George Floyd, A Memo to Conservatives

A good many of my conservative friends are in shock at the reaction to the killing of George Floyd.? ?"We saw the video.? We agree its awful.? No one we know is defending this."

Yes, that is likely true.? The video was pretty damning.? But you see, these things seldom happen on video.? And when they don't, Conservatives are generally in a "believe all cops" mode that is just as ignorant of due process and nuance as the me-too brigades were with Julie Swetnick's crazy accusations about Judge Kavanaugh.

I understand that a great many police officers are good, even laudable people.? But not all are.? And because there are bad apples, we need careful accountability systems for police particularly because we give them powers and responsibilities that go beyond those of ordinary citizens.

The problem with this accountability is that Conservatives tend to go past respecting and supporting police, to fetishizing them.? I get it -- police are really at the core of beliefs for many Conservatives, whose views turn around the fight between civilization and barbarism.? It's hard not to think of this with barbarism in the streets over the last 24 hours.? ?No matter how much we respect them and need them to be there, we still also have to impose accountability on them.? You Conservatives frequently stand athwart of this accountability (you Progressives too, but I will get to that in the next post).

George Floyd, A Memo to Progressives

I am not going to lecture serious Progressives on the arson and looting in the streets today -- if you don't understand that stealing iPhones is not an appropriate reaction to police brutality, then the rest of this is going to be lost on you.? But you guys basically represent my side in this thing and frankly you are doing a terrible job.? I will focus on BLM and it could apply equally well to the entire Progressive response.

  1. There is a real problem with police accountability and police violence in this country, one I have been writing about since long before the BLM movement was even created.
  2. The harm of these police accountability issues falls disproportionately, but not solely, on blacks and other minority ethnic groups
  3. For any number of reasons, fixing racism is not the immediate answer. ?Most obviously, because racism is super-hard to eradicate and has persisted (though improved, IMO) despite a lot of attention over many decades. ? It is hard to point to any time and place in human history when some folks have not been seduced by in-group-out-group thinking. ?The other reason is that the primary issue is accountability, not racism. ?We give police special powers to use force that the rest of us do not have, but impose less accountability on them for the use of force than the rest of us face. ?No matter how good most police officers are, this accountability problem is going to allow bad eggs to repeatedly abuse their power.
  4. There are real, identifiable steps that can actually increase police accountability and transparency and reduce the types of police violence incidents BLM was formed to oppose. ?Early on, BLM?actually identified a pretty good list.
  5. BLM did?a fabulous job of raising awareness and putting these issues near the center of political discussion.
  6. Having done so, BLM now has gone completely off the rails. ?It appears to be entirely focused on virtue-signalling and disruption and support of progressive issues completely tangential to its initial focus. ?It has no coherent action plan. ?Colin Kapernick torpedoed his own football career to bring attention to BLM, but once he did so and had microphones thrust in his face from every direction, neither he nor any of his supporters had anything specific to advocate for, other than outrage and telegraphing their victim status.
  7. Things are even worse today.? A middle and upper class white populace who was sympathetic two days ago may be turning against you.? If you display barbarism in the streets, barbarism that only the police can head off, then you increase sympathy for the police rather than support your narrative of accountability
  8. Progress can be made on these issues, but what it will take is a hard city by city slog to change the rules that govern police discipline and transparency. ? As I wrote before, BLM "could learn a lot from Conservative and libertarian groups like ALEC, that focus on creating model legislation and local success stories that can be copied in other places."
  9. Republicans often oppose police accountability steps -- they don't just support the police, they fetishize them. ?But the cities that most cry out for new accountability rules -- New York, Chicago, Detroit, Baltimore, St. Louis, Los Angeles -- are have Democratic super-majorities and governments whose officials almost to a one have come out publicly in support of BLM. ?So why no progress? ?One big barrier is the Democratic Party's unwavering support for public employee unions, and it is police unions that are the biggest barrier to implementing the steps BLM should be demanding.? ?If you are not diving in and challenging police union contracts on their next renewal, then you aren't doing anything useful on this issue.

Another Climate-COVID Computer Modelling Similarity

In this post, I wrote about parallels between climate and COVID alarm and related issues of computer modelling.? I realized I left out at least one parallel.

In the world of climate, computer model results are often used as the counterfactual case.? Let me give you an example.? The world has warmed over the last 100 years at the same time atmospheric CO2 concentration has increased.? Obviously, to truly judge the effect of CO2 on temperatures, we would like to know what the temperatures would have been over the last 100 years without rising CO2 concentrations.? But we don't have thermometers that read "with" and "without" CO2.

I remember I got caught up in this years ago when I published an analysis that showed that estimates of temperature sensitivity to CO2 concentrations used in projections going forward greatly over-predicted the amount of warming we have seen already.? In other words, there had not been enough warming historically to justify such high sensitivity numbers.? In response, I was told that alarmists considered the base case without CO2 increases to be a cooling world, because that is what some models showed.? Compared to this cooling counterfactual, they argued that the warming from CO2 historically had been much higher.

By the way, this argument always gets to be very circular.? When you really dig into the assumptions of the counter-factual models, they are based on assumptions that temperature sensitivity to CO2 is high.? Thus models predicated on high sensitivity are used to justify the assumption of high sensitivity.

I thought of all this today when I saw this post on COVID models and interventions from Kevin Drum.? I read Drum because, though I don't love his politics, he is more likely than most team-politics writers from either the Coke or Pepsi party to do a reasonable job of data analysis and interpretation.? But I have to fault him for this post, which I think is just terrible.? You can click through to see the chart but here is the text:

At the end of March, the highest estimate for [NY State] hospitalizations was 136,000+. Today the peak is estimated at about 30,000. That’s a difference of 5x. Did the modelers screw up?

Not really. Remember the Imperial College projections for the United States? They estimated about 2 million deaths if nothing was done; 1 million deaths if some countermeasures were taken; and 200,000 deaths if stringent countermeasures were taken. That’s a range of 10x. If you figure that we’ve taken fairly stringent countermeasures but not the maximum possible, then a reduction of 5x is about what you’d expect. Alternatively, if you ignore the Columbia University projection as an outlier, the IHME estimate has only gone down by about 2x. That’s what you’d expect if we took countermeasures that were just a little more stringent than their model assumed.

At the end of March it was still not clear how stringent and how effective the coronavirus countermeasures would be. In the event, it looks like they worked pretty well, cutting cases by at least 2x and possibly more.?This?is why the model estimates have gone down: because we followed expert advice and locked ourselves down. Just as we hoped.

Treating the early model estimates as if they are accurate representations of the "no intervention" counter-factual is just absurd.? ?It is particularly absurd in this case as he actually quotes a model -- the early Imperial College model -- that is demonstrably grossly flawed.? He is positing that we are in the Imperial College? middle intervention case, which estimated a million deaths in the US and is likely to be off by more than an order of magnitude.? Given this clear model/estimate miss, why in the world does he treat early Columbia and McKinsey models as accurate representations of the counter-factual?? Isn't it at least as likely that these models were just as flawed as the Imperial College models (and for many of the same reasons)?

The way he uses the IHME model results is also? flawed.? He acts like the reductions in the IHME estimates are due to countermeasures, but IHME has always assumed full counter-measures so it is impossible to use the numbers the way he wants to use them.

Parallels Between COVID-19 Alarm and Global Warming Alarm

So I finally had a day or two of downtime from trying to keep my business afloat (it's weird reading all the internet memes of people at home bored when I have never been busier).? I wondered why I was initially, and remain, skeptical of apocalyptic COVID-19 projections.

I have been skeptical about extreme global warming and climate change forecasts, but those were informed by my knowledge of physics and dynamic systems (e.g. feedback mechanics).? I have been immensely skeptical of Elon Musk, but again that skepticism has been informed by domain knowledge (e.g. engineering in the case of the hyperloop and business strategy in the case of SolarCity and Tesla).? But I have no domain knowledge that is at all relevant to disease transfer and pathology.? So why was I immediately skeptical when, for example, the governor of Texas was told by "experts" that a million persons would die in Texas if a lock-down order was not issued?

