Two points on PRISM

The discussion about PRISM has brought out a lot of commentary. Much of it, described in my two earlier posts on the subject, is silly. But two issues caught my attention in the last couple of days. The first was a WSJ article on whether the PRISM program suffers the statistical risk of being inaccurate. The WSJ has a regular column called the Numbers Guy which often offers remarkable insights about numbers related subjects in the news. This article presented some comments from Biostatisticians about whether the methodology to collect information in PRISM is likely to yield tons of false positives (identifying culprits where none are present). Two quotes will give you an idea about the issue. One PhD candidate in computational ecology wondered on his blog whether PRISM could (based on the algorithm) produce 10,000 false positives for every real hit. Peter F. Thall, a biostatistician at the University of Texas' M.D. Anderson Cancer Center commented that the even if the NSA methodology is "is terribly clever and has a very high sensitivity and specificity, it cannot avoid having an immense false-positive rate,"  That should give one pause, especially if this data is held in perpetuity (and with the rapidly declining cost of storage that is probably the default option).

There is a second issue which I began to think about while I was reading a book called Socialnomics.  The author makes a point about how instantaneous information is and also how important it is for purveyors of information to be genuine.   He cites an example of a college football player who made an inappropriate tweet about President Obama and was immediately sanctioned for his one comment.   The author does not mention the video that hit YouTube for a while of a couple at a campus in the west who were videoed on a rooftop of a campus building having sex.   In both of those cases the students might well have gotten away with something that was a bit outside the norm in earlier years, but no more.   But both are prime examples, of how 140 little characters can affect people's lives.

In earlier times, security agencies were able to get away with impinging on freedoms by simply claiming that they were protecting us.  I am pretty sure that we should be using all sorts of surveillance of potential terrorists, after all, I start with the notion that I have nothing to hide.   At the same time, in this era of instant communication, it would be good and prudent to establish a reliable review process to cross check whether the benefits outweigh the costs.  In the highly charged atmosphere of Washington politics that might be very tough, but it is still necessary.   From all of the commentary to date there is little evidence that this program received more than a scant attention from insiders about key questions about effectiveness and alternatives ways to achieve the results.    Irving Janis, in a book called Groupthink, argued a couple of decades ago that experts tend to fall into conforming errors.   In this age, we need to establish systems which will counterbalance those traps.

Strange Bedfellows Indeed

The Snowden kerfluffle has produced a rare congruence of opinion.  House Speaker John Boehner, R-Ohio, called the elusive, 29-year-old former intelligence contractor a "traitor."  Senate Intelligence Committee Chairwoman Dianne Feinstein, D-Calif., also called the disclosure "an act of treason" and said Snowden should be prosecuted.  Just because I think Senator Feinstein has not read it it might be useful to remind us the Constitutional definition - (Article 3, Section 3)  “Treason against the United States, shall consist only in levying War against them, or in adhering to their Enemies, giving them Aid and Comfort. No Person shall be convicted of Treason unless on the Testimony of two Witnesses to the same overt Act, or on Confession in open Court. The Congress shall have Power to declare the Punishment of Treason, but no Attainder of Treason shall work Corruption of Blood, or Forfeiture except during the Life of the Person attainted.”

From my perspective we need to separate the disclosure that Snowden did (and the opportunity it presents) with the broader issues of public policy.  Surprisingly ( perhaps even for the first time) I find myself agreeing with the Senate Majority Leader who counseled that it might be a good idea to calm down.

Most Americans understand, perhaps better than officials like Boehner and Feinstein, that we need to have a balance between the need for security and the competing need for privacy.  The Patriot Act was adopted in the heat of the moment and like most other laws, it probably could benefit from some review.  The ranking member on the House Intelligence Committee seems to have gotten this balance right.  In a HUFFPOST article he said. "Congress needs to debate this issue and determine what tools we give to our intelligence community to protect us from a terrorist attack," said Rep. C.A. Dutch Ruppersberger of Maryland, top Democrat on the House Intelligence Committee, and a backer of the surveillance. "Really it's a debate between public safety, how far we go with public safety and protecting us from terrorist attacks versus how far we go on the other side."

Supporting a reasonable review of programs like PRISM, gives nothing to the terrorists and at the same time takes nothing away from our intelligence efforts.  Security types have caused some major changes in the last couple of decades.  Some may be necessary.  But others seem to operate for the benefit/convenience of the security people.  Having a less open society may be necessary in some areas, but those changes should not be agreed to in the heat of the moment and then continued forever.  I am not sure what if anything should be done to the leaker but ignoring this as an opportunity to think about policies with a bit more balance seems prudent. 

It's all about Stickiness

The Keynote for the Worldwide Developers Conference for Apple was done today and from the comments on the blogs - it was ho-hum.  But wait, that story is baloney.

WHAT WAS NEW -   The presenters introduced an upgraded line of Macbook Airs which have increased and impressive battery life.  They also did a preliminary look at a significantly revised Mac Pro.  They also offered a refresh of OS X (now called Mavericks) and the IOS (for mobile devices) now called IOS 7.   They also created a significant competitor to Google Docs and a competitor to Pandora and the other music streaming services.   They did not refresh the iPhone or iPad lines.  None of this is real until the "fall."

WHAT WAS SAID - Tim Cook, Apple's CEO presented some interesting data.   93% of IOS users are on the latest refresh of the IOS.   That compares to about a third of the Android users who are on an operating platform that was first introduced in 2010.  There were some other metrics which suggest that the IOS is a pretty sticky platform.  IOS users are more attached to their devices - they use it more during the day.  The IOS still produces about three quarters of the developer revenue for mobile devices - that should have been music to the ears of the crowd that was listening.

WHAT'S NEW - From my perspective the product announcements were interesting but the software announcements were smart and very good.   The new IOS is integrated with Mavericks so that all of the functions work over all the IOS devices that one uses.  So whichever device you use - integrates all information from each device.  The new environment allows one to use a set of devices that are constantly integrated.  For example, if you do a map search on your laptop, it is immediately integrated into all of your IOS devices.

