden sailing vessels show us how fishing and whaling and trade were accomplished in the age of sail. The town, famous for Mystic Pizza and its eponymous movie, is situated several miles north of Fisher’s Island Sound and is reached from the sea by navigating a circuitous channel and negotiating several ponderous bridges.

The first, a swing bridge, carries Amtrak trains across the river.  After contacting the bridge operator by radio, the bridge swings open when train schedules allow.  After waiting for one northbound and one southbound high speed Acela to pass, the bridge slowly swings open and we slip though. The next bridge carries busy US Route 1 through the middle of Mystic.  It opens at 40 minutes past each hour – if you arrive late, you must wait.

After negotiating both of the bridges and carefully staying within marked channels (the mud flats are treacherously shallow), we arrive at the Seaport.

The museum features a number of large sailing ships, notably the Charles W. Morgan (a whaling ship built in 1841 in New Bedford, MA), the L.A. Dunton (a fishing smack built in Essex, MA), and the Joseph Conrad (a 111 foot, square rigged training ship). All of these ships share the use of wind power, intricate sails strung from masts and yardarms, hoisted and canted by multitudinous lines.  Knowledgeable docents vividly describe life at sea, the jobs that the crew performed, and how they climbed through the ranks.

On a large capital ship of the late 18^th century, twenty or more sails hung on three masts provided power to the ship. Well over 300 lines were used to control and support the sails, and an able seaman must know all of their names and their functions. These were a combination of halyards (to haul the yards, i.e., raise the sail), sheets (to control sail angle and shape), and stays (to steady the masts). More, there were cunninghams, and vangs, and topping lifts, all used to control and refine sail shape, and hence deliver power to the ship.

In days of sail, the able seamen who mastered the complexity of their ships were the highly skilled workers of their time. They were the equivalent of today’s firemen and engineers who tend the engines of huge container ships and oil tankers.

Rising though the ranks, the sailing ship officers were educated and skilled in the arcane science of navigation.  Charts and sextants and trigonometry were used to ascertain the ship’s position and plot a course to the desired destination. Those mastering these skills were the technology wizards of their time, and handsomely paid.

After several days spent pleasantly reliving our maritime heritage, we fondly bid the Seaport adieu and head down the river.  Early, sun just risen, mist hangs on the water but begins to dissolve as we negotiate the two bridges. But upon reaching the base of the Mystic and entering Fisher’s Island Sound, we encounter a heavy fog, barely able to see the bow from the stern. Time to deploy our modern miracle, an iPhone with a marine GPS navigation app. We creep through the treacherous shoals and reefs, watching the navigational buoys loom from the fog, each on time and in position as predicted by the app. After some time, we emerge into the expanse of Block Island Sound, and the fog eases.

It becomes clear that what was of value then, and now, is knowledge. The able seamen and navigators of the sailing ships were the diesel engineers and Apple programmers of their day. Knowledge and skill must be learned, and earned, and applied to our common good. Anything we can do, collectively or individually, to motivate our children to learn, to enable their academic journey, is the highest good. We, and they, will benefit mightily.

Economics and the minimum wage

Most people think that economics is a highly mathematical science, abounding with spreadsheets and eyeshades and complex computer models.  That it is, but only because it tries to understand human behavior, a nearly unfathomable task. 

Economics is the study of how we humans decide to spend or save our hard earned money. It deals with demand and supply, and how business owners choose what to produce, and how much, depending on signals that they divine from consumers. It tries to understand what incentivizes job producers to hire workers and how to encourage them to hire even more.  But it’s all about human behavior, human thought, human decisions.

Government often tries to influence economic behavior.  They seek to assist the downtrodden, to regulate business, and to pick winners in new, exciting technologies. But do not neglect to recognize that government is a collection of humans who are governing humans and regulating businesses made up of humans.  So it is a true wonder that government seems to neither understand human behavior nor economics.

Here’s an example.  There is an ongoing effort to increase the minimum wage (currently $8.00 in Massachusetts).  The reasoning is that $8.00 per hour, or $16,640 per year, is not a “living wage”.  You may agree, or you may disagree.  Perhaps we should increase the minimum wage, or perhaps we should not.  But in any case, before making the decision, let’s try to understand what it’s all about. 

First of all, lets recognize that the minimum wage is paid to workers that are completely interchangeable. That is, they have no significant skills. If you are a minimum wage worker, it means that absolutely anyone can replace you. Once you have gained some expertise, such as how to operate a CNC milling machine, it is clear that not “absolutely anyone” can replace you, and you will earn significantly more than the minimum wage.

Now, a thought experiment.  Let’s assume that increasing the minimum wage is a good thing.  Further, we decide that it should be a very livable wage, so we set the minimum wage at $40 per hour ($83,200 per year). Let’s explore the consequences of this decision.