I think the reason for my skepticism was pattern recognition -- I saw a lot of elements in COVID-19 modelling and responses that appeared really similar to what I thought were the most questionable aspects of climate science.? For example:

  • We seem to have a sorting process of "experts" that selects for only the most extreme.? We start any such question, such as forecasting disease death rates or global temperature increases, with a wide range of opinion among people with domain knowledge.? When presented with a range of possible outcomes, the media's incentives generally push it to present the most extreme.? So if five folks say 100,000 might die and one person says a million, the media will feature the latter person as their "expert" and tell the public "up to a million expected to die."? After this new "expert" is repetitively featured in the media, that person becomes the go-to expert for politicians, as politicians want to be seen by the public to be using "experts" the public recognizes as "experts."
  • Computer models are converted from tools to project out the implications of a certain set of starting hypotheses and assumptions into "facts" in and of themselves.? ?They are treated as having a reality, and a certainty, that actually exceeds that of their inputs (a scientific absurdity but a media reality I have observed so many times I gave it the name "data-washing").? Never are the key assumptions that drive the model's behavior ever disclosed along with the model results.? Rather than go on forever on this topic, I will refer you to my earlier article.
  • Defenders of alarmist projections cloak themselves in a mantle of being pro-science.? Their discussions of the topic tend to by science-y without being scientific.? They tend to understand one aspect of the science -- exponential growth in viruses or tipping points in systems dominated by positive feedback.? But they don't really understand it -- for example, what is interesting about exponential growth is not the math of its growth, but what stops the growth from being infinite.? Why doesn't a bacteria culture grow to the mass of the Earth, or nuclear fission continue until all the fuel is used up?? We are going to have a lot of problem with this after COVID-19.? People will want to attribute the end of the exponential growth to lock-downs and distancing, but it's hard to really make this analysis without understanding at what point -- and there is a point -- the virus's growth would have turned down anyway.
  • Alarmists who claim to be anti-science have a tendency to insist on "solutions" that have absolutely no basis in science, or even ones that science has proven to be utterly bankrupt.? Ethanol and wind power likely do little to reduce CO2 emissions and may make them worse, yet we spend billions on them as taxpayers.? And don't get me started on plastic bag and straw bans.? ?I am willing to cut COVID-19 responses a little more slack because we don't have the time to do elaborate studies.? But just don't tell me lockdown orders are science -- they are guesses as to the correct response.? I live in Phoenix where it was sunny and 80F this weekend.? We are on lockdown in our houses.? I could argue that ordering everyone out into the natural disinfectant of heat and sunlight for 2 hours a day is as effective a response as forcing families into their houses (initial data, though it is sketchy, of limited transfer of the virus in summertime Australia is interesting -- only a small portion of cases are from community transfer.? By comparison less than a half percent of US cases from travel).
  • In both cases, advocates of the precautionary principle seem to rule the day.? I would argue that in practice, the precautionary principle means that any steps that might conceivably limit something bad should be pursued irregardless of cost.? You see a form of this all over social media, which folks arguing that it is wrong to balance deaths against money, and any life spared is worth the cost.? But this is absurd two at least two reasons
    • First, unemployment and economic recession have real, proven effects on mortality.? Shut down the economy to reduce CO2 or virus spread, and people will die
    • Second, if we really followed this principle for everything we would be back in the stone age.? Take the flu.? 15,000-20,000 people will die of the flu every year in the US -- my healthy 25-year-old nephew died of the flu.? Are we going to shut down the economy next year in flu season?? It would reduce flu deaths.? Or take the 37,000 people killed each year in the US in motor vehicle accidents.? With the lockdowns, that figure is certainly reduced right now.? Should we just shut down the economy forever, it sure would reduce car fatalities?
  • And of course there is the political polarization of what should be scientific opinion.? The Nevada and Michigan governors initially banned chloroquine treatment strategies for no good reason other than the fact that Trump publicly highlighted them as promising.

Update:? Prediction from climate applied to COVID-19:? No one will go back and call out widely-used models for failing to accurately model the disease or attempt to learn from their mistakes.? If it is ever mentioned that these models grossly over-estimated deaths, it will be forgiven as being exaggeration in a good cause.? (Somewhat related, Bryan Caplan on Social Desirability Bias)

For the Left, Excess Hospital Beds Were "Too Many Deoderants" ... Until This Month

For years, a significant critique (mostly from the Left) of health care costs has been that over-investment by private hospitals in premium facilities (e.g. ICU beds, MRI scanners, etc) is part of the reason health care costs have been rising so rapidly.? This is why the response to a study like this from several years ago was not "wow, how fortunate the US has so many ICU beds" but instead "wow, this is what is wrong with US healthcare."? This is why per capital healthcare cost is in the next column, implying a link between more beds and higher costs.? And, this is why the "life expectancy at birth" is included in the chart.? The conclusion was supposed to be "see, the US spends all this money on ICU beds and gets nothing for it."? (Obviously this conclusion would be absurdly narrow-minded even before COVID-19, as US life expectancy is lower than that of many other countries due to lifestyle choices and other factors -- a better comparison would be US life expectancy at 65, where US looks much better).

As a result, many states and municipal authorities have Certificate of Need (CON) processes that require hospitals and other health care providers to get government permission before adding certain types of capacity/infrastructure.? Many of these government agencies actually delegate these decisions to a board populated with representatives of the current local incumbent hospitals, meaning one must get permission from one's competitors before adding capacity (permission unlikely to be given).

This sort of regulation has had acute consequences in the age of COVID-19.? John Phelan has an example from Minnesota.

With the extra time, Minnesota will work desperately to expand its ICU capacity. Local stadiums and hotels?will be converted to temporary hospitals. “The attempt here is to strike a proper balance of making sure our economy can function; we protect the most vulnerable; [and] we slow the [infection] rate to buy us time and build out our capacity to deal with this,” Gov. Walz said....

Until 1984, Minnesota operated what were called?Certificate of Need (CON) laws. These require government permission before a facility can expand, offer a new service, or purchase certain pieces of equipment. While Minnesota has not operated CON laws since 1984, along with two other states—Arizona and Wisconsin—it maintains several approval processes that function like CON?laws.

In 1984,?Minnesota enacted a hospital construction moratorium. This prohibits the building of new hospitals as well as “any erection, building, alteration, reconstruction, modernization, improvement, extension, lease or other acquisition by or on behalf of a hospital that increases bed capacity of a hospital.” Whenever hospitals or provider groups propose an exception to the moratorium, the Minnesota Legislature requires the Department of Health to conduct a “public interest review.”

Researcher?Patrick Moran?explains:

In its review, the Department must consider whether the proposed facility would improve timely access to care or provide new specialized services,?the financial impact of the proposed exception on existing hospitals, the impact on the ability of existing hospitals to maintain current staffing levels, the degree to which the facility would provide services to low-income patients, as well as the expressed views of all affected parties.?[Emphasis added]

Moran continues:

These reviews must be completed within 90 days of the proposed project. However, the public interest review is not binding. The Minnesota Legislature ultimately decides which exceptions are allowed to go forward.?Except for the fact that the Legislature makes the final determination about each project, the public interest review process for new hospitals and hospital beds closely resembles CON statutes in other states.?[Emphasis added]

Indeed, it is incredible to note that, as with CON laws, the purpose of this system is to make it harder to provide hospital beds in Minnesota. Moran says: “Policymakers hoped that the moratorium would be more effective than CON in reducing the growth of hospital beds.”

They appear to have been successful. In the twenty years from 1984 through 2004, 16 exceptions were granted permitting just 94 additional licensed beds. As the chart below shows, between 1996 and 2016, the number of licensed beds in Minnesota actually fell by 921 while the population increased by 810,000. Exactly how “the Minnesota Department of Health has concluded that the moratorium is largely ineffective in restraining bed capacity”, as Moran says, is something of mystery.

The reason for this sort of thinking has in part been based on misunderstandings on the Left about markets (similar to Bernie Sanders and his too many deoderants statement).? But it is part based on the reality that the US healthcare system is stuck between two different regulatory models.

  • In model 1, which we will call free market, investment by private actors increases supply.? In such a market with a lot of fixed investment, prices are driven down as competitors vie to fill excess capacity.? This is close to the model the US has in veterinary medicine and some non-insurable surgeries like eye correction and plastic surgery, but is far from the model we have in most patient care
  • In model 2, which I will call the public utility model, a small number of private companies operate with heavy regulations of services and prices in exchange for a guaranteed return on assets.? Since the size of the asset base drives profits, private players have the incentive to add lots of assets while regulators look on asset additions skeptically

The US patient healthcare system is stuck between these models, which may be a worse spot than either alone.? Dominance of third party payers or even a single government payer tends to drive the system towards model 2.? But model 2 is notoriously bad at producing innovation, often results in poor capital allocation decisions, and sub-optimizes costs compared to model 1.

Please Honor Social Distancing Rules, Even if You Are Skeptical of the Risk

I write this because I have been publicly skeptical of some of the COVID-19 responses.? But be that as it may, the decision has been made to go all-in on social distancing.? I am fully participating, whatever my personal beliefs are about risk.? Our family is staying isolated and wearing masks and gloves when we need to go into a store -- not because we are scared but because we are participating.? These sorts of things are much easier to do when everyone else is doing them, and more effective as well.

In places like Phoenix that is lightly hit by the virus and in rural areas where my company operates that have been hit not at all (e.g. zero cases in the county), a lot of folks are not playing along.? It would be heartbreaking to crash the economy and double the government debt only to have this thing still drag out because folks couldn't put neighborhood barbecues on hold for a few weeks (yes, I have seen several).