The Web based iWork is superb - based on the first look.  Google Docs is clunky, at best.  This looks like all the functionality of iWork with a web based product.   In the last two years I have reduced my usage of the Microsoft Office suite because it has grown to overly clunky.  Now that is no longer a problem.

iTunes Radio has the opportunity to bounce Pandora out of the box.   The deal is as follows - with ad support, it is free.   If you use iTunes match, for $25 a year; Pandora is about $10 a month.

But there were still the naysayers.  For example, Yahoo said - "If Apple has been in a funk, it’s an extremely profitable funk. The company earned more than $22 billion in net profit during the six months ended in March. Still, investors worry that the company hasn’t produced any new hits since the iPad, especially with Google’s (GOOG) Android operating system gobbling up market share on mobile devices."  But the comparisons are probably not valid.  Sure there are a lot of Android devices but numbers on customer satisfaction and adoption rates belie whether Android is going to be a dominant platform.

The bottom line is that the WWDC offered some new products and software which are likely to make the IOS platform even more sticky.

WHO IS NEW - One of the key things about WWDC is to understand who Apple is ramping up as a spokesman.  Tim Cook and Phil Shiller both had roles.  But Craig Federighi (Picture above), the software engineer who manages the integration of the IOS and Mavericks had a major role.  He was funny, if not a bit snarky.  He had a couple of good hits on the Android platform and Firefox and yet at the same time he presented a pretty clear picture of where Apple is going.  Johnny Ivy was in the audience but did not have a direct role - I always thought he was a bit new age.   His design genius is unquestioned but the new team was actually pretty good.

SO DID APPLE MAKE THE SALE - As a user of the IOS and OSX - what I saw today was no hardware that I was going to buy.  Although the PRO looks pretty awesome and the new AIR is something I would buy if I had not bought one about a year ago.   But the software improvements did two things - they made my existing devices even more useful and they added some features that look interesting.  IF Apple introduces new versions of Phones and iPads in the fall - then the Fall market will be even more robust.     If they do not, I still have a lot of reasons to not consider the Android alternative.

Edward Snowden

The revelations of the Guardian interviews of Edward Snowden were quite interesting.   According to the news interviews Snowden was a contract employee in Hawaii for Booz, Allen - which once was one of the original consulting firms and is now fundamentally an enterprise whose prime clients are the government.  (A bit like a Government Sponsored Enterprise)

Snowden argued that the system that he outed allows government to surveil anyone at any time.   He describes the potential for this program as "turnkey tyranny."   He argues that with the rapid decline in the cost of storage that it has become simple to collect and store massive amounts of data from all sorts of electronic sources and they do it because that policy represents  "easiest, most efficient, and most valuable" to do the job.   But we should be questioning whether that is job we should be doing.

There are a couple of interesting side notes.   First, according to the Washington Post Snowden is not very well educated, he holds a GED but I suspect his technical skills are well developed.    Second, he enlisted in the Army reserves but was then denied the opportunity to enlist in the Special Forces.   He left the Army after breaking both legs.   What interested me in listening to and reading interviews he has given is that he is quite articulate.   His move was not an impulsive one.

There has been a lot of commentary about whether the Obama administration expanded this program which seems to have been started as a result of the Patriot Act (although it is probable that this kind of monitoring has gone on for a time considerably longer than since the passage of the Act.  Based on comments from experts in the field, they have.  Clearly, what has changed has been the ability of government to store massive amounts of data from phones and the web.

There are two questions here that I think are interesting.  First, did Snowden violate the law?  From the news reports he probably did, technically.  But that is at once not a very interesting question.  The more important one is what reasonable limits should be placed on the ability of the government to collect and use any of the data they collect?   From my perspective, most  people that work in security are cognizant of their intense responsibilities.   But how do you prevent a rogue or a group of rogues from using the collected data.    One of the valid criticisms of J. Edgar Hoover's reign in the FBI was that he collected and used confidential data, supposedly collected for national security purposes, to advance his career and to limit the roles of all sorts of people inside and outside the government.   The PRISM program looks a lot like the Hoover files on steroids.

There are clearly some important public policy questions here.   From the start it has been my opinion that the Patriot Act was sloppily drafted.  Senator Mark Udall commented yesterday  "The ultimate check, the ultimate balance is the American public understanding to what extent their calls are being collected, if only in the sense of metadata," he said. "Let's not have this law interpreted secretly, as it has been for the last number of years." There needs to be a balance between the legitimate need to collect information and the Constitutional guarantees to US Citizens against unreasonable search and seizure.    From what we know about the role of the security agencies in collecting information about the Boston Marathon bombers, their competency in using information is certainly in question.  That does not call for eliminating all data collection but it does call for a thoughtful review of what should be collected and how should it be used.   For that, even if Snowden did break the law, we should not neglect this as an opportunity to step back and see whether "easy, efficient and valuable" is a legitimate policy goal.

Almost Everything You Know About Proposition 13 is WRONG!

This week marked the 35 Anniversary of the passage of Proposition 13 in California.  The California Taxpayers Association released a report which analyzed what has happened since the measure was first adopted.  It is well worth the read.

When it was under consideration opponents warned that California would crash and burn if the measure were passed.  They suggested that unemployment would increase (it actually was lowered a bit).   They also argued that over time, the burden paid by homeowners would increase relative to business and industrial property.   Finally they suggested that the revenue restraints of the proposition would be unbearable.   Time magazine, a few years ago wailed "But California's woes have a set of deeper reasons: direct democracy run amok, timid governors, partisan gridlock and a flawed constitution have all contributed to budget chaos and people in pain. And at the root of California's misery lies Proposition 13, the antitax measure that ignited the Reagan Revolution and the conservative era."    Contrary to what Time tried to portray every time a politician tries to monkey with the key elements of the proposition - they get their heads handed to them quickly.   Remember the federal government does not have Proposition 13 yet gridlock is as bad or worse than what we live with in Sacramento.   Budget chaos did not come from the Proposition but more from policies adopted by the legislature which combined between a drunken sailor mentality on spending and a confiscatory tax system which has begun to encourage the wealthiest and most productive to leave the state.

