How to find an honest expert

My car makes a funny sound; something about sticky valves. I don’t know much about cars, nor do I care to learn. If I ask a mechanic to fix everything, he’ll overcharge me because we have an information asymmetry, he knows more than I do. So how can I get my car fixed without getting robbed? This same problem pops up everywhere. How can I trust the treatment recommended by my doctor? How can I trust my financial advisor on retirement options? The problem is that I want to separate the diagnosis from the implementation. I want to get a trustworthy mechanic to tell me what’s wrong for a flat fee, then I’ll shop around for the lowest cost mechanic. This sounds like a job for the Internet. If we had a cheap & reliable source for expert second opinions, it would reduce the information asymmetry and, hopefully, reduce prices.

Creating comparative advantage

The theory of comparative advantage says that two countries can mutually benefit by trading that which they are good (or not so bad) at producing. This easily explains trade in natural resources: I’ll trade some coal for your tasty corn. But this doesn’t quite explain [to me, at least] how one acquires an advantage in non-natural things, like high tech [read more here]. There is no natural nerd mine that one country can exploit, while others lack it. Instead, nerds can be manufactured with a decent educational system. Similarly, governments can produce industries that have a comparative advantage over other producers by protecting them while they are in the development stage. However, there is no guarantee of success. These companies are still competing in a world market where advanced countries have a huge lead. The best bet is to commoditize older industries that aren’t too profitable in Western countries. For example, developing countries should target polluting industries like chemical plants because Western countries are slapping more restrictions on them. They are all aiming for IT because it requires much lower infrastructure costs. Whatever it is, once you build a base that pulls in money you can expand into other areas. You can’t leap into nuclear power plants, but you can start with textiles, furniture, call centers, IT, chemicals, steel, etc. There are other external serious problems that will still prevent poor countries from developing, but at least it won’t be their fault.

Raise the capital gains tax

Long-term capital gains is taxed at 15%, while income is taxed progressively from 10% to 35%. This means a rich person who derives most of their income from investments will pay a lower tax rate than a coal miner who earns a salary. This is ridiculous. Former Fed governor Alan Blinder agrees that low capital gains is silly. All income, regardless of its source, should be taxed equally. John Edwards proposes raising the capital gains tax rate to 28%. He wants to lower taxes on low income groups, but raises top rates to 38% because he would repeal Bush’s tax cuts. If you increase the capital gains tax, then all tax rates should be lowered so total tax revenue is the same. In addition, the double taxation on corporate dividends should be fixed. The total tax hit on the rich will go up, but the taxes will no longer be distorted by weird tax laws.

The Iraq War is good for the environment

Contrary to popular opinion, Western countries should use more foreign fuel resources to save the environment. The price of oil is influenced by the OPEC cartel and the global marketplace. If the West reduces demand for oil, the price of oil will fall. There are actually lots of caveats there since OPEC can manipulate prices by throttling supply. However, developing countries around the world have a growing appetite for large amounts of oil, particularly India and China. Therefore, demand from these growing economies could easily replace the lost demand from the West. OPEC will see little change in their net revenue. The big difference, however, is that oil will now be consumed by countries with no environmental protections, rather than by the relatively clean West. A barrel of oil burned in the West will produce fewer pollutants than the same in the other countries. Ignore Tom Friedman‘s idiotic ranting: reducing oil consumption in the US will have no serious impact on the Middle East nor the global environment.

Conversely, the West can drive prices up by increasing consumption of oil, delaying development of more oil fields, and starting hopeless wars. Developing countries will be forced to use energy more efficiently, which generally means more cleanly. The West can vastly improve their efficiency and cleanliness, too. This means less pollutants will be produced per barrel of oil. The unfortunate side effect is that OPEC will be rolling in mountains of cash. In an ideal world, they would use the money to develop their country and improve the lives of their people. In the real world, they will buy off their enemies and choke the life out of their country. Personally, I don’t care what they do over there as long as they stay over there. In a weird way, the Iraq war drove the price of oil up and forced the world to use energy more efficiently. The Iraq war is good for the environment.

Outsource Your Life

This post refers to the book The 4-hour Work Week, which is in part about outsourcing personal tasks. What tasks can you outsource and how much time would it save? It varies for each person, of course. Since my time is worth little, it makes no sense to outsource. My wage slave friends, OTOH, would need to outsource more. Here’s a quick list:

• Purchasing groceries and cooking consume a large amount of my time. Since I’m an epicure, I spend 4hrs/week shopping and 2hrs/day cooking. I could order groceries online, cook larger batches of food and eat out more. This would save a lot of time.
• I spend 3hrs/week cleaning. I could hire a cleaner once per week. If I ate in restaurants, then I wouldn’t have to clean up the kitchen every day.
• I’ve already setup automatic bill pay for most things.
• I should select a set of index funds into which I add more money monthly.
• I waste a lot of time skimming through RSS feeds. I’d rather use an edited RSS feed. If you read a bunch of tech feeds and select the interesting items, then I can skim the edited list much faster.
• When I purchase something substantial, I do a lot of online research. It’d be easier if I could find/buy a purchasing guide. For example, I had to learn all about LCD technology to help select which monitor to buy.
• I’d like to hire a tester in India to write test scripts & more to thoroughly test my code. We’d be a 24hr coding team.