Update from a long-time reader:

The claimed purpose of quarantine is to create a gap in a long line of transmission. While it can be quite effective, the quarantine time does not really start until EVERYONE stops moving around. As long as even a few still move between isolated groups, those groups are not actually isolated at all. This means that failure to self quarantine lengthens the required quarantine period of all who actually comply. I would like this to be over, the sooner the better.

COVID-19 And Some Thoughts on Data Analysis

I am not going to take a position on COVID-19 severity now, if for no other reason as I am not an expert and I think its fine not to clutter the debates about virus responses too much with non-experts (though it is wrong, as discussed below, to censor experts who have heterodox opinions).? I am convinced COVID-19 is "not just the flu" but when I see the governor of Texas being told that there will be a million deaths in Texas alone if there is not a hard quarantine there -- well, I am skeptical.? Like with global warming, the full denier and total alarmist positions are likely both wrong -- with a lot of bad data analysis in the media along the way.? I have decided to focus on the latter.? So here are a few random thoughts:

  • The data we have sucks, and thus any conclusions we are drawing mostly suck too.? ?The data is worse than just being incomplete or bad -- if it was randomly distributed, we could live with that.? But the lack of test kits and how we have deployed the few we have means that the data is severely biased.? We are only testing people who are strongly symptomatic.? If there is a normal distribution of outcomes from this disease, we are only testing on the right side of the distribution.? We have no idea where the median is or how long the tail is to the left side of asymptomatic outcomes.? The only thing we absolutely know about the disease is its not as deadly as the media is portraying as we are missing hundreds of thousands of cases in the denominator of the mortality rates.? The media has also been terrible about reporting on risk factors of those who died.? When a bunch of people died suddenly in Seattle, one had to read down 5 paragraphs into the story to find that they were all over 70 in an old-age home.? Or when prime-of-life people die, facts such as their being type 1 diabetics -- a known severe risk factor for this virus (and one that makes it different from the flu) are left out.
  • The media is constantly confusing changes in measurement technique and intensity with changes in the underlying progress of the virus itself.? Changes in case numbers have as much to do with testing patterns and availability than they do with the real spread of the disease.
  • While COVID-19 is likely worse than the normal flu, our perceptions of how much worse are strongly affected by observer bias.? Frankly, if every news broadcast every night spent 15 minutes reciting flu deaths each day, we would all be hiding in our homes away from flu.? They present a healthy man in his thirties dying clearly as the tragedy it is, but the spoken or unspoken subtext is, "this is abnormal so this thing is much worse."? But it seems abnormal because we do not report on the very real stories of healthy young people who die of the flu.? My nephew who was 25 years old and totally healthy with no pre-existing conditions died of the flu last month -- and no one featured this tragedy on the national news.
  • The data we are getting sucks worse because the media has decided, as one big group, that for our own good they are going to limit all facts about the virus to only the bad ones.? There is a strong sense -- you see it on Twitter both in Twitter's policies as well as Twitter group attacks -- that saying anything that might in any way reduce one's fear of the disease should be banned for our own good.? One of the more prominent examples was Medium removing an article NOT because it was proven wrong but because it took one side of a very open question and it was obviously decided it was "unsafe" to allow that side to even be aired.

    This strikes me as a terrible precedent and one with a very slippery slope.? We have had to fight this attitude for years in the climate debate, the bad idea that good science is unacceptable if it gets to the wrong answer.
  • The media is never more dangerous than when it understands a little about a scientific topic.? After 40 years of engineering experience with feedback phenomena and exponential effects like positive feedbacks, the media suddenly thinks its the expert now and needs to lecture me that I don't really understand the power of exponential spread.? They are right that exponential disease spread with a highly transmissible virus is dangerous, but their 3rd grade math understanding is so simplistic it makes me scream.? Yes I understand the growth math, but I also understand that the same growth math says that a single bacteria colony in a month of growth should consume the whole Earth and a single chunk of plutonium that fissions indefinitely could destroy the planet.? But neither happens because there are brakes on the doubling process in later iterations.? I don't know in the case of COVID-19 if these brakes are strong or weak, but showing me mindless doubling trees is just insulting.
  • Many of the computer model results I am seeing make no sense to me.? I am exhausted with people talking about computer models as if they are some fact, rather than a really opaque calculation on some researcher's set of non-transparent hypotheses.? The only way I respect a computer model is if someone presents it this way, "If X, Y, and Z are true, and you assume A and B, then this model shows what the result might be, with some large error ranges."? Add to this the fact that most modelers run a range of models based on a range of inputs that yield a range of outputs, and then the media picks the most extreme of all these outcomes and presents it as "the model results of experts" without even showing the range of other outcomes.? Arnold Kling wrote something I nodded my head to about COVID-19 and data modelling:

Once you build a model that is so complex that it can only be solved by a computer, you lose control over the way that errors in the data can propagate through the model. For me, it is important to look at data from a perspective of “How much can I trust this? What could make it misleadingly high? What could make it misleadingly low?” before you incorporate that data into a complex model with a lot of parameters.

  • It will be interesting to see if anyone goes back to the models making the national news today and reconciles them to actual results.? Certainly no one ever does this in the climate debate, so I am not holding my breath.
  • Frankly, I am done with the Precautionary Principle.? This does not mean I am against taking precautions, even strong and expensive precautions, against bad things.? But I am done with the notion that one should ignore the costs of these precautions and not make sensible tradeoffs.? This is even true when trading off the risk to life on one hand with reduction of economic outcomes on the other.? This is in part because reduced economic activity has real effects on human misery and has direct correlations with lifespan and well-being.

Update:? This is exactly the kind of thing I would like to see more of.? Kudos to 538.? When people rattle off ridiculous figures, it causes me to tune out.? I take this seriously.

A Letter to the Harvard President on COVID-19 Response (Wherein Coyote Actually Sortof Makes An Intersectional Argument)

I got this note from the head of alumni affairs (or something like that) at Harvard:

I write to share with you a message President Bacow sent this afternoon to Harvard faculty and staff. He also sent a similar message to students. His message is one he and I would like to extend to all of you.

This is an unprecedented moment for Harvard and for the world. The last week has brought uncertainty, but also great resolve and resiliency. I am heartened by the way members of the broader Harvard community, extended beyond the campus, are coming together to support each other.

I have never been prouder to be a part of the Harvard community.

Attached was a letter (sorry, no online version but this roughly mirrors its content) from the Harvard President about bravely making the decision to send all the students home.? There is a lot of uncertainty in the right response to COVID-19 and so I am generally open to difference of opinion, but the smug tone of making a brave decision in the face of adversity just rubbed me the wrong way.? So I wrote this in response.? Note I am not an expert, just one person's opinion:

FWIW, since you sent this, I will say that I think what Harvard has done is exactly the wrong thing and its actions are a victory of virtue-signaling over rational responses.

In particular, it is clear that the mortality rates for people aged 18-25 from COVID-19 are trivial -- and would be even more trivial except that we don't measure most of the COVID-19 cases in this age group because they are so mild (this from the South Korean experience where they had more measurement and they found many asymptomatic cases in this age range). When in university, these students are gathered together in a pocket of other people in their same age range and also with minimal mortality risk.

By sending these kids home, you have created a massive diaspora of folks from one of the US viral hotspots (Boston) all over the country. Students that would have been living with other low-risk people are now living with parents and grandparents who are very much at risk. Add to this the anecdotal evidence I see on the news and social media of young folks of college age flaunting quarantine and social isolation rules, and I believe that Harvard and other institutions have increased risk rather than decreased it. Also, given that Boston may have the best hospital network in the country, for those of your students who might get sick you have sent them from this location with strong medical services to one which almost certainly has an inferior medical network. Finally, given just how low the risk is to people of this age, it is amazing how panicked people in this age range are today, perhaps because they have a stronger presence on social media where there are panic positive feedback loops. An adult response would have been to tell the kids that they are going to be fine, and that their job was to stay clear of their family members who are far more vulnerable.

A better solution would have been to keep students in school and then to minimize their exposure to the older administration and professor body through online classes. Students if online but still at university could still have access to educational resources and could still hold group discussions that are much harder to do online.

I will add as a final note, because Harvard today seems to be inordinately focused on issues of class and intersectionality: I believe there is an ugly class issue built into the current panic. You can see a class gradient in the panic itself -- AJ's and Whole Foods in San Francisco have empty shelves, whereas everything is normal at the Family Dollar in rural Alabama. What I see are rich people with good amounts of savings and professional jobs at well-capitalized companies where they can work remotely asking that the jobs of low-wage restaurant, factory, and retail workers be sacrificed through quarantine for their incremental safety. I will make my assumptions explicit -- for a variety of reasons from under-counting asymptomatic cases to academic and media incentives that cause skeptical voices to self-censor or be overwhelmed, I believe the US potential mortality from COVID-19 is being grossly overestimated. One might say that it's better to be safe than sorry, but in public policy (I assume they teach this at the Kennedy School) there are always tradeoffs. What, for example, is the human misery and mortality associated with, say, 20% unemployment? I can't remember CNN interviewing many out-of-work restaurant employees about why we should quarantine cities for 2 months. I will bet you that those Harvard professors who are focused on intersectionality will be writing about exactly this a year from now -- and when they do, remember this old white cis European dude told you first.

