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April 28, 2010

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A Loss of Faith in Government

Posted: 28 Apr 2010 03:06 AM PDT

At CBS MoneyWatch:

A Loss of Faith in Government, by Mark Thoma: I'm at the Milken Global Conference, my third, and I've been trying to detect changes in the attitude of participants, changes in the program, etc. relative to the past two years now that we've moved from recession to what appears to be the beginning of a recovery.

One of the biggest changes I've noticed, and this goes beyond the conference, is the attitude toward government. Republicans have always targeted government as inefficient, bloated, a threat to liberty, and so on, but this is different. The criticism and contempt for government is more widespread, and it's gone beyond a party slogan. Even with many accomplishments under its belt, e.g. health care legislation, and even with the perception of moving forward on immigration, financial reform, and climate change legislation, government is still viewed as ineffective, irresponsible, and unresponsive to people's needs. ... [...continue...]...

"Paid Sick Leave Pushed for Low-Income Workers"

Posted: 28 Apr 2010 01:05 AM PDT

The administration supports legislation that grants paid sick leave to "some of nation's lowest-paid employees":

Paid sick leave pushed for low-income workers, by Tony Pugh, McClatchy Newspapers: Fresh off passage of a sweeping health care overhaul, the Obama administration is supporting legislation to provide mandatory paid sick leave for more than 30 million additional workers who are some of nation's lowest-paid employees.
The Healthy Families Act, sponsored by Sen. Christopher Dodd, and Rep. Rosa DeLauro, both Democrats from Connecticut, would require companies that have 15 or more employees to provide one hour of paid sick leave for every 30 hours worked or up to seven sick days a year for a full-time worker.
Both bills — HR 2460/S1152 — are stuck in committee... Top Obama administration officials voiced their support for the federal proposal this week... Groups such as the Institute for Women's Policy Research and the National Partnership for Women and Families say the proposal would provide an overdue measure of economic and workplace justice.
Only 25 percent of low-wage workers have paid sick leave, which makes it a financial hardship for them to get sick and miss work. Those who do stay home to heal or to tend to a family member's illness fear that they could lose their jobs if they miss too many days.
At a briefing Tuesday morning, Terrell McSweeny, domestic policy adviser to Vice President Joe Biden, called the proposal "an issue of middle-class economic security" for struggling families.
Business groups such as the National Federation of Independent Business and the Employment Policies Institute oppose the measure. They say a government mandate on sick leave ... would hurt the very people it's intended to help because employers would offset the cost of the benefit by cutting positions and workers' hours. ...
More than 50 million American workers — nearly 40 percent of the private labor force — don't get paid if they miss work because of illness.
The problem is most pronounced in lower-paying industries such as food service and child care, in which only 27 percent of workers get paid sick leave. A recent report by the Institute for Women's Policy Research estimates that people who came to work while they were sick with the H1N1 virus may have infected 7 million people at the height of the outbreak last year.
After trying to call in sick with the flu several years ago, 23-year-old Megan Sacks of Tacoma, Wash., was told she would have to be "on her deathbed" in order to miss her lunchtime shift as a waitress. After she showed up visibly ill, however, a customer contacted the health department to complain. Sacks ... was ... later fired because her boss thought that she'd called the health officials. "I was really hurt ... because I thought I was a valued employee," she said. "And to this day I still don't know who called the health department. If I knew, I would have asked them not to, because I lost my job over this." ...

One thing that came up in the session The 21st-Century Workplace: Time to Talk About What Works and What Doesn't is that even when workers have the legal right to a benefit like sick leave, very often they are still afraid to use it. Workers won't be able to take full advantage of these types of benefits if the culture within the workplace doesn't change along with the change in the law. Leadership from the administration and others can help to change the workplace culture, and changing the law will help in any case -- see this chart -- but changes to workplace culture won't happen overnight. Employers benefit from the current arrangement and they will resist changes to workplace norms no matter what the law says, and no matter how strongly they are lectured about their moral obligation to their workers.

Solving the Social Sciences' Hard Problems

Posted: 28 Apr 2010 01:04 AM PDT

I'll focus on things related to economics -- there's more in the original:

Solving the Social Sciences' Hard Problems, Harvard Magazine: Across all the disciplines of the social sciences—economics, history, anthropology, political science, sociology, and more—what are the hardest problems that need solving, and which are most worthy of time spent working on a solution?

Scholars from a range of disciplines presented their answers to this question in an April 10 symposium at Harvard. The discussion continues online...

