Heart-strings trip up rational giving

ABC's "Extreme Makeover: Home Edition" is one of those shows that you see ads for and think, "Who watches this shit?" - but apparently enough people do to keep it on the air for five asinine seasons. What makes the show such a little basket of joy is the grandiose display of irrational - misplaced, ill-optimized - giving.

The Harper family in Atlanta was given a 5,500 square foot home, valued at over $450,000. The family of five was also given a quarter of a million dollars for their three kids and home maintenance. And now they're probably looking for a new pad (Access Atlanta). The house is in foreclosure after they mortgaged it to raise money for a failed construction business.

First, consider the size of the gift itself. 5,500 square feet? Only in a status obsessed, super-size culture would this make any sense as a charitable gift for a family of five. But why not? Why not grant a family a 10,000 square foot house? Waste aside, people don't adjust well to sudden endowments (see: lottery winners). When people see large income or wealth shifts (up or down, but especially up) we don't have time to adjust our preferences. Instead of thinking of the gift as a gift, something to be cherished, we just adjust our status quo.

Next there's a huge income effect, and this limits the recipient's ability to properly allocate resources. Think of an athletic team that opens up a huge lead at half time and then gets destroyed in the second half. Your strategy shouldn't materially change just because you have a lead, and you shouldn't materially change your priorities just because you fell into some money. But that's what we do. We're people; we're irrational.

Fini: charitable giving, whether at the individual level or the state level, should be limited to the just-enough level. People are much better at dealing with resource deficits than we are with dealing with resource surpluses.

Loose credit, by land or by air

I've seen the deluge of credit offers I used to get in the mail drop to a trickle and a dead stop the last couple months. It's not the economy, I think, but that I removed my name from the direct mail lists. At any rate, I thought there was a credit crunch stretching from banks to consumers. Loose lending helped create our problems, so it's time to tighten up lending practices, right? So I thought until my flight home on US Airways (in late October).

The airline joined forces with Bank of America to offer a new credit card - in the air. Somewhere over southern New England or perhaps New Jersey one of the flight attendants got on the PA and launched into a sales pitch for the new card, enticing us with 25,000 miles and a bonus 500 if we signed up in-flight. WTF? He proceeded down the aisle, offering applications to passengers. I didn't see anyone fill one out.

Now, really, any new business model that promises to lower airfares is good by me. The full tray advertisements on the meal trays? Grand idea. But offering credit? And offering credit so flippantly in the immediate wake of a financial crisis borne of careless lending?

Terry McAuliffe will "create jobs" - cold fusion next?

Terry McAuliffe is priming to run for governor of Virginia. Yes, that Terry McAuliffe.

Politico reports today that the former DNC chairman filed papers to establish an exploratory committee and

The former DNC chairman intends to spend the next 60 days touring the state before officially announcing whether he will run.

Why is McAuliffe running?

I think I can go out and fight for people. I think I can create jobs. I think I can take this state in a new direction, and the thing I’d like to do, too, is to come out with some big, bold ideas.

That's just what Virginia needs, big, bold ideas that will... Wait, what!? How the f*&@ is he going to "create" jobs? Alright kids, gather round to hear something new - politicians do not create jobs. See that punctuation mark at the end of the sentence? That's a period. Politicians do not create jobs. Period.

Grant McCracken touched on this last week, in this strange conflation of Republicans and capitalists:

What [Obama] does not appear to grasp is that, when it comes to markets, politicians do their best work by omission, by staying out of the way.

May I say how strange it is that Republicans and other capitalists have yet to learn how to tell this story.

This nonsense - which is by no means limited to Democrats - undermines the role which government can successfully play in the economy. The government can foster an environment beneficial to job growth, based on sound infrastructure, consistent application of the law, regulation of externalities, etc. But the government does not "create" these jobs. That is the role of the entrepreneur.

The government can create more government jobs, that is, it can hire more people to work for the government. It can hire more contractors. These two strategies have quickly diminishing returns. Thus at the margin they involve creating extra work.

The government - specifically the politician - can entice businesses to move jobs or not move jobs. The [federal] government can create supreme obstacles that make it costly for consumers to patronize far-away businesses. But this is not job creation.

More:

• Bryan Caplan on the "make-work" bias
  
• Frederic Bastiat, the original "make-work" bias, Candlemakers' petition

Photo credit ktylerconk.

Let no one mourn the newspaper

[Cross-posted from Collaborativationalism]

It's really an old story now. Newspaper circulation is dropping and it's dropping fast. There are various and good reasons why this is the case. But they call come down to one thing.

Newspapers - and their core audiences - got hung up on the means and forgot about the end.

There's something enjoyable about paging through a well-written newspaper over a late breakfast, this much I grant. But if what you want is to know what is going on in the world, to gauge the opinion of others, to hear salacious gossip about people you've never met - well then those are your ends, and the newspaper need be the medium no more than a train need be the means to travel between New York and Washington.

We let our irrational fixation on the means steer us away from what really matters. This is the core problem people face with small innovations and advancements.

The Department of The Totally Unsurprised

Today's Wall Street Journal reports (paywall) that the markets' slump has been very good to Nassim Nicholas Taleb:

Separate funds in Universa's so-called Black Swan Protection Protocol were up by a range of 65% to 115% in October, according to a person close to the fund. "We're discovering the fragility of the financial system," said Mr. Taleb, who says he expects market volatility to continue as more hedge funds run into trouble.

Taleb's overall strategy is straightforward, and is described in the WSJ article much as Taleb explained it himself in The Black Swan.

To execute its strategy, Universa buys far-out-of-the-money "put" options on stocks and stock indexes. These are bets that the market will see a sharp, sudden downturn. They become extremely valuable in a market decline of 20% or more in a one-month period.

The lesson? Success lies waiting outside highly dynamic, uncertain systems predicated on a high degree of false certainty.