Warren Meyer
MBA 1989

Bringing Understand Across Party Lines:Guns and Abortion

Theresa Bonopartis writes at the Federalist, "If Abortion Providers Cared About Women, They Wouldn’t Fight Abortion Safety At The Supreme Court."? ?The article is about what one would expect, an abortion opponent wondering why women who support abortion would oppose reasonable health and safety regulations to protect women from dangerous medical practices while receiving an abortion.

This should be super easy to explain to Conservatives (and vice versa) because there is an exactly parallel question that folks on the Left ask of Conservatives.? My New England liberal mother-in-law often asks "why do gun advocates oppose very reasonable and incremental measures to make gun ownership safer?"

And the reason in both cases is exactly the same:? That strong advocates of certain practices (gun ownership, abortion) are often worried -- and frequently with just cause -- that incremental regulations are not aimed at safety but are meant as ways to constrict the practice on the road to eventual elimination.? They fear these are eliminationist rules in the Trojan horse of "reasonable regulation."? ?This is why the Left, which generally advocates regulating the hell out of most every service offering, resists abortion regulations that are in some cases less stringent than those put on tanning booths.? And this is why the Right, which is generally happy to deny all civil rights to any criminal and put them in a hole for life, is resistant to background checks for gun ownership.

The funny thing is that as obvious as these parallels are to me, they almost never work with strong partisans.? "That's not the same at all, we are talking about protecting women, not letting wackos carry handguns to shoot up preschools." "That's not the same, we're just trying to protect ourselves while they are killing babies."? But the point is that while the issues are not the same, the reason for skepticism about "reasonable regulations" is exactly the same.

Welcome to August 1929

It is not October of 1929 yet, but we are getting close in the stock market.? A few parallels

  • A 10+ year bull market where many retail participants can't even remember a bear market
  • New low cost brokerage models (in the modern case, zero-commission trading at Robin Hood and emulated by most major brokerages) attracting new inexperienced investors and increasing the trading frequency in retail
  • A government that is completely clueless to its policies that artificially inflate asset prices

We see stocks today that are traded absolutely untethered to their fundamentals as if they were bitcoin rather than ownership interests in productive companies (e.g. Virgin Galactic, Plug power, Apple, Tesla, etc).? Virgin Galactic doesn't even have the prospect of selling its first product and has run up to a $6 billion valuation.? Tesla has an enterprise value close to the largest car company in the world (Volkswagon) despite 1/20 the car sales, no profitability, and stalled revenue growth.? The market in general goes way up on good news and then goes up on bad news.

Be cautious everyone.

Dear Republicans:I Am Sorry, But This is How Precedents Work

In response to Bernie Sanders promising to jam through his programs by executive fiat if necessary in a declared state of emergency, folks of the Right are rushing to distance themselves from helping to create this monster.? From the National Review

Trump’s emergency declaration was contained to a single issue and a single project. Declaring “climate change” — an amorphous threat that’s perpetually a decade away from destroying us all — a national emergency, however, puts virtually all economic activity under the executive branch’s purview. If we’re to believe media reports, there isn’t a single hardship faced by mankind that isn’t in some dubious way connected to the slight rise of the earth’s temperature. Sanders would empower the same bunch of Malthusian hysterics who have been indefatigably wrong about everything for the past 50 years, to run some of the world’s most powerful bureaucracies.

The Sanders agenda terrifies me as well, but let's not pretend that Trump didn't fully establish the precedent for executive action through declaring states of emergency to end-run a Congress.? The fact it was "just that one time" is meaningless -- that's how precedents work (they are a bit like losing one's virginity in that sense).

It's not like this Democratic move wasn't fully predictable at the time of Trump's action.? Even political outsiders like, say, me were able to do it

I can pretty much guarantee you that if Trump uses this emergency declaration dodge (and maybe even if he doesn't now that Republicans have helped to normalize the idea), the next Democratic President is going to use the same dodge.? I can just see President Warren declaring a state of emergency to have the army build windmills or worse.? In fact, if Trump declares a state of emergency on a hot-button Republican issue, Democratics partisans are going to DEMAND that their President do the same, if for no reason other than tribal tit for tat.

The Tesla Stock Price -- WTF?

So as of the morning of 1/17 when I started writing this, the enterprise value of Tesla (market value of its debt and equity) was somewhere around $110 billion.? I can't even pretend to explain how a company that over 10+ years has never made an annual profit and which produced less than 400,000 vehicles as this sort of valuation (Volkswagen, which has about the same equity market value, makes about 11 million vehicles a year).? Tesla has an enterprise value of $300,000 per annual car produced (each of which, on average, lost money for them last year).

I don't have the energy to repeat my concerns on Tesla, but I do want to give a few updates from the last 12 months

  • Tesla is not seeing a lot of organic growth.? I know that seems an odd statement given that deliveries have been up the last few quarters (though even this growth has been pretty modest for a company with such a large valuation growth premium).? In retail there is a useful concept called "same store sales".? Revenue might be growing due to addition of new store locations, but what is happening in the core stores you already have?? In this case, one can say that Tesla's same stores, or more accurately "same product-geography sales" have been disappointing.? They enter new markets with a big splash and a lot of pent up demand -- Model 3 US, then Europe, then UK left hand drive, etc.? But in each case, after 2-3 quarters, lacking some specific one-time boost, deliveries begin falling.? Deliveries fell in the US the last 2 quarters.? ?Apparently they fell in CA last quarter.? ?They fell in strong Tesla markets like Norway the last quarter.? They are falling in most of Europe.? Tesla is eeking out small increments of growth each quarter by one time effects -- first the introduction of the model 3 in Europe, then in the 3rd quarter in the UK, then in the 4th quarter with a huge burst of sales in the Netherlands as EV subsidies in that country expired at end of year.? Tesla as a whole has some growth (though still more modest than you might guess from the hype) but look at each constituent market and you see a more disturbing story.
  • The model 3 has cannibalized Tesla's high end, high margin Model S and X products.? In a post last year, I criticized Tesla for under-investing in refreshing the Model S and X, whose designs were getting long in the tooth.? Today, it's becoming increasingly clear that Tesla is on a path to abandoning these products, which have already seen steady sales declines as they are cannibalized by the less expensive model 3.? The problem with this approach is that it is creating a mix shift from higher price/margin to lower price/margin products.? Even as deliveries go up, revenues are not rising nearly as fast and there is downward pressure on gross margins.
  • Given the above two points, I was as surprised as most people that Tesla reported a profit for 3Q2019.? It made almost no sense that they produced more vehicles but with essentially unchanged revenues and had net income go up.? I am still tremendously skeptical about Tesla's financial statements but for what its worth, they seeming to be getting them past the auditors.
  • My guess is that they will show a profit of 4Q2019 but probably still a loss for the year, but if anyone can stretch 2019 into a small positive net income gain, Tesla will find a way.? Maybe a massive sale of emissions credits or some sort of one-time supplier rebate or recognition of self-driving revenues.? No matter what, though, 1Q2020 almost has to be a disaster.? Tesla fans seem to think that China will fill in the hole, but I believe Tesla is exaggerating the ability of its new Shanghai plant to produce in volume, while the Chinese auto market is pretty sick right now anyway.
  • Tesla still does a lot of counter-productive stuff to buff up quarterly numbers.? Just one example, I noticed around Dec. 20 that two Tesla showrooms in Scottsdale had zero display vehicles on the floor.? I was told that this is now a common Tesla practice to sell out all of its display inventory each quarter to show a few extra delivery numbers (with 3 cars each at 200 showrooms this is maybe another 600 deliveries or about 0.5% of quarterly sales).? This strikes me as tremendously short-sited.? They went for weeks in the busy holiday shopping season without any demonstration models in their stores just to increase quarterly deliveries by maybe a fraction of a percent.? Elon Musk and Tesla seem to expend an inordinate amount of energy trying to get short-term boosts in the stock price.? The only other person who spends as much time on twitter pumping stock prices is Donald Trump, who IMO shares a number of personality traits with Musk.
  • The market apparently does not care one bit that the Tesla makes promise after promise that are not only broken, but entirely forgotten.? The Semi, the roadster, battery swap, a million robotaxis by 2020, a thousand solar roofs per week in 2019 -- all these promises and more were introduced to much fanfare and stock pumps and then promptly forgotten by all.? Each new promise that comes out, no matter how unbelievable it smells, is treated by the stock market as an occasion to run the stock up another 20 points.
  • The Tesla acquisition of SolarCity was at least as corrupt as I thought it was at the time it happened.? Recent disclosures in the shareholder suit challenging the SolarCity acquisition as a bailout of the extended Musk family have confirmed that a) SolarCity was on the verge of bankruptcy when Tesla stepped in; b) despite the shaky financials and no other interested parties, Tesla paid a premium for the company with almost no negotiation and c) for at least 2 years afterwards Tesla was essentially shutting down that business, doing fewer installations every quarter and closing sales locations.? Then, in the same week that Musk was deposed in the shareholder suit, Tesla began announcing new solar roof initiatives and making more Musk-like promises of huge future growth.? I am convinced this activity is a sham meant to give Musk the ability to truthfully testify that Tesla is committed to the solar business, and that all this activity will go the way of the Tesla Semi and battery swap once the trial is over.? From recent prototypes it does not appear that Tesla has solved the long-standing installation issues of solar shingles and that at the currently-promised pricing Tesla will lose thousands on every installation.
  • Tesla's biggest mistake IMO is still the lack of a 3rd party, well-capitalized dealer network.? Tesla is the only major auto manufacturer that refuses to participate in JD Power satisfaction and reliability surveys, so we don't have super-good satisfaction data, but the little data we have seems to point to massive reliability and service problems with Tesla cars.? I had thought that 2019 would be the year that such problems would hit the mainstream press, but apparently not.? Part of the reason Tesla is able to hide these problems is the codependent relationship they have with Tesla owners.? Tesla message boards are full of posts that begin "I love my Tesla, but..." and then go on for 3 pages describing product defects and the impossibility of getting service.? From time to time Musk will promise huge new service investments -- particularly just after a blue check mark complains on Twitter -- but all evidence is that they greatly grew their installed based of cars in 2019 with only tiny investments in their service network.
  • I was mostly happy that Vern Unsworth lost his libel suit against Musk for calling him a pedo.? Look, Musk acted like a totally entitled pr*ck in the whole affair, but there are important reasons to keep a very very high bar on libel.? For $TSLAQ fans who are now mad at me for giving even this slight accommodation to Musk, imagine that the US had a much lower bar for libel suits.? Which thin-skinned billionaire CEO of an overvalued automobile manufacturer would likely be first to take advantage of this regime and weaponize the courts against his critics?