Nicholas Christakis, professor of medical sociology and of medicine at Harvard Medical School and professor of sociology in FAS, argued for further exploration of how the social becomes biological. ...: why, for example, does emotional contagion exist? Why would it provide a selective advantage if, when you meet someone in a foul mood, it poisons your own mood, too? And how can biology account for behavior—which is not genetically determined, although genes may contribute—with findings such as abusive behavior being transmitted through subsequent generations of rats?

Noting that he and collaborators recently published a study showing that altruism spreads through social networks, Christakis said he believes this line of inquiry will also shed light on the origins of goodness. ...

University of California, Berkeley sociology professor Ann Swidler '66 highlighted the question of how societies create institutions, and how they restore missing or damaged ones. The American military's experiences in Iraq and Afghanistan indicate just how little is known about this, she said. Swidler cautioned that any solutions would be tremendously complicated...

Nassim Taleb ... spoke of "the problem of small probability." Taleb ... noted that science—whether lab science or social science—cannot account for extremely rare events such as financial meltdowns. ... "Not only can we not predict rare events," he said, "but we cannot even figure out what role they play in the data." That is because "you don't measure risk like you measure a table," he said: risk cannot be quantified in a precise way. This problem may not be solvable, Taleb acknowledged; the most to hope for, he said, may be to define its boundaries. ...

Oxford University philosopher Nick Bostrom challenged the academic community to identify the biggest fallacies that are accepted as common knowledge today, and highlighted past misconceptions that were once universally believed... "Not all progress consists of going forward," said Bostrom. "Sometimes if we've taken a wrong turn, what we need to do is turn back."

Weatherhead University Professor Gary King, who directs Harvard's Institute for Quantitative Social Science, posed a methodological problem: "post-treatment bias in big social-science questions." Post-treatment bias happens when researchers, in attempting to control for variables that may skew the results of a study, inadvertently control for a variable that is directly related to the outcome they wish to measure, yielding erroneous results.

King gave the example of a company accused of paying black employees less than white employees. When studying whether the accusation is true, a researcher's natural instinct would be to control for position within the firm, so that the question being asked is whether employees are getting equal pay for equal work. But if 99 percent of employees in the mailroom are black, and 99 percent of employees in upper management are white, it might not matter that all the mailroom employees are paid at the same rate ... and all the high-level managers are paid at the same rate.... "If you control for position in the firm," said King, then you'll find that race has "no effect on salary—and then this racist firm gets to say, 'Hey, no problem!' " King highlighted ... pressing real-world questions for which post-treatment bias stands in the way of finding answers...

Emily Oster '02, Ph.D. '06, focused on behavior change in health. Massive increases in life expectancy during the twentieth century resulted from advances in sanitation, technology, and medicine; in the twenty-first century, she said, they will depend on getting people to change their behavior—an infinitely trickier task.

Oster ... noted that newly diagnosed diabetics who are very obese gain more weight, in the year following their diagnosis, than similarly sized people who are not diabetic—contrary to what one might expect... In addition, she noted, only 60 percent of diabetics who are prescribed medication take it as directed.

Over and over, when economics and public-health researchers ask, "Do people do good things for their health if they're very easy?" the answer turns out to be no...

Lee professor of economics Claudia Goldin called for further research on the persistent problem of why women are paid less than men are, and how to level the playing field. Her own research has shown that most or all of this bias is unintentional: women self-select into fields that pay less. ...

Beren professor of economics Roland Fryer drew attention to another persistent problem in American society: the racial achievement gap in education. This gap, he said, underlies numerous other social problems: racial differences in the incarceration rate, employment, wages, and health. ...

Although each presenter supposedly outlined what he or she saw as the most pressing problems in the social sciences today, an audience inquiry about what other questions the panel would have raised, having heard each other's contributions, prompted the formation of a whole new list.

"I'm glad that we were given this opportunity," Goldin responded, "because when we were asked to come up with a hard problem in the social sciences, I think all of us thought very hard about it, and we came up with a bunch of hard problems. But when we had to create something for the audience, we realized that we had to come up with something that we actually knew something about, so then we threw away that hard problem and we took our research."