So what does the report say.  First, it gives a short history of what caused Proposition 13.   The chart at the right tracks property assessments prior to passage.  They were growing at a healthy clip.   Indeed, for the four years coming up to the June, 1978 election assessments had risen by double digit rates each year.   That was caused by significant improvements in data gathering of assessors and also in several clumsy fixes that the legislature had tried to adopt.   Assessed value rose by 61% in just four years.   The Sacramento sages could not understand why voters were so grumpy.

A second picture emerges by looking at the share of property tax burden borne by Commercial and Industrial property compared to residential real estate.   Remember that most of the legislature's experts thought that because home owners moved more than businesses that the burden would shift. It turns out that since Proposition 13 passed the share of property tax burden borne by residential taxpayers has actually decreased.   Often the justification for supporting a split roll is to address a problem which does not seem to be real.

Let's be clear here.   Since the proposition passed assessed values have exploded from about half a trillion to more than four trillion dollars.   That even takes into account the dip we had from the recession that started in 2007-08.   By any account that is a pretty healthy rate of growth.

There is a third issue with Proposition 13 which is not much of a surprise but it is certainly instructive.  A key marker for a sound tax system is stability of revenues.    Since the passage of Proposition 13 property tax revenues have been relatively stable in terms of growth.   The legislature over the same period of time have had complete discretion over the income tax.  The majority has chosen to make our income tax increasingly progressive - so that the tax relies more and more on fewer and fewer taxpayers.   So compare the red line in the third chart to the blue one.  If you want adequate public services which would you prefer to work with?   The answer should be obvious.

There are some issues with Proposition 13 which could be improved.   For example, because of the way that the Legislature reacted initially local government's ability to meet local needs has been reduced significantly.   The increased  reliance on sales tax revenues by local governments has also produced some distortions in public policy.   Both of those are governance not tax issues.

What is most disappointing about this report is how the opponents of Proposition 13 will continue to ignore the results.  You won't see much coverage of this research in most papers in the state.   It does not confirm their biases.  But you should.   Proposition 13 was a meat axe to a problem facing taxpayers.   But based on the CalTax research - the choice that Californians faced was a meat axe or a bludgeon.

Another Message for the NSA story

The news has been fast and furious about the NSA monitoring of internet and phone accounts.  But one of the funniest responses came from Edward Tufte who twittered yesterday about how bad the NSA did on their slide presentation.

Tufte has taught those of us who use slides (I favor Keynote over Powerpoint) a lot about how to make slide presentations readable and helpful.  But  I personally like the rule first offered by Guy Kawasaki called 10-20-30 Rule (see below to hear Guy give you the rap about the rule) - I have heard Guy use two versions of the rule - 10 Slides - 20 words per page or 20 minutes max for the presentation and no less than 30 point type for anything on the screen (he quotes a funny algorithm - figure out who the oldest person in the room is and divide his age by 2 to figure out the minimum type size).

I am not bothered by the collection of this data in part because they are searching using algorithms that are unlikely to include the things I do.   There is a possibility that could change but not based on the content of the NSA slides.   Because as Kawasaki points out so clearly, if you do not follow the rules (and the NSA presentation violated two of the three) you are a bozo.



I am not worried about getting caught in the bozo's web but I am concerned about whether people who create these types of slides can actually competently figure out who the bad guys are.

Trolls in the Sandbox

A few days ago the US International Trade Commission issued an order prohibiting Apple from selling a couple of devices that, at this point in the technology cycle, have a very short shelf life.    You may not have heard about the ITC before.   It is one of those government creations designed to help improve competition.  The Commissioners on the ITC are people with little engineering expertise.  They are mostly lawyers.  They were asked, as a court in Europe had earlier been asked to do, to figure out whether Apple stole ideas from Samsung or vice versa.

For every beginning student in Economics or Public Policy - a must read has always been Garrett Hardin's "The Tragedy of the Commons" which was written not by an economist but by an environmentalist.   Hardin argued that the risk to common areas was overuse when there were not sufficient controls on use.  (Have an open field and if you allow citizens around the field to allow their sheep to over graze it, it will soon be degraded.)  Hardin's article (which was originally in Science) is widely discussed.   A couple of years ago another professor, this time one named Michael Heller (a Columbia Law Professor) , wrote something called The Gridlock Economy which presents the counterfactual to Hardin's thesis.   Heller argues that when there is too much ownership in an area we get something he calls the "Tragedy of the Anti-Commons" - where contending parties squabble over arcane points of ownership that are granted by this or that system.   I am not a big fan of Hardin's paper - because there are so many obvious alternatives to solve his problem.   But I think Heller has a point.  The patent system in the US is one such "Anti-Commons" - A good indicator of this trendline can be seen in the number of successful patents.   In 1963 there were about 49,000 successful patent applications, in 2012 there were 277,000.

The problem(s) with the patent system are numerous.   First and foremost, the existing system grants patents unevenly, so if you look at some of those 277,000 patents that have been granted some are very narrow and some are overly broad - it is a hodgepodge of rights that are beginning to cause companies to trip over each other.   Second, there are the "trolls" in the system; firms that go through those thousands of patents (many of which never have a commercial application) and scoop them up then harass legitimate businesses for infringement.   At this point, the most egregious story I have read about them is a company that has gone around to places that offer free WIFI and have asked for compensation for their technology (which they had no part in inventing).  But then third are places like the ITC which seems to be used more for defensive rent seeking than arbitrating legitimate cases of trade infringement.

Some recent data on the incident of rent seekers in patent matters can be seen in the number of lawsuits filed in relation to patents.  The chart at the left shows that the number of lawsuits has doubled in the last six years.   The President has expressed support to curb these kinds of abuses but the proof of whether his proposals are a good idea will be in the final draft of the legislation.   The remarkable thing about the graph is that the red part represents patent trolls. (PAE - Patent Assertion Entities)

In the tech realm all the smart phones and tablets that we have become addicted to operate with many similarities.   But what differentiates the devices is the operating systems.  It is pretty clear to me that a lot of the design of smart phones is evocative of earlier models. The ITC order affects Apple phones that are at the end of their cycle - for example the iPhone 4 which according to Piper Jaffrey accounts for about 1% of the company's revenue - which is likely to decline when the new round of iPhones is announced as early as next week in the Worldwide Developers Conference.  I've watched the evolution of the Windows and Android operating systems.   They have some interesting concepts incorporated in them.   Some, in my opinion, look a lot like the Apple IOS.   And indeed, some of the IOS features look like something first enabled on Android.   Even with those look alikes the market for these devices is not declining.