•  Imagine that your morning cup of coffee at Dunkin Donuts will now cost $8. 
• The neighborhood grocery store will install more self-checkout lines, reducing staff, and increasing unemployment.
• Manufacturing concerns will find that roboticized assembly lines are much more economically feasible, allowing them to shed workers.
• Service providers and call centers will determine that outsourcing of jobs overseas is increasingly prudent. Domestic employees can be dispensed with. 
• Overseas wages will be become drastically cheaper in comparison. Imports will increase, exports will decrease, and joblessness will inexorably creep up.
•  Students will determine that dropping out to earn this new, high minimum wage makes more sense than laboriously studying to learn new skills.

That’s pretty crazy, increasing the minimum wage to the point that it spawns inflation, demotivation, and increased unemployment.  Nothing good here.  But this is just a thought experiment.  What if we were to only increase the minimum wage to $10? The truth is, all of the above ills would still occur, but to a lesser, proportional, degree. 

Another way to attack the social issue of the minimum wage is from the other side.  Instead of artificially increasing the wages for unskilled labor, let’s increase the ranks of skilled laborers. By training and tutoring those at the bottom of the labor pool, we empower them to participate in our increasingly technical 21^st century economy. As a side benefit, this approach would result in workers with much higher, and well deserved, self-esteem and satisfaction. 

And by decreasing the supply of unskilled workers, we would, oddly enough, cause them to be in more demand with attendant higher wages.

That can’t be a bad thing. 

Socialization and social comity

President William Howard Taft

The CDC has spoken and we are fat. The worst state, Mississippi, has an obesity rate of 35%. Massachusetts, the third best, has nothing to brag about with nearly one out of four citizens tipping the scales at “unhealthy.” This 2011 study was based on self-reporting and people tend to gild the lily. Another more rigorous report which involved weighing participants estimates that 36% of all Americans are overweight.  We are in the midst of a true epidemic.

Obesity is serious because it increases the incidence of diabetes, heart disease, cancer, and stroke among other ailments. Quality of life is worsened and mortality rate increased. Obesity results in significantly elevated health care costs.  And while it is easy to make rationalizations, obesity is a choice. What and how much we put in our mouths, whether and how frequently we exercise; these are personal choices.

We hear the term “socialization” tossed about frequently. By this, we don’t mean the process of making your puppy play well with others, but rather, the spreading of risks and costs across a large group of people.

It is a familiar concept.  One common example of socializing risk is automobile insurance.  Every driver (at least in Massachusetts) is required to carry automobile insurance.  In a given period, not everyone will have an accident, but everyone pays premiums.  The unlucky few who actually suffer a loss are compensated from the pool.

But this is not, in itself, socialization of risk.  If a 19-year-old from Roxbury paid a premium based on his actual risk of loss, it might be $10,000 per year.  Meanwhile, a 50-year-old woman in rural western Massachusetts might pay only $400.  But that’s not how we do it.  The state, in its wisdom, has deemed that we should all pay more so that the young scofflaw in Roxbury pays less.  This is true socialization of risk, the salient point being that it is actuarially unfair. (Unfair in that the woman from western Mass, along with most of us, pay more than we should while the young man pays far less than he should). This leveling of risk premium removes from the young man in Roxbury the incentive to drive exceedingly carefully.

In other words, socialization of risk distorts our decision making process and leads to more risky behavior (because risk, and hence cost to the individual, is subsidized).  It is always true that to get less of something, tax it; to get more, subsidize it. Subsidizing risky behavior is a sure fire way to get more.

Any form of national health care is another variety of risk socialization. Our increasingly socialized health care system does not charge premiums based on risk factors.  For instance, an inveterate rock climber does not pay higher health insurance premiums than you do, but she takes much greater risks.  Likewise, a motorcycle racer, skier, pilot, scuba diver, or lumberjack do not pay higher premiums than you do.  Health risks are subsidized.

It was different in an earlier era.

William Howard Taft, our 27th president, served from 1909-1913.  He was morbidly obese, suffered from high blood pressure, severe sleep apnea, and died of a heart attack. But at that time, each was responsible for his own behaviors and the resultant consequences. Taft ate richly and drank to excess, did not exercise, packed on the pounds, and suffered poor health as a result. But no one had to pay Taft’s physician except Taft.

In this day of increasingly socialized medicine, where poor personal choices engender no individual costs but burden the public fisc, it is difficult to observe such profligacy without comment, or at least smoldering resentment.  Socialization is making us downright rude.

But government, which is adept in creating such a mess, can further intervene. A recent article in The Telegraph (London) offered such a solution:

“Ridiculing someone as 'fat' or 'obese' could become a hate crime under an idea being floated by a group of MPs and a leading charity.”

This is a solution of sorts.