She added that the problem she really wanted to talk about was how and why social norms change. Other presenters added these problems to the mix:

  • the problem of emergence: "How do you get the mind out of a bunch of neurons? How do you get a political system or an economic system out of a bunch of individual people?" (Kosslyn)
  • the role for genetics in thinking about social-science problems (Oster)
  • how, in general, to jump from breakthroughs on small problems to progress on big problems: "We're better at biology than behavior." Obesity, from a biologist's point of view, is "totally solved," said King—people just need to exercise more and eat less. But as Oster noted, getting people to do these things is easier said than done, and so from the point of view of economics and psychology, the problem is "not solved at all."
  • how to square the realization that people don't always behave rationally with the need to avoid paternalism and let people make their own decisions even when they choose an outcome that isn't good for them (Zeckhauser)
  • trying to understand ideologies—"the beliefs we have that we're willing to die for" (Carey)
  • the "translational gap"—the gap between advances in knowledge and their implementation. "You go to business school and take a class in finance, and they teach you theory that we know doesn't work, that we have known doesn't work now for 25 years," said Taleb. But "people still teach it today."
  • how to explain "small outbursts of creativity and achievement": such Renaissance Florence, the Scottish Enlightenment, Silicon Valley. "What enabled small populations to achieve disproportionately for a period of time?" Bostrom asked. "Is that something we could learn to recreate deliberately?"
  • the evolutionary origin of overconfidence. Citing a study that showed that 94 percent of academics think their work was above average, Fowler said, "We have this 'Lake Wobegon effect' that really interests me."
  • developing better models of what culture is and how it works. "It's really important to remember," said Swidler, "that you cannot derive the properties of a complex arrangement from the properties of the individual pieces."
  • the question of where tastes come from. "If your tastes come from the people around you," asked Christakis, "where do their tastes come from? Maybe all of a sudden one person wants something for a chance reason, and it just ripples through the network."

To read more about the symposium, see accounts from the Harvard Crimson, the opinion pages of the Wall Street Journal, and on the HarvardScience and Alumni Affairs & Development websites.

links for 2010-04-27

Posted: 27 Apr 2010 11:04 PM PDT

Do Our Financial Models Still Work?

Posted: 27 Apr 2010 05:58 PM PDT

Do Our Financial Models Still Work?

  • Aaron Brown, Risk Manager, AQR Capital Management; Author, The Poker Face of Wall Street and A World of Chance
  • Colin Camerer, Robert Kirby Professor of Behavioral Finance and Economics, California Institute of Technology
  • Stacy-Marie Ishmael, Reporter, Financial Times
  • Myron Scholes, Nobel Laureate, 1997; Chairman, Platinum Grove Asset Management
  • Bruce Tuckman, Director of Financial Markets Research, Center for Financial Stability

Moderator: Glenn Yago, Executive Director, Financial Research, Milken Institute

Update: See also:

What's Wrong with Risk Models, by John Cassidy: First up, sincere apologies to the organizers and attendees of the Milken Global Forum, in Los Angeles, where I was due to appear this afternoon at a session about economic models of risk. I was looking forward to engaging the other panelists, who included Nobel laureate Myron Scholes, of "Black Scholes" fame; Colin Camerer, a Cal-Tech behavioral economist I've written about in the past; and Aaron Brown, a former Wall Street risk modeler. Unfortunately, my early morning flight from Ottawa, Canada, where I had another speaking engagement last night, was canceled...

Anyway, here is roughly what I would have said ...

The Goldman Hearings

Posted: 27 Apr 2010 03:15 PM PDT

Since I'm at a conference, I haven't been able to pay as much attention as I'd like to the Goldman subcommittee hearings being held today in the Senate. Here are a couple of reports:

Goldman Sachs on trial, by Andrew Leonard: Fans and detractors of Goldman Sachs agree on at least one point: The investment bank employs the smartest traders on Wall Street. The best risk managers, the most deadly sharks, the crème de la crème. But at the start of a full day of congressional hearings featuring Goldman Sachs executives, past and present, Sen. Carl Levin, chairman of the Senate's Permanent Subcommittee on Investigations, made Daniel Sparks, Goldman's former head of mortgage trading, look pretty dumb.
The first panel featured four Goldman executives at the heart of Goldman's structured finance division, including Fabrice Tourre, the trader who is the focus of the SEC's allegations of securities fraud against the investment bank. It would not be an exaggeration to describe these four men as the belly of the structured finance beast...
Levin's first question, directed at Sparks, concerned Goldman's efforts to sell to clients a security that referenced mortgage loans originated by New Century Finance -- one of the most notoriously reckless subprime lenders. The loans were terrible, and Goldman knew that they were terrible -- Goldman was hedging its own risk by betting that the security would decline in value.
One of Goldman's clients asked via e-mail, "How do you get comfortable with the collateral behind those securities?" Meaning, basically: Those loans are crap, how in the world can you possibly be comfortable pushing this deal?
Levin wanted to know whether Sparks thought Goldman had a responsibility to tell its client that it was "getting comfortable" by selling the security short, by betting against it. In other words, did Goldman have a responsibility to tell its client that Goldman's own opinion was that the security was likely a bad investment?
And Daniel Sparks simply would not answer the question. ... But a relentless Levin kept pressing the point, which boiled down to something very simple: Did Goldman have a responsibility to its client to indicate its own evaluation of the securities it was pushing?
Susan Collins, the ranking Republican present on the committee, followed up with an even more direct question: "Do you have a responsibility to act in the best interest of your client?" Seems like a simple enough question, but Sparks could not answer it either, saying only, after much pressure: "I believe we have a duty to serve our clients."
Right then and there, Goldman Sachs lost any chance it had of making a positive case to the American public. Right then and there, Goldman Sachs declared to all who were watching that its vaunted dedication to the interests of its clients was just so much hot air.
Goldman's defenders, if you can find them, will say that Goldman's responsibility was just to broker deals, to be a "market maker." If a sophisticated investor wanted to get on the side of a deal that Goldman was betting against, that's OK. ...
That may well be a legally defensible position. But the reality is that most Americans do not understand the definition of "serving your client" to include "pushing your client to invest in a 'shitty deal'" (as one Goldman exec characterized a deal zeroed in on by Levin) on their clients. And that's what Goldman was doing.
Wall Street was, in fact, a factory for turning shitty deals into profit. Goldman was the best in the business, but it was a very, very bad business.