In earlier times, Apple made a joke of companies ripping off their stuff.  When Windows came out with the look and feel of the Apple Operating system, there was a lot of talk about "Windows, OS 7 (this is when Apple was first offering OS X or 10), implemented poorly."   I am not arguing that there are legitimate reasons why some inventions should be protected for a limited period of time.   But based on the iterations of the Apple/Samsung wars the real inventors of technology are not the engineers that produce these goods that we cannot live without but the lawyers who tie up innovation in arcane squabbles.  Their invention is obscure legal pleadings which often contradict each other and which add to the costs of producing those goods.  That seems a lot like a couple of three year olds throwing sand at each other.

Sophistry ad absurdum

The Chairman of the Federal Reserve went to Princeton to give the Commencement Address and seems to have misunderstood his role.  I've given a number of these addresses and have always taken a fairly modest approach to them. Indeed, I am giving one at a university in Mexico at the end of the month.  I work from three rules.   First, they should be brief.   Graduates and their families are there to celebrate their commencement into a new phase in life not to listen to endless meanderings in erudition.    Second, if possible, they should have a bit of humor.  Third, if you cannot satisfy the second rule, you still need to satisfy the first.

The speech is a series of short explorations (they are even numbered) into a several fields.   One part of his address was remarkably candid, which started  after a short comment on Lily Tomlin and cynicism.   "Honest error in the face of complex and possibly intractable problems is a far more important source of bad results than are bad motives."  One might send him a copy of Hayek's paper on "the knowledge problem" which argues that centralized solutions are doomed to fail because they cannot ever understand the complexity of human perceptions/motivations across the spectrum.   From my experience most players in the political system are motivated by ideology not cynicism but they are also motivated by a sincere belief that their opponents are motivated from ignorance.   Part of the perceived intractability of many problems is the failure to recognize that we often cannot know enough to understand the consequences of our actions and as importantly that our perception of the ability to affect human behavior is far more limited than most in the political system understand.   Adam Smith, in the Theory of Moral Sentiments (what many economists call "his other book"), call the man on the chess board problem.

Where I was bothered by his talk was in his riff climbing on to the "you did not build it" myth.  Admittedly he started out the talk with a nod toward the virtues of striving.   But then he said  “The concept of success leads me to consider so-called meritocracies and their implications. We have been taught that meritocratic institutions and societies are fair. Putting aside the reality that no system, including our own, is really entirely meritocratic, meritocracies may be fairer and more efficient than some alternatives. But fair in an absolute sense? Think about it. A meritocracy is a system in which the people who are the luckiest in their health and genetic endowment; luckiest in terms of family support, encouragement, and, probably, income; luckiest in their educational and career opportunities; and luckiest in so many other ways difficult to enumerate-these are the folks who reap the largest rewards.”   Bernanke does not make an absolute claim on the "you did not build it" riff but in my opinion    Luck always plays a role in life.   But any system which denigrates human effort and ingenuity is designed to fail from the start.   Part of the rationale for establishing equity compensations in a just society is to make some accounting for the role of chance.

Some writers on the left, like the author of Wonkblog, jumped on the "you did not build it" section.  From my view, the speech is worth reading in its entirety (which is why I gave you the link to it above).   But were Bernanke a bit more modest in his expectations for the role of a commencement address - it would have been a much better product.   Come to think of it, his role in making policy at the federal level could have benefited from the same level of modesty.

Three charts one story

The Congressional Budget Office released a report on "tax expenditures" which purports to show one thing (the skewing of benefits to the highest quintiles in income) but actually shows something quite different.  This is not to say that the data is wrong - merely that it fails to account for a key fact.

The WP immediately seized on the story.  (Gee what a surprise.)

You may remember that Tax Expenditure theory is one of those delightful Washington creations which purports to measure the loss in tax revenue that is created by allowing taxpayers to exclude certain parts of income from their tax returns through deductions and credits and income exclusions.   For example, a large one (originally created when WWII wage and price limits were cutting into employment) is the exclusion from income of health benefits.   Many have distortive effects.   The health care system would probably be much better if we did not have that exclusion.  Tax Expenditure Theory was invented in large part by a former Assistant Secretary for Tax Policy who thought that rich folks did not pay enough tax.  It was one of those insider debates that is deceptively simple, but ultimately not very accurate.   The arithmetic is correct, but the thinking is distorted.

 The problem with these types of concepts was first pointed out by Adam Smith in the Theory of Moral Sentiments.  (Emphasis added)

"The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it."

Ultimately, while we may think we can calculate the effects of structural elements of the tax code - those calculations may have no ultimate relation to actual human behavior.  So here are the charts - the first two from the CBO report.   The first, with seeming great precision, seems to show that the highest 20% of taxpayers reap enormous benefits from the tax expenditures.

 The second attempts to show the distribution of benefits by type of of preference - exclusions from income, preferential treatment of income (for example capital gains) or tax credits.

The problem with all this seeming precision is that it fails to account for the ultimate structure of the how the income tax ultimately works.   In spite of these preferences the American tax system has two characteristics that are key.   First, it is highly progressive.  The distribution of tax payments skews significantly to higher income taxpayers.   The Tax Foundation has the most reliable data on who actually pays income tax.  Here is a chart divided by income.

Note the top 1% of taxpayers have a bit more than 18% of the adjusted gross income but pay 37% of the tax burden - so even if the CBO numbers are correct, they may not be important. The bottom 50% have just under 12% of the income and pay 2.4% of the tax.   By any measure that is a progressive system.

But wait, there is more.  According to the latest IRS data about 70% of the taxpayers do not itemize.   While it can be argued that some exclusions (like the one for health insurance) are accounted for in this data you will notice that those are skewed relatively evenly.   But the rest of the provisions in the code are supposed to be bundled up in the Standard Deduction for those who choose not to itemize.   But the CBO report does not seem to take that into account.  One final comment, about half the taxpayers pay no income tax - so the distribution of tax expenditures has no effect. But again the report ignores that detail.