I can’t think of many things that I could outsource over the computer. One example (I think from the author of that book) is that he hired someone to handle all correspondence with women on a dating site. I don’t think it worked out well, but it is brilliant. It might be better to hire someone to write only the initial email because the failure rate is so high. I wish I had the balls to try this. Any other ideas?

Income Envy

There’s a lot of hoopla about income inequality in America. Apparently, the rich are getting much, much richer than the rest of us. The NYTimes had a bunch of stories about inequality (here’s one) and it’s a big issue in economics and politics. I’ve read zillions of articles and papers on the subject and I can’t figure out why anyone is troubled by this. The top 1% is making gobs of money. The bottom 20% is keeping up with inflation. Each quintile above that is making more real money than 1979: 11%, 15%, 23% and 63%. In the article I linked to, the writer says that if the top 1% were removed from the data, then America would be fairly egalitarian. So how does a CEO’s (or celebrity’s) giant paycheck effect anyone else? Everyone else is making more money in real terms, except the bottom 20% who have no skills anyway. This is not an economic problem, but a social problem. Americans are envious of the rich, and politicians are preying on this envy by pretending to be populists (John Edwards).

Comparative disadvantage

Is outsourcing bad for the American economy?  A few years ago, Sen. Schumer and Paul Craig Roberts wrote some op-eds arguing that America has much to lose from outsourcing. If there exists an endless supply of cheap labor in foreign countries, then surely everything will be outsourced and Americans will work as Walmart greeters. Economists replied that the theory of comparative advantage, which says that two regions can specialize in their area of expertise thus creating more goods at lower overall costs, will save the day. They say that something, though we don’t yet know what, will replace those lost jobs. Recently, Alan Blinder – a big shot economist – had a change of heart. He argues that the upheaval caused by outsourcing requires big changes in the American economy and educational systems.

Health care costs

In the comments to this post, Maggie Mahar offers some interesting stats on health care costs. Roughly 75% of our $2 trillion dollar health care is spent on severe chronic illness. Malpractice lawsuits increase costs 0.5%, though it may result in over-treatment because doctors want to cover their ass in case they get sued. The rule of thumb in software development is 20% of your code consumes 80% of your execution time. Profile your software and fix the hotspots. In health care, the hotspot is clearly chronic illness. Perhaps the easiest solution is government health care only for chronic illnesses. Even if the government offered lavish care, it would still save tons of money by using effective treatments, not expensive drugs & devices of dubious efficacy (which Mahar blames for most of the cost increases). If you can cut those costs in half ($750 billion instead of $1.5 trillion), you’ve saved enough money to pay for every man, woman and child to join the Jenny Craig weight loss program. Problem solved!

Development Economics

An economist writes about the latest in development economics. He says economist study development economics as if it were a machine with predictable behavior. Increase funding for education and a smarter workforce will deliver economic gains. Provide legal security for private property and entrepreneurs will start small businesses. These single-factor arguments are seductively simple, yet they don’t work as advertised. In my opinion, the problem is that economies are not like machines, they are like the weather. The primal forces that govern economies are the Seven Deadly Sins. Economies are certainly not linear systems where one can add more X and get more Y. Instead, they are chaotic social systems (i.e., stupid humans) where you coerce people to behave less sinfully, more virtuously. Or, coopt their sinful behavior to produce more social good. This is why I often roll my eyes when I hear UN and World Bank do-gooders blather about some new social program. These plans often aren’t effective because they mistakenly believe that people will do what is obviously in their best interest. Go to school, have fewer children, take medicines, stop boinking hookers, etc. The steps to improving a poor country are easy, but those people aren’t willing to take these simple steps. Instead, progress will come slowly and randomly when the chaotic social machine suddenly inspires people to do the right things. Development experts should focus on psychology and marketing, not economics.

Why are 300M Indians hungry?

Kamal Nath, India’s minister of commerce and industry, says “due to a lack of proper handling of the produce at post-harvest stage, more than 7 percent of food grains, 30 percent of fruits and vegetables, and 10 percent of spices are lost before reaching the market. Though India is the second-largest producer of fruits and vegetables (next to China) in the world, only 2 percent of fruits and vegetables are processed.” In fact, India exports about $8B worth of agricultural products each year. So why are so many Indians hungry? It’s not for lack of food, it’s a failure of distribution and markets.