Postscript:? I will add a note that people seem unable to separate the company's valuation from how much they like the products.? Certainly Apple has wonderful products AND is a very valuable company.? But this does not have to be the case.? WeWork rents beautiful offices -- heck, it turns out they are giving me $10 of office for every $5 I pay, what's not to love? But it was and still is overvalued as a company because it has no reasonable plan to ever make money.? So saying that Tesla makes great cars or Tesla cars suck are both largely irrelevant statements to my thinking about whether $tsla stock is overvalued.? My personal view is Tesla could have been a nice niche automaker and is probably worth $10-$20 billion -- at which price they might get purchased by another major auto maker.

Postscript #2: I have explicitly left out discussion of Tesla autopilot.? There is no question it has been overpromised and oversold, but I can't quite form an opinion on whether it is safe.? I personally would not trust my own safety to a self-driving technology that did not include LIDAR -- there are just too many ways for a vision-only system to make mistakes.? Tesla AP clearly has made mistakes and hurt and killed people.? Alert drivers make mistakes that hurt and kill people.? I don't know which is more prevalent, though one can be suspicious of Tesla when it does not really make it easy to analyze the data on this and produces clearly flawed analyses.? ?I certainly don't trust Tesla AP just because of the aura of Elon Musk supposedly being a genius, because I am pretty certain he is not? (things like the hyperloop I DO have a lot of background to understand and its a joke).? As a libertarian I don't want to see the government restricting the hell out of self-driving development and progress with stacks of regulations, and I refuse to call for such regulation just because it would help the value of a Tesla short position.? As should now be clear, I have limited knowledge and mixed feelings on the topic, so I avoided it in the main body of the post.

The US Has the Least Poverty In the World -- Here Is How Metrics Are Crafted to Hide That Fact

A few weeks ago Matt Yglesias published a tweet (since deleted, which I don't totally understand as I thought it was pretty innocuous from a Progressive viewpoint) saying that he wanted to spend more time focusing on "relative child poverty."? What the heck is "relative" child poverty?? I want to spend a bit of time discussing why this is a useless metric, helpful only if one want to try to sell socialism in the US.

Relative child poverty is a metric based on the country's median income -- how many kids live in families with income that is X% of the median.? Here is an example (source):

If you click on the source, the headline presents this as "These rich countries have high levels of child poverty."? ?The implication is that the US has more child poverty than Latvia or Poland or Cyprus or Korea and only slightly less child poverty than Mexico and Turkey.? But does it really mean this?? No.? This chart is a measure of income equality, NOT the absolute well-being of children.

Many of the countries ahead of the US are there not because their poor are well off, but because their median income is so much lower than ours. In fact, you will notice the lack of African and Asian countries in this. I will bet a lot of money that certain countries in Africa and Asia everyone knows to be dirt poor would beat out the US in this, thus making the bankruptcy of this metric obvious.

Take Denmark in the #1 spot. It looks like 20% more kids in the US live in poverty than in Denmark. But per the OECD, the US has a median income 41% higher than Denmark. So what it really means is the US has 20% more kids living under an income bar that is set 41% higher.? How can this possibly have any meaning whatsoever, except to someone who wants to make the US look bad?

The chart below does the same thing -- it has nothing to do with absolute well-being, but defines poverty as living below some percentage of that country's median income. In this metric, a country where everyone equally made only $1000 or even $10 a year would have 0% poverty!

Within the US, the same game is being played with poverty stats.? Despite decades of government income distribution and poverty programs, the stats appear to show that the US has nearly unchanged poverty rates.? ?But this is because the census data on which the poverty stats are based EXCLUDE government transfers -- in other words, they exclude the effect of many or most of these poverty programs.? When this and other issues are corrected for, US poverty rates have dropped to all-time historic lows (source)

Here is another study coming to a very similar conclusion.

One thing you never, ever, ever see is comparisons of the poor in the US to poor in other countries on an absolute well-being basis after transfer payments. That is because the bottom 10 or 20 percentile in the US are among the top half of richest people in the world, and in many nations they would be among the top 10%. It is possible to make these comparisons, though. I did so several years ago from a data set I saw Kevin Drum using (ironically to try to make the point the US is worse than Europe, again by using relative poverty numbers).? I am sorry this data is old, but there is a long time-delay in the data source itself and I have not updated the analysis for a couple of years (on my to-do list, though).

Here are the US Bernie-Socialist favorites Denmark and Sweden:

I know progressives would argue that if you take more from the right end and give it to the left end, our poor would be even better off. But we have a control group for this -- Including Sweden and Denmark -- and that is clearly NOT the result one gets.? The problem with this theory is that forcible income redistribution policy and economic growth / prosperity are not independent variables. When you redistribute the pie, you get a smaller pie.

If one wishes to compare poverty across countries, the way to do it should be to compare the disposable incomes after taxes and transfers (adjusted for PPP) of the 10th or 20th income deciles in each country.? This seems obvious to me, after all we use the median (50th decile) income to compare prosperity across nations, so why not the same approach for poverty? But no one ever does it. My guess is the point is to exaggerate poverty in the US and understate it in socialist nations.

Update:? In related news:

Well, in 1820, 94 percent of the world’s population lived in extreme poverty (less than $1.90 per day adjusted for purchasing power). In 1990 this figure was 34.8 percent, and in 2015, just?9.6 percent.

In the last quarter century, more than 1.25 billion people escaped extreme poverty - that equates to over 138,000 people (i.e., 38,000 more than the Parisian crowd that greeted Father Wresinski in 1987) being lifted out of poverty every day. If it takes you five minutes to read this article, another 480 people will have escaped the shackles of extreme of poverty by the time you finish. Progress is awesome. In 1820, only?60 million?people didn’t live in extreme poverty. In 2015,?6.6 billion?did not.


Great Moments in Climate Prediction:2020 Disaster Predicted in 2004

I am working on a bit of a climate update in a post called something like "Dear Greta, the climate is not about to kill you."? But until then, just so you can calibrate the current hype, here was the hype from 2004.? Specifically, an article in Guardian February 21, 2004:

A secret report, suppressed by US defence chiefs and obtained by The Observer, warns that major European cities will be sunk beneath rising seas as Britain is plunged into a 'Siberian' climate by 2020. Nuclear conflict, mega-droughts, famine and widespread rioting will erupt across the world.

The document predicts that abrupt climate change could bring the planet to the edge of anarchy as countries develop a nuclear threat to defend and secure dwindling food, water and energy supplies. The threat to global stability vastly eclipses that of terrorism, say the few experts privy to its contents.

'Disruption and conflict will be endemic features of life,' concludes the Pentagon analysis. 'Once again, warfare would define human life.'...