After reading the report one is left with the question - so what?   Should the tax system be simplified?  Absolutely!   But do tax expenditures materially distort the fundamental progressive nature of the tax system?  Probably not.

Apples and Baloney

Some lefty think tank released a report yesterday which argued that among a large group of well off nations we are the only one which does not guarantee paid vacation days.   The Center for Economic and Policy Research claims on its website that it was established "in 1999 to promote democratic debate on the most important economic and social issues that affect people's lives. In order for citizens to effectively exercise their voices in a democracy, they should be informed about the problems and choices that they face. CEPR is committed to presenting issues in an accurate and understandable manner, so that the public is better prepared to choose among the various policy options."   If this report is an example of accuracy, then they are still learning their job.  The graph is pretty unfortunately it is wrong.

If you read the entire report you find that the report misses the substance of both state and federal law.   For example, the Fair Labor Standards Act requires overtime pay for labor in excess of 40 hours per week.   Many states modify the FSLA provision so that the bonus rate applies after 8 hours in a day (see for example the provisions of California's AB 60).   There are also a whole series of provisions in federal and state law which offer leave, paid and unpaid (again varying by state law) for things like family and bereavement.   Obviously, none of that is vacation time.

The report also argues that there is discrimination based on income.   Higher paid employees get more vacation.  It claims that only 49% of low wage workers get paid vacation.  They laud the EUs "working time directive" which establishes minimum requirements in law that EU members must follow.   Many of those provisions are covered in labor contracts in the US.  

The most important tradeoff here is whether having a federal standard would actually improve the lives of lower paid workers.    Most large employers in the US (certainly many national companies that hire lots of hourly workers) offer some kind of vacation accrual and holiday pay as a way to stay competitive.   For example, McDonalds offers 10 days a year for all but the most marginal employees.   They also offer sabbaticals and bonus paid weeks off for every five years of service.  Walmart which is often a target of the left, on a page called For Respect, offers vacation accruals for all employees.   Vacation accruals increase as a person works more and as their time with the company increases.

Perhaps the way that the 49% was calculated was on number of employees not on hours worked.   Even then the statistic lack validity.   The tradeoff here is that lack of a federal standard most likely assures more opportunities for people entering the workforce and for the most casual seasonal workers.  Does the CEPR actually think that is a bad thing?

Doc Watson - Milestones

This Spring Kickstarter had a project to help produce a set of previously unreleased recordings by Doc Watson - there are a total of 92 songs in the set.  They are a very interesting mix of family recordings and material that had not been on any other albums.   The project also includes a book put together by Doc's daughter, Nancy, which includes a lot of family photographs.   It is a unique history of Watson's career.   You can get it using the Amazon Paypal system for $65.

Doc Watson was a unique performer.   As I think I have covered previously, I saw him many times when I was a more serious amateur bluegrass musician at the Ash Grove in LA, which at the time offered a wide range of country and folk performers.  

I also met him at the UCLA Folk Festival in 1963.  He was having lunch  and I had the chance to sit down and talk with him for some time.   Watson was a versatile guitar player (this set demonstrates the wide range of music that he played) but he was also a great banjo player.   One thing I learned from him was how to get a drop thumb effect without actually being able to do drop thumb.   There are three kinds of basic banjo styles - three finger picking (often called Scruggs picking), double thumbing (a style that uses only thumb and forefinger) and frailing (or up picking) - within frailing there is a style that some old time players use where the thumb drops down from plucking the fifth string to plucking the middle strings.   Below is a short video on how the two styles are different.  



Watson, at one point said he could not get the style (and I could not either) and he suggested an alternative way to get the same effect without doing that style.   He had a very simple cheat which achieved the same effect.

What impressed me most about Doc Watson was his humanity - this set of four disks and the books - shows off that quality very clearly.  If you have heard Doc, this is probably a must.   If you have not click into one of the sites above and then order the set.

Political Theater is to Theater as Military Music is to Music

This week Senator Carl Levin and his Homeland Security and Government Affairs Subcommittee held a hearing on tax practices for multinational corporations. (A copy of his opening statement is included in the hot link with his name.)  Note, the Senator is not a member of the Finance Committee, which writes tax legislation so the purpose of the hearing was not legislative in any real sense of the world.  Also note that he was able to pull out his own personal iPhone as a prop to make sure the media could snap a photo.

Levin's opening statement is a good example of his biases.   He called the Apple policies, which has operations all over the world, a "tax avoidance" strategy.   Levin seems to have no understanding of the monstrous tax code that he helped to create.  Nor does he seem to have any idea about the complexity of operating a corporation all over the world.   Corporations that do business in many countries have to deal with individual tax policies of the countries they operate in.  At the same time they need to work hard to deal with fluctuating exchange rates and a whole host of other challenges.    

Obviously, there are lots of US based companies that have subsidiaries outside of our borders.  One wonders (actually I do not wonder) why Senator Levin failed to include some other large multinationals in his web - for example, what about General Motors?

Tim Cook's opening statement was clear and unambiguous.  He said “We don’t depend on tax gimmicks. We don’t move intellectual property offshore and use it to sell our products back to the United States to avoid taxes. We don’t stash money on some Caribbean island. We don’t move our money from our foreign subsidiaries to fund our U.S. business in order to skirt the repatriation tax.”   Cook also pointed out that the APP store alone has created 300,000 jobs in the US and generated $9 billion for those developers.   Levin seems to have missed the point.   But then the point of this exercise was not to build understanding.

The ranking member on the subcommittee, John McCain, took the same kind of one sided approach to looking at the situation.   McCain event went so far as to quote Senator Levin in his opening statement.   Levin seems to think that if all the operations of Apple were repatriated that all of his pet social programs would be better funded.   Here is the relevant quote from Levin's opening statement -

"Because of those cuts, children across the country won’t get early education from Head Start. Needy seniors will go without meals. Fighter jets sit idle on tarmacs because our military lacks the funding to keep pilots trained. Apple and the other companies exploiting tax loopholes depend on the safety, security and stability provided by the U.S. government. Their economic existence depends on the U.S. government’s energetic protection of their intellectual property – property which they develop here, and keep under the protection of the U.S. legal system, while shifting the income it generates overseas."