And, one more:

Goldman Sachs execs still don't get it, by Barbara Kiviat: Today's Goldman Sachs hearing in the Senate is fantastic theater. The kind of theater that makes you want to run to the restroom to vomit.

I've been watching the hearing on TV, and I am nauseated to report that they still don't get it. The world came to the brink of financial ruin, and the people driving the mortgage securities death-machine still can only look back and say that at the time it all made sense. To say that the Goldman Sachs executives testifying lack introspection is like saying that the Black Death was a minor health scare.

Consider the following exchange between Senator Ted Kaufman and Daniel Sparks, who ran Goldman's mortgage division from late 2006 until mid-2008. Kaufman wanted to know about stated-income loans—mortgages in which borrowers don't have to prove they make the amount of money they claim to. These loans, which may make sense for rich people with variable income (an entrepreneur, say), came to be sold to all stripes of borrower, including many with subprime credit. Kaufman remarked on one securitization in which 90% of the loans were stated-income. ...

Kaufman went on to detail how Goldman didn't just securitize some stated-income loans, but a lot of them. ... Kaufman then launched into a tirade about how, if the witnesses in front of him were to be believed, the United States had suffered some great natural disaster—an event that had been in no way been man's doing. It was if the financial crisis was something that just kind of happened to us.

I am equally as appalled. ...

Time and again at today's hearing, Goldman executives refused to admit, even in retrospect, that they had crossed a line. Time and again at today's hearing, they defended their actions by saying that they were rightly responding to market demand—as if responding to market demand somehow absolves one of the responsibility to use human judgment. ...

[T]he people who work at Goldman Sachs are terribly smart, and it would be helpful to have them seriously thinking about what went wrong and how we might better manage the financial ecosystem in order to avoid meltdowns in the future. Instead, they seem to be using all their energy to circle the wagons. Senator Kaufman's question about stated-income loans was open-ended and non-confrontational. What might that exchange have looked like if Sparks had started with, "You know, stated-income loans are great for some people, but not for others. In the bubble, they went to the wrong people. It's a good question—how do you design products so that they're not misused?"

What really frightens me in all of this is that it didn't seem like a legal or PR strategy. It seemed like these Goldman executives genuinely had no ability to take a step back and make observations about the system in which they operate. It seemed like they had been so thoroughly inculcated in the culture of high finance that it was literally impossible for them to do the thing intelligent people are supposed to be able to do in the wake of a systemic breakdown—re-evaluate the assumptions that went into building that system.

Perhaps I was expecting too much out of my fellow human beings. ... I just thought—especially after hearing that the Goldman executives agreed to testify without being subpoenaed—that we might learn something useful in these hearings. That we might actually gain some insight instead of just another reason to want to bring these people down a peg.

I was wrong.

Any other reactions???

Update: See also Pete Davis and James Surowiecki.

Republicans Block Debate on Financial Reform, Reid will Try Again

Posted: 27 Apr 2010 11:47 AM PDT

After the failed attempt to begin debate on financial reform -- the Democrats couldn't get the 60 votes they need -- Harry Reid is going to try again later today. The result is not likely to be any different, the game here is to generate negative headlines for the GOP and, hopefully, get them to back down on their opposition. If today's vote fails, another vote is being set up for Wednesday.

I'm not sure who will win this battle, or that it will do much to rein in the financial industry if reform does pass in its current form, but it's hard to imagine the Republicans looking good on this one.

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