Already, according to Randall and Schwartz, the planet is carrying a higher population than it can sustain. By 2020 'catastrophic' shortages of water and energy supply will become increasingly harder to overcome, plunging the planet into war. They warn that 8,200 years ago climatic conditions brought widespread crop failure, famine, disease and mass migration of populations that could soon be repeated.

Randall told The Observer that the potential ramifications of rapid climate change would create global chaos. 'This is depressing stuff,' he said. 'It is a national security threat that is unique because there is no enemy to point your guns at and we have no control over the threat.'

Randall added that it was already possibly too late to prevent a disaster happening. 'We don't know exactly where we are in the process. It could start tomorrow and we would not know for another five years,' he said.

Of course being wrong then does not mean the same folks are wrong now, though it is amazing that being wrong over and over does not seem to dent these folks' credibility one bit in the media.? You would think there might be one journalist who would ask, "you keep predicting climate disaster, and it always remains 10 years away.? What's up with that?"

As always, my advice to you on climate is to be a good consumer of information.? Specifically, when the media claims a trend, look for the trend data.? And if they claim a long-term trend, check to see if the trend data is long-term.? You will be amazed how often the media will claim a trend from a single data point.? ?I will soon do an update on four of the most hyped climate "trends" -- hurricanes, droughts, crop failures, and sea level rise -- and show that the first three have no trend (or an improving trend) and the fourth, sea level rise, has a trend but that trend has been existent since before 1850, long before most manmade Co2 was put in the air.

A Proposal for Princeton and Other Ivy League Admissions -- Lottery 20% of the Spots

The Varsity Blues admissions scandal along with the lawsuits by Asian Americans against Ivy League schools' admissions processes have brought new scrutiny to private university admissions standards.? I was thinking about a small proposal to respond to this scrutiny that particularly falls on legacy, large donor, and athletic admissions.? I think this proposal would help restore some trust in the process.

I have a lot of problems with my alma mater Princeton and their admissions, so much so that I have dropped out of the recruiting process after participating in it as an interviewer for 20 years.? But one good thing that they and others have done is to apply some of their massive endowment to allowing need-blind admissions, and more recently, to making all financial aid grant-based so that kids can graduate debt-free and do whatever they like with their education, irrespective of how much money it makes.

Here might be a next step:? Draw a line in the admission pool designating kids (by grades and test scores) who we might designate as "Ivy-ready."? Many of these kids will not get admitted, because there are too many of them.? Most won't have the extra-curricular activities? or sports or alumni connections or rich donor parents that differentiate the 1450 SAT that got in and the 1450 SAT that did not.? ?In current parlance, all of these resume items are likely markers of privilege (including the extra curricular activities, many of which are driven by knowing parents more than real interest).

Proposal:? Save 20% of the spots.? After the other 80% are allocated by the traditional means, throw all the other folks who clear the Ivy-Ready line and throw them in a lottery and lottery the final spots.

Of course, these 20% will have to be freed up from current uses.? Princeton just had a 20%-ish increase in class size by building more residential college capacity, and I wish they had adopted this approach at the time.? I am not sure where it would come from, but my personal starting point would be athletic spots.? I think the Ivies spend way too many resources (including most especially valuable admissions slots) trying to be more competitive at college athletics.? And I say this despite my son having been a student-athlete at Amherst College.? (By the way, tiny Amherst uses so many admissions spots on athletes that pretty much everyone on campus is one.? The kids actually have a term "NARP" -- non-athletic regular person -- for the few unicorns not actually on a varsity team.)

Why Single Payer In the US Will Not Necessarily Lower Costs

A few days ago I wrote a multi-part tweet on the topic of whether single-payer in US health care would necessarily lower costs.? Twitter is a frustrating medium not only because of the short length but also because many critics just read the first tweet in the string (with the summarized hypothesis to be discussed) and comment without reading the rest.? That is probably why I got many comments like "but European single-payers get better pricing" as if I did not spend a number of tweets on exactly this topic.? So I will go back to my old medium of blogging to deal with this complex topic.

As a thought-starter, let's think about another industry where the US government is the single-payer in a complex industry that is a substantial part of GDP:? Defense.? The US government has always been the single payer in the defense industry and I think it isunlikely most of use think the US government gets particularly good pricing in that industry.? I have seen that a number of folks have instinctively rejected this analogy, without giving any specifics about why they do so, but I want to observe here that in fact Defense may have better price dynamics than single payer for pharmaceuticals, as at least in defense there are multiple sellers to play off against each other.? I am not going to insist on this analogy, and will provide another analogy later that I think is perhaps more apt, but I would challenge the reader to name a field where the US government is a single payer -- not a large payer in a larger market but the single only payer -- and gets better pricing than might be had in a free market.

A single-payer system eliminates market pricing and all the enormously valuable information that those prices contain.? In a real market, prices are set based on the knowledge and preferences and expertise of millions of people. In single-payer, you lose access to all that.

For this post I am going to focus mainly on pharmaceutical prices in large part? because, from observing the Twitter comments, that is what most folks seem to think about first as an area for cost reduction under single-payer.? I will return at the end to a discussion of other health care costs under single-payer.? ?I am also going to entirely avoid discussion of the many supply-side restrictions in the US healthcare system -- from pharmaceutical approval to physician licensing to hospital certificates of need.? I want to look primarily at the supposed beneficial (in some peoples' minds "huge") price reductions that might flow from single payer negotiating leverage.

Before I do that I want to discuss the misuse (IMO) of the term "economies of scale" in this discussion.? In my mind "economies of scale" refers to a real reduction in unit costs from an increasing volume.? In most cases, this is not what we are talking about with single payer.? There is nothing from single payer, to my understanding, that actually reduces the development, production, and distribution costs of pharmaceuticals.? I know folks like to point to the elimination of private insurance companies as a cost saving, but I find that hard to believe.? Most of the functions of the private insurance company would have to remain and profit margins in health insurance are tiny, on the order of low single digit percentages of premiums.? Eliminating these profit margins could theoretically save a few percent on costs, but only if one assumes that the government is just as efficient on claims processing and management.? One might get rid of some marketing costs, but the government has found under PPACA that communication and education costs, essentially not much different from marketing, have been pretty substantial.

The main potential advantage of single payer for pharmaceuticals is not one of economy of scale but of negotiating leverage.? ?With negotiating leverage, larger buyers can try to extract discounts vs. what other smaller buyers pay.? Certain countries like Canada have certainly been able to do this with pharmaceuticals purchased by their state health care systems.

For all those who want to point this out to me as if I don't know it, I freely stipulate that it is true.? To understand what is going on, let's take a step back.? Pharmaceutical prices will theoretically include three portions:

  1. Variable cost of actually manufacturing and distributing the pharmaceutical.? For many drugs, even expensive ones, this can be relatively low
  2. Fixed cost of developing the pharmaceutical and getting it through testing and approval.? This fixed cost also will contain a share of the costs of failed drug development efforts, just like one producing oil well has to cover the cost of the 10 dry holes drilled before oil was struck.? These fixed costs can be very very high
  3. For drugs still covered by their patents, a profit from having a monopoly position, which we allow to incentivize new drug and medical procedure development

Most US pharmaceutical makers treat the US as the main market for recovering 2 and 3.? They are willing to treat foreign markets and incremental, and price their drugs (either directly or via the licensing fees they charge) closer to marginal cost without full cost recovery.? This is in part because many other countries negotiate, and the US mostly does not -- Medicare has restrictions on pharmaceutical price negotiation and drug companies have limited negotiating leverage.? If you wonder why the latter is so, it is because insurance companies are required by law that they must buy a lot of these pharmaceuticals.? One's negotiating leverage against a single monopoly seller is extremely restricted if one cannot walk away and the seller knows it.

I have for years supported laws allowing drug re-importation from other countries.? I see no reason why US consumers should tolerate essentially subsidizing drug development for the rest of the world.? By the way, if you don't accept my cross-subsidy picture, watch what happens in the rest of the world if the US were to adopt drug re-importation laws.? My guess is that the other countries would ban their export, because they know such policies would serve to reduce the cross subsidy, lowering US prices but raising prices in their countries.

To understand my concerns over cost control in US single payer, let's think about negotiation at Walmart.? It is well known that Walmart uses its huge market size to get large discounts from suppliers.? In part, these discounts could be related to true economies of scale (ie if you are a niche seller and not yet in Walmart, getting into Walmart could drive huge new volumes for your product).? But for companies like Coke, Walmart's main leverage is the threat to walk away, or at least to give less shelf space, to your product.

But forget the leverage and negotiating strategy for a second, how does the negotiation actually go?? As I imagine it, Walmart does some research and finds the lowest price they can find Coke selling to anyone else is X.? They will then turn to Coke and say we want 10% off X.? The key point is that the negotiation begins in reference to an existing market price.? ?I will bet that's how you negotiate for a car, or for anything else.