One member of the committee got it right about the purpose of the show trial that Levin called a hearing.



There are several problems with these types of media events.   They don't ever bother to deal with the kinds of issues that are fundamental like tax complexity.   They start with a conclusion hoping to generate not sound public policy but media coverage.   Second, they make many of the participants look like buffoons. (And that may not be a bad thing.)   After reading Senator Levin's opening statement and listening to his questions of Apple Executive Tim Cook, it is pretty clear that Levin never had a course in basic accounting.  Third, and most importantly they do nothing to advance a legislative agenda or to solve a problem.    The US Tax Code is overly complex and based on the last decade or so its rate structure is considerably higher than other nations.   That makes it a lot harder for US corporations to be successful.   Tim Cook's responsibility to shareholders is to assure that Apple is a profitable company not to fund Levin's pet social programs.   If Cook does his job well, the government will generate a lot of tax revenue.  (And based on the statement from Cook, they did.)  In Levin's ideal world some Senate staffer would have the responsibility to determine Apple's tax liability.

What are the implications of Zero Tolerance?

One of my grandsons was suspended from school after he brought a toy gun to school.   No adult saw the toy.  He was in an after school program and showed it to another boy and was reported by three other students who saw him showing the toy to his friend.   When the Principal was informed about the incident, several days after it happened, she called in this boy and confronted him - without another adult in the room.  The Principal ultimately commented that because he had used his hand, while playing with another kid as a gun, in the second grade, this represented a "pattern" of behavior.  (From my point of view, that comment was nonsense.) He was then suspended for two days.

There are a number of issues here.   But let me comment first that I think if an organization establishes a rule, it should be followed.  So in one sense I do not disagree with the ultimate result.   I would question however the thinking about these kinds of rules.   Here are some thoughts.

#1 - Does a Gun Free Zone rule actually improve safety on campus?   That is a hard one to evaluate.  It certainly does not improve the possibility that a person cannot come on campus with a gun.  Witness Sandy Hook.   But it may reduce the likelihood that a student will bring a weapon on campus, and that may be good, especially in some schools.

#2 - Does the rule improve student discipline?  There is always a problem with children and attention spans and a rule which prohibits them from brining toys on campus, is probably good for keeping their attention on studies.   This morning I showed one of my other grandsons a bird feather that I had found on a recent fishing trip, and he commented that he could not take it to school because it was a toy.  Even at five that is a good thing to encourage children to do.

#3 - Does this kind of rule isolate guns and diminish the attention to and respect for the Second Amendment?  I wonder if you make something so foreign in the long term will the proper role of firearms in a free society be lost on its citizens.   The debates about gun control bother me because so many of the strongest advocates on both sides make such outrageous claims.   Ideologues against guns like Diane Feinstein (who arguably is where she is because of a gun incident early in her political career) have no understanding of guns and therefore diminish the strength of a reasonable argument that there should be some limits on the use of firearms in society.   I am especially skeptical of the Principal's interpretation of a gun free zone to include any action which might be quite normal for a boy, such as using you hand to play cops and robbers.   This is not a slippery slope - forming you hand into the shape of a pistol - will not cause you to become a gun toting criminal.  

#4 - What is the role of parental involvement? - In this incident the three children who reported the toy to the principal and the one kid who my grandson showed it to were called in an questioned by the principal.  Then my grandson was called in and confronted with the issue.   In this case, because there was a suspension involved, it would have been good to try to engage one or both of his parents in this conference.   This was not an emergency (the actual incident in question had happened several days before) so it would have been smart of the principal (and I think professional) to get the parents on the phone.  As it was done, an opportunity for learning was turned into a most punitive event.

A study in the Arrogance of Incompetence

The Congress began the process of trying to understand the scandal at the IRS.  Steven  Miller who seems to have spent his entire education and career in Washington came off as someone with little concern for the possible issues raised by targeting groups by the IRS.   Politico characterized his testimony as follows - "And he maintained that he didn’t lie to Congress — even though he never revealed the targeting program in response to repeated requests from Republican lawmakers in recent years."   The former head of the Exempt Units group in the service, Lois Lerner, who will head up the IRS role in implementing the tax elements of Obamacare, has decided to take the Fifth Amendment.  The Washington Post gave Ms. Lerner Four Pinocchios for her explanation of what happened in this disgraceful episode.  That is as high as a public liar can get.

The NYT tried in an article to spin the story that the whole mess was created because the poor IRS workers in Cincinnati were "overworked."   They threw around huge numbers the IRS gets 70,000 (the article said 60,000) applications a year.   But that number includes all of the types of exempt organizations.  Most of the news services looked at a small increase in the number of applications from 2010 to 2011 and a slightly higher increase in the number from 2011 to 2012.    There were 200 employees in the office which means that even if all of those applications were for C4 organizations and presumably they were not the real increased workload was manageable.  They needed to make some ways to simplify the process of review.  But lets be clear here - according to many sources there were 400 organizations (among all of the applicants) that came under increased scrutiny.  At the height of the problem there were an estimated 2800 C4 applicants.

Critical to respect for government is an understanding that the tax agency operates in a professional manner. Neither Miller nor Lerner seem to understand that.    Comedian Dave Barry summed up the current esteem for the agency which he quipped “The IRS spends God knows how much of your tax money on these toll-free information hot lines staffed by IRS employees, whose idea of a dynamite tax tip is that you should print neatly.”   For an Administration that claimed it would be the most transparent in history - they certainly have not come close to that standard on this episode.

Isabella without Columbus

Inside Higher Education had a story this morning about Swarthmore College, a selective liberal arts college in Pennsylvania, that is considering whether to divest from its endowment companies that produce fossil fuels (coal, oil and gas). Part of this comes from the activities of one Bill McKibben - pictured at the left - who seems to think this would be a good idea.  (After all, it is not his money.)  McKibben, like all good ideologues, has established a blacklist which demands that these companies cease their exploration for new fossil fuels.  (It is not clear whether he has also demanded that we go back to a flat earth policy.)

When this story began last year one Swarthmore senior commented in a New York Times story - “We’ve reached this point of intense urgency that we need to act on climate change now, but the situation is bleaker than it’s ever been from a political perspective,” said William Lawrence, a Swarthmore senior from East Lansing, Mich.   There have been a couple of colleges with tiny endowments that have made the step but were Swarthmore to make join them it would slightly more important.   No one out of East Podunk Maine has heard of Unity College and while many have heard of Hampshire - it is out there on the fringes.

But were Swarthmore to make this step it would be significant.  Harvard's undergraduates have

requested the Harvard Board to do it.  So far Harvard's board has declined but what the request actually represents, besides economic insanity, is a real cost.   About 10% of the Russel 3000 involves companies that would be on the no-no list.  So the Swarthmore trustees decided to do an analysis of whether this bright idea made any sense.  Not a bad idea when your endowment really counts.

The IHE story details the potential costs.  For students at Swarthmore it would produce a couple of hundred million dollars in foregone revenue.  That could amount to an increase in tuition of about $13,000.   Swarthmore, like many other endowments (theirs is currently $1.5 billion) uses index funds to improve investing efficiency.   The paper estimates that up to 60% of the funds they use could be affected by this policy.   The five and ten year returns to Swarthmore have been pretty good - for the 10 year benchmark returns have exceeded averages by a bit less than 2% per year.

As the Swarthmore trustee paper suggests, managing an endowment over time is a complex set of tasks.  Fortunately, anyone with a bit of sense would look that this proposal and reject it immediately.

You cannot make these things up.

Huffpost did a story this morning about the President thinking he might go "Bulworth" on us.   David Axelrod - the Dick Morris of this administration commented - “It’s probably cathartic just to say it. But the reality is that while you want to be truthful, you want to be straightforward, you also want to be practical about whatever you’re saying."  Hmm, Practical as opposed to Truthful.   That is what I love about the Washington establishment, PT Barnum now spends full time in politics.  Only an allegedly brilliant strategist like Axelrod would not see the irony in his remarks.

As a reminder - here is the IMDB synopsis of Bulworth the movie -
A suicidally disillusioned liberal politician puts a contract out on himself and takes the opportunity to be bluntly honest with his voters by affecting the rhythms and speech of hip-hop music and culture.

This President, in his first campaign, worked very hard to obscure his political views, in part because he knew that if the American people understood the depth of his passion about liberal policies - they would not have elected him.  This all sounds like Bull but it is not worth much.

What is a Social Welfare Organization?

There are many reasons to form an organization that is not expected to generate a profit.   Some are formed to do charitable activities (like universities or hospitals) and others a formed for more narrow purposes for example cemetery organizations (501 c 13) have a very distinct purpose which is different from state sponsored workers compensation reinsurance organizations (501 c 27).   It all fits into that category first described by Alexis DeTocqueville called voluntary organizations.  When DeTocqueville came to the US in the 1840s he was amazed at the American ability to form organizations to benefit the community.

The Social Welfare category(501 c 4)  of exempt organization is a catchall.  The IRS has two standards to qualify for this status the organization "may be performing some type of public or community benefit but whose principal feature is lack of private benefit or profit."   Clearly informing the public about civic issues, when such a large percentage of the economy is dedicated to government, would fit into the definition.  But should it also fit with all sorts of other organizations that are formed for exempt purposes but not ones designed to influence our roles as citizens?

The NYT argued in a column this morning that advocacy organizations should be filed under §527 - which is a newer category in the code designed to allow groups to form to "influence the selection, nomination, election, appointment or defeat of candidates to federal, state or local public office."   But are groups like the Tea Party doing something more than trying to influence who is going to be the next member of congress from the fifth district?   The major difference between a 527 and 501 c4 is the requirement in the 527 to disclose donors.

There are really a couple of questions here.   First, is it time to rethink how we allow citizens to form into groups not seeking a profit which want to inform the public process and should we continue to make a distinction between groups which want to elect candidates and those that want to influence civic debate?  Obviously, that is something we should do.  But the suggestion that limiting political speech should not be on the list.  Citizens should be able to unite to petition both the government and their fellow citizens. (That you may have noticed was a very bad pun.)

Second, is this (like so many of the other Obama problems right now) an example of an administration that does not understand the limits of authority?   The current administration is not the first to use these kinds of discretionary actions to move opponents or reward friends.   These kinds of breaches should not be tolerated.  Cleaning up the current problem(s) is not enough.

Third, how can we regain a sense of limited government where these kinds of outrages would not happen?   The most direct answer is to reduce the size of the fisc that goes to the federal government.  The GDP ratio of federal spending (which exceeded 25% at at the high end of the downturn) should be reduced significantly.

Former Clinton Aide Joe Klein commented "As in most presidencies, there have been an awful lot of political hacks populating the mid-reaches of this Administration.  In the Obama instance, these have shown an anachronistic, pre-Clinton liberal bias when it comes to the rules and regulations governing many of our safety-net programs, like Social Security disability. And now they have violated one of the more sacred rules of our democracy: you do not use the tax code to punish your opponents."   From my perspective that is true, but not enough.

An Administration with Only Low Level Employees

As one who spent the early part of my career in Washington, I have been bemused with the continuous claims of this administration on responsibility.   Remember, that when they came in they claimed that this would be the most "transparent" administration in history.  In four recent incidents they have been both murky and arrogant (not a good combination).

#1 - The Alcohol, Tobacco and Firearms unit in the Department of Justice was caught in a hair-brained scheme to transfer to and then track illegal firearms with the Mexican drug cartels.   The scandal blew up when it was discovered that there were about 2000 guns where the ATF transferred ownership - or allowed it to happen - to the cartels.   Problem was that the guns ended up being used in illegal activity (SURPRISE!!!!).   When that fact became known, the Administration went into defense mode and claimed that some low level operative in the Phoenix ATF office had developed this plan to move a couple of thousand guns to illegal contacts.  (SOUNDS CREDIBLE DOESN'T IT)  These were not BB guns, many were high caliber weapons.  Evidently the standards that the ATF used for this program were different than the one used on the Obama Gun Control proposal.