But they key question is: "What happens when there is no market price."? I am the last one to say that US health care markets, with all their various inefficiencies and interventions, is anything like a free market, but there is still some sort of market there.? I would argue that if the US goes single payer, that will essentially end the only market for drugs and other health care services in the world.? How do you negotiate if there is no market price to start from?? What does negotiating leverage even mean in that situation (again, consider the Defense example above)?

I suppose for some years negotiation for pharmaceuticals under single payer will be in reference to the old, pre-single-payer price.? But that reference can only be meaningful for so long.? And how does one use negotiating leverage for an entirely new product?

Let's say a new drug comes along that's a better treatment for gout.? There is no market price or price history.? No one has ever bought it or sold it.? What does your negotiating leverage even mean?? There is no market price, so how can you get a discount?? You could say that you want a discount off list, but the inventor could just name the list price arbitrarily high.? You could ask to see their cost accounting but anyone who has ever made the mistake of taking net profit points in a movie can tell you that cost accounting can be gamed endlessly.

This is basically the situation in government defense procurement.? They can theoretically use their negotiating leverage to get a better price for hammers or sidearms, because a market price exists for those set by many other individual buyers. But how does it use its negotiating leverage for a Patriot missile?

And remember, the only way that negotiating leverage has any power is if one is willing to walk away from the table.? At some point, the single payer has to be willing to say, "F it, if that is your best price for Humira, we aren't buying any (and thus no American can have any)."? Does the government really have the ability / cojones to do this and make it stick?? After all, one reason why insurance companies overpay for a lot of medical procedures is that they HAVE to pay for it, by law.? They cannot walk away from the table.? Imagine negotiating for a car if next time the dealer you are buying from knows you have to leave the store that day with a car.? You are not going to get a very good price.

The situation is slightly different in other health care payments, such as to providers.? But this is only true because there are multiple providers and provider groups in a given area.? And here the negotiating leverage is still the same, the threat to walk away.? And in fact we have seen this, with low cost PPACA plans offering very limited networks -- essentially they have walked away from higher cost suppliers.? Note that this really pisses off consumers, and is one of the reasons they say they hate insurance companies, so its not clear if there would be the political will for the government to do the same thing as single payer.? Also note that providers and banding together into larger and larger provider groups -- essentially in this great game of monopsony and negotiation they want to grow to be too large and comprehensive to walk away from.

The likely outcome is to turn pharmaceuticals and other medical suppliers into regulated utilities.? In electricity, the government essentially acts not quite as single payer but in a very parallel role as single price negotiator.? They negotiate the prices to be paid for all consumers in their state or region.? They are negotiating as the single buyer with a company that is a monopoly provider.? This situation faces all the issues we discussed above, basically a negotiation without any market price reference.? So most governments regulating utilities choose an approach where the utility opens its books and sets prices so that the utility gets a minimum return on capital but not any "excess" profits.? ?In theory, they try to get the lowest price they can that still ensures that private capital will still have an incentive to flow into the company.

There are a number of problems with this approach vis a vis pharmaceuticals and other health care purchases

  • Its not at all clear it achieves a lower price than in a freer market.? Certainly non-regulated cogen companies in California have made a lot of money selling electricity below the regulated rates
  • There is little incentive for innovation.? Regulated utilities make the most money when they do nothing new or risky.? This may be OK in electrical generation, but it is not great for drug development.
  • There is a lot of potential for cronyism.? Even in electrical rates, certain politically favored groups get lower rates subsidized by less influential groups.? Military procurement often leads to bad decisions driven more by lobbying than reason.? In health care, changes in reimbursement rates in Medicare are already subject to immense political gamesmanship -- for example, the famous annual Congressional "doc fix" battles.

Of course the government could just fix prices by law at some low level, or even seize all pharmaceutical patents and offer drugs close to marginal cost (which tends to be low).? This might work great if you are perfectly happy with the medical treatments available today and want nothing new.? But if innovation is a concern of yours at all, this would obviously kill it (not to mention drive a lot of providers out of the business, reducing demand and increasing wait times to those of .. all the other single payer countries).

While the choice not cut off future benefits just to get current stuff cheaper may seem a no brainer to many of you, I would argue that many Progressives, whether from risk aversion or a lack of ability to perceive opportunity costs, might well take this deal.? Its a sort of Directive 10-289 solution and a preference I discussed way back in 2004 (yes, I was blogging at this same site then).

Ironically, though progressives want to posture as being "dynamic", the fact is that capitalism is in fact too dynamic for them.? Industries rise and fall, jobs are won and lost, recessions give way to booms.? Progressives want comfort and certainty.? They want to lock things down the way they are. They want to know that such and such job will be there tomorrow and next decade, and will always pay at least X amount.? That is why, in the end, progressives are all statists, because only a government with totalitarian powers can bring the order and certainty and control of individual decision-making that they crave.

Progressive elements in this country have always tried to freeze commerce, to lock this country's economy down in its then-current patterns.? Progressives in the late 19th century were terrified the American economy was shifting from agriculture to industry.? They wanted to stop this, to cement in place patterns where 80-90% of Americans worked on farms.? I, for one, am glad they failed, since for all of the soft glow we have in this country around our description of the family farmer, farming was and can still be a brutal, dawn to dusk endeavor that never really rewards the work people put into it.

This story of progressives trying to stop history has continued to repeat itself through the generations.? In the seventies and eighties, progressives tried to maintain the traditional dominance of heavy industry like steel and automotive, and to prevent the shift of these industries overseas in favor of more service-oriented industries.? Just like the passing of agriculture to industry a century ago inflamed progressives, so too does the current passing of heavy industry to services.

I understand the large numbers of people are concerned about the potentially bankrupting effects of a major medical condition.? The problem is that people keeps suggesting solutions that don't actually solve the problem, or make things worse.? I have suggested an intervention here that preserves much of the health care market while protecting folks in the case of major medical conditions.

Uber Takes Another Body Blow

Waaaay back in April of 2015, I prophesied that California's efforts to turn Uber drivers into employees would kill Uber, though it would take some years to bleed out.? California has since embodied that court ruling into law (a law which Uber is currently ignoring).? Now, New Jersey is going after Uber:

Two months after Uber?decided to ignore new?ignore new California legislation requiring companies to reclassify contract workers as employees - a measure which would affect up to one million residents who work as contractors and drastically impact Uber's bottom line - more states are lining up to demand a pound of flesh from the world's formerly most valuable startup (and subsequently one of the year's worst IPOs).

On Thursday, New Jersey picked up where California left off and found that Uber owes the state about $650 million in unemployment and disability insurance taxes because the rideshare company has been misclassifying drivers as independent contractors, the state’s labor department said.

As Bloomberg reports,?Uber and its subsidiary Rasier LLC were assessed $523 million in past-due taxes over the last four years, the state Department of Labor and Workforce Development said in a pair of letters to the companies.?The rideshare businesses also are on the hook for as much as $119 million in interest and penalties on the unpaid amounts, according to other internal department documents.

The New Jersey labor department has been after Uber for unpaid employment taxes for at least four years, according to the documents, which Bloomberg Law obtained through an open public records request. The legal battle goes back to 2015, when New Jersey first informed Uber that it had obtained a court judgment ordering the company to pay about $54 million in overdue unemployment and temporary disability insurance contributions. It’s not clear whether the company ever paid any of that bill.

The tax issue in my mind is not the biggest problem.? I still think that the worker "protections" states are starting to insist Uber adopt (e.g. minimum wage, shift lengths, shift scheduling, etc) are death for their whole labor model, and in fact will hurt most of their workers by killing what attracted drivers to Uber in the first place.? To summarize that article, there is a huge irony in that for decades labor advocates have been decrying the loss of agency by hourly workers in a capitalist economy.? Uber has given its drivers agency they don't have in almost any other hourly job, and labor advocates are doing all they can to kill it.

Phoenix Light Rail Fail, 2019 Update

To the surprise of no one who reads this blog, Phoenix Light Rail continues to fail at every goal it set for itself, despite over $2 billion in cumulative expenditures and over 10 years of time to "catch on."? In fact, the only goal it has succeeded in is to allow our local leaders to virtue signal with their peers that they have a "modern" transit system, "modern" for some reason defined as increasing the use of a 150-year-old transit technology.

Here are the numbers, relatively fresh from Valley Metro's ridership reports.? Valley Metro has stopped (for reasons likely to become clear in a moment) publishing long-term ridership trend charts, so I have made my own from their data.

The original Phoenix light rail line cost about $1.4 billion.? The one line was expanded midway through the 2016 fiscal year by 31% in length and 36% in cumulative dollars spent (to very little obvious effect).? To date, well over $2 billion has been spent on the line.

What we can see here is exactly what Randall O'Toole of Cato has been saying for years -- that light rail projects tend to actually hurt total transit use as they scavenge resources from other modes, like buses.? This is because light rail costs so much more to move a passenger, both in terms of capital investment and operating cost, so $X shifted from buses to rail reduces total system capacity and ridership substantially.? We have seen this in Phoenix, as light rail costs have forced closing or reduced services in a number of bus routes, with obvious results in the ridership numbers.

There are a couple of ways to look at the ridership numbers and our $2+ billion light rail investment.? First, this investment has gained us an additional 1.25 million round trips on the system, at a capital cost of $1600 per added annual round trip ($2B divided by 1.25MM).? ?For someone who commutes 250 days a year, this means the Phoenix taxpayer has spent $400,000 per incremental daily commuter on the system.? I used to predict that we could more cheaply buy every rider a Prius with the money we spent on the system, but I obviously underestimated how bad it was.

Another way to look at this is that in fact we did not increase ridership at all, but decreased it.? From 1997 to 2008 the system increased ridership by an average of 5.6% a year.? Had the same growth rate obtained for the last 11 years since light rail was put in place (and certainly Phoenix has continued its fast growth in this period) the ridership of the system should have been north of 110 million trips a year.? By this metric, we spent $2 billion to shift to a costlier, less flexible transit mode that lost us 45 million annual trips.? Even if transit had just grown with population we should have seen 80 million or so trips in 2019.

The problem with light rail (and the reason it is popular with government officials) is that it is an upper middle class boondoggle.? There can be no higher use of transit than to provide mobility to poorer people who can't afford reliable automobiles.? Buses fulfill this goal better than any mode of transit.? They are flexible and can reach into many corners of the city.? The problem with buses, from the perspective of government officials, is that upper middle class people don't like to ride on them.? They like trains.? So the government builds hugely expensive trains for these influential, wealthier voters. Since the trains are so expensive, the government can only build a few routes, so those routes end up being down upper middle class commuting corridors.? As the costs mount for the trains, the bus routes that serve the poor and their dispersed commuting destinations are steadily cut.

Some of my other posts on Phoenix light rail are here.? As you can see from this 2008 article, I am not just a Monday morning QB but predicted exactly this failure in advance and explained why from data.

Family Blogging Updates

My sister has a podcast that seems to be doing well on theater and its potential trans-formative effect on people and communities.? The Princeton Alumni Weekly wrote about it here.

My son has a blog on economics as applied to Sci Fi/Fantasy realms and board games.? ?Having survived a period of sometimes nearly debilitating OCD issues, he is also writing about what he learned, eg here.

My daughter continues to work through art school (which is like a million times more work than my engineering degree, shattering a lot of stereotypes I had).? She has updated her portfolio here.

Creating Conspiracies By Reading History Backwards

Sorry for the absence, I have taken a bit of vacation and simultaneously been consumed in a deluge of interest for our company's new offerings.

I saw this story a while back, titled "Japan's General Staff Office Knew About Hiroshima and Nagasaki Atomic Bombing in Advance and Did Nothing, According to 2011 NHK Documentary"? I am only going by the author's summary because I can't understand the Japanese original, but this fits in with a whole class of revisionist history of which I have written before.? A historian digs through piles and piles of intelligence reports and decrypts and finds 2 or 3 that seem to point in advance to some catastrophic event in advance of that event.? A classic example was the revisionist claim that FDR knew in advance of Pearl Harbor but willfully ignored the warnings because he wanted a reason to pull isolationist US into the war with Germany.? More recently, whole conspiracy theories rest on similar hints that the GWB White House knew about the 9/11 attacks in advance.

The problem with all these theories is that they are reading history backwards.? Intelligence agencies weed through thousands of rumors, decrypts, and hints every day.? The historian can wade through this mass and latch onto the couple of correct and prescient such rumors because she knows how history turns out.? She knows Japan bombed Pearl Harbor so she knows how to jump right to the needle in the haystack.? But officials at the time had no such foreknowledge.? Sure there may have been hints of attacks on 9/11 but there were also likely hints that turned out to be incorrect on scores of other potential plots and attacks, plots that would have (at the time) looked no more or less realistic than a hinted attack on 9/11.

There is a related problem that is a pet peeve of mine related to probability.? Let's say I offered you a 50/50 bet that you would win if a 6-sided die came up 1-5 but lose if the die came up 6.? Clearly, all day long the right decision is to take the bet.? But then imagine you took the bet and the day came up 6.? Was this, in retrospect, a bad decision?? I would argue absolutely not, you made a great decision that simply did not work out this one time, but over time making similar decisions will be a winner.? On the flip side, imagine someone who took the opposite side of the bet, a 50/50 bet that only pays off with a 6.? If a 6 comes up, did they make a good decision?? Absolutely not.? It was a terrible decision that they got bailed out on by luck, but over time they are going to bankrupt themselves.

These may seem like contrived examples, but I see exactly this sort of bad analysis all the time of risky decisions taken in an array of fields from sports to business.? I am sorry, but a football coach that goes for it on 4th and 8 from his own 30 and makes a first down did NOT make a good decision, despite the fact it worked out okay this one time.? But almost everyone in the media brings a retrospective bias to analysis of such decisions, rating them a good decision if they worked out all right and a bad decision if it did not work out all right, irrespective of whether the decision, when made, made a lick of sense.

Illustrating the Corruption in Climate Science

Long-time readers know that while I believe the evidence for warming over the last 100 years is strong, the evidence of negative knock-on effects from this warming (hurricanes, tornadoes, sea level, etc) is really weak, often the weakest part of an climate report.? Here is one example.

In the most recent National Climate Assessment written by our betters in the US Government, this chart was used to illustrate increasing hurricane intensity.

I will begin with the positive:? The use of a metric for total hurricane energy rather than something like hurricane counts or landfalls is a huge improvement over past reports and a much better metric to test changes over time in hurricane frequency and intensity.? Now here is the bad news -- the North Atlantic hurricane date is based on a cherry-picked time interval that creates a trend where none exists, and the authors HAD to know it.? ?The odds that this is just sloppiness or incompetence rather than outright obfuscation are low.

Pat Michaels had Ryan Maue (the scientist who creates most of the hurricane intensity databases) calculate this same metric back to 1920.? This is what the chart looks like, with the cherry-picked dates in the Assessment chart shown in red

That red trend line is just as dishonest as can be.? It is super hard to see any sort of long term trend here, just a multi-decadal cycality that hurricane scientists used to acknowledge before they started extrapolating individual sine waves into long-term upward trends.? This is particularly true since the advent of many new hurricane observation tools, such as aircraft and space photography, mean that numbers before 1960 may well be underestimated.

In fact, when you look beyond just the North Atlantic and look at all the world's oceans, there is not even a trend in hurricane intensity over the period since 1970? (accumulated cyclonic energy is a slightly different but related way to measure the time integral of hurricane intensity).

Unicorns and the Societal Benefits of Short Selling

I will refer you to my post last December on how much of society seems to hate short-sellers, and on some of the virtues of short selling.

For this post I just wanted to make a more narrow point -- one reason that unicorns (private startups with valuations north of $1 billion) like WeWork and Uber and Peloton had their valuations get so out of whack is because there is no way to short stocks in the private equity world.

Companies like Lyft and Uber and WeWork have seen private funding rounds at ever-increasing valuations.? These are done outside the accountability of the broader market and untethered to any sort of normal valuation metrics like earnings or even revenues.

Lots and lots of investors, perhaps the vast majority of them, believed that the last private round that valued WeWork at $45 billion was insane.? Many folks, including myself, would have gladly shorted the stock at this price had we been able.? Heck, many of us would have shorted back at $10 and $20 billion valuations for the company.? Because there is no short selling in this private equity world, unicorn valuations are +based on information from a very limited number of the most optimistic company supporters.? And because of this faulty price discovery, billions of capital that could be doing something more productive have been wasted in many of these companies, poured into business models that don't work or, worse, the tequila and drug fueled Gulfstream flights of the founders.

As I wrote over a decade ago, short selling broadens the group of people who can "vote" on a company's value

At the start of the bubble, a particular asset (be it an equity or a commodity like oil) is owned by a mix of people who have different expectations about future price movements.? For whatever reasons, in a bubble, a subset of the market develops rapidly rising expectations about the value of the asset.? They start buying the asset, and the price starts rising.? As the price rises, and these bulls buy in, folks who owned the asset previously and are less bullish about the future will sell to the new buyers.? The very fact of the rising price of the asset from this buying reinforces the bulls' feeling that the sky is the limit for prices, and bulls buy in even more.

Let's fast forward to a point where the price has risen to some stratospheric levels vs. the previous pricing as well as historical norms or ratios.? The ownership base for the asset is now disproportionately made up of those sky-is-the-limit bulls, while everyone who thought these guys were overly optimistic and a bit wonky have sold out. 99.9% of the world now thinks the asset is grossly overvalued.? But how does it come to earth?? After all, the only way the price can drop is if some owners sell, and all the owners