#2 - In September 2011, Islamic militants (this administration seems incapable of using that term) attacked embassies in Egypt and Libya.  There is plenty of evidence that the Administration had knowledge of the attack while it was going on.  Yet, there is also plenty of evidence that they fiddled with it.   The President claims he described this as a terrorist incident - but the transcript of his statement does not confirm that.   What is more troubling is that the Administration tried to foist a story on the American public that the cause of all this unrest was a video that no one in the middle east had ever seen.   (Note - All this happened on 9/11 - but the Administration did not seem to grasp that the date somehow had significance.)   The Administration's dereliction of duty came in two ways - first, it consistently denied requests by the embassy in Libya to beef up security and second, it failed to send any kind of assistance as the attacks were taking place.   Neither the President nor the Secretary of State could be bothered.

WP Graphic of the Results of the IG report

#3 - IRS Scrutiny - Until yesterday  morning the Administration's most recent example was evidence that an office of the IRS which used the Exempt Organizations unit to give extra review for 501(c)(4) (Social Welfare Organizations) if they espoused conservative ideas or if they had certain terms in their names.  That started, according to an Inspector General's report in 2010 and then the Director of the Service told them to cool it.   Then in 2012, a "rogue" group started it up again.  (Is is coincident that 2012 was also an election year?) Reminds one of the Nixon administration.

#4 - AP Phone Records - Yesterday, a story developed that the Department of Justice used secret subpoenas to obtain home, office and cellular phone records of individual Associated Press reporters, allegedly to assist on an investigation about disclosure of classified information on a failed attempt by Al Qeada plot.   Most of the news class (and indeed anyone with a sense of the First Amendment) think this might have been a bit of an overstep by the Attorney General.   The AG defended his actions as a "one of the most serious breaches of security" in his 35 years as a prosecutor.

Second administrations often have problems.  But there are a couple of themes that tie these four together.   First and foremost, in each there is an almost megalomanic sense of authority - the Administration's officials know better how to do things than even the laws that are designed to constrain government.   That was what Frederich Hayek saw as a branch "knowledge problem" - the ultimate inability of officials to know enough about events to be able to control them.   Second, although this has not come out completely on the phone records fiasco - there is a pattern after inappropriate behavior.   Each of these steps happens at some point.   A) The President denies responsibility.  B) He promises to get to the bottom of the problem - and hold those who perpetuated this outrage responsible.   It is remarkable how he uses the same phrase repeatedly and then ignores ever actually holding anyone responsible.  C) He claims that the actions are a result of some low level functionary who acted without proper authority.  D) His spokesman dismisses efforts by the press or Congress to understand what happened by discounting the story as "old news."

Lord Acton was only partially right - his famous aphorism should be revised - absolute power (or even the assumption of absolute power) corrupts absolutely.

How do you do a destination wedding?

This is not a topic that I would normally write about but over the weekend became inspired when two friends of ours got married at Stanford Sierra Camp.   As my daughter taught me, when she got married, weddings are fundamentally a set of logistical events.  She was so well organized that she kept a massive three ring binder on all the details.   I am convinced that her vigilance made her wedding a memorable event but also kept costs down.    But as I thought about this weekend there were so many points where the couple paid attention to small details to make it superb.  But here are four details that made the event even more meaningful.

#1 - Location - find a place that can accommodate you and at the same time which has the opportunity for your guests to have lots of things to do.

Our location was in the Sierra and brought people together with good food and lots of outdoor activities.  On the first night we were there we had a "talent show" - which had a good range of talents - ranging from recitation to music of all types to a little humor.   Yesterday morning there was a not to strenuous hike up to some falls and for those who wanted to go a bit further.   The hiking group included all ages including a couple of people who were over 80.  Not everyone went - but for those who did not there was sailing on the lake and just relaxing.

#2 - Brand the Event and Personalize It.

The attention to detail on this event was incredible, beginning with the hold the date announcement.  When you signed up for the "Wedding Camp" you got a booklet back which had a schedule of events and other sorts of details.  Some gleaned from the normal SSC camper information and some unique to the event.   When each guest arrived there were two glasses and a bottle of wine that had been personalized for the wedding.   This morning, every mother received a rose with their name on it.  As you went into the reception area you saw a banner hanging over the fireplace which spelled out wedding camp.  Strewn around the central location were a couple of photo books with pictures of all of the people who were coming as well as some pictures of the couple.   There were also a couple of jigsaw puzzles from pictures of the couple then and now.  This morning a new puzzle appeared that said "Happy Mother's Day."

On the first night, to take advantage of the location, they did a cruise on a pontoon boat to gaze at the stars.  Without the normal light pollution that you have in a city - the sky is quite beautiful.

Every participant also got a Tshirt commemorating the event.   Because this was a camp event - the wedding cake was a S'mores cake - I spoke to the baker who had to do some ingenious baking to achieve the texture of that famous campfire food.  All those things made this event unique.

#3 - Make the meaningful parts of the ceremony for the couple - meaningful to the guests

This couple chose a non-religious ceremony and yet they included elements from Shabbot (the end of the Jewish Sabbath and the commencement of the week to come - and the wedding itself was late afternoon on a Saturday) and they also chose to use a Ketubah (which is a prenuptial agreement) which is not used much but helped to reinforce that a wedding is a serious event.   The couple chose to explain the significance of both the Shabbot (before we participated in it) and the Ketubah.   The Ketubah involved some levity (because part of the tradition in the contract is the dowery) but ultimately both ceremonies were treated with enough reverence to assure that all of us understood that this was not just a party.

#4 - Assure audience participation 

The talent show did that but so did the use of WEDPICS - a smartphone app which encouraged guests to snap pictures.  As I said yesterday - one friend who is a wedding photographer thought there would be a lot of crappy pictures but in reality the album from the wedding has a lot of shots that a normal wedding photographer would not capture.   The WEDPICS album is different but is really interesting - they compliment each other.

If you are planning a wedding soon or if you have a son or daughter that is likely to be married soon and is considering a destination wedding - you might want to start with these four principles - but if you are serious send me a note and I will give you details - they should write a book about how to bring all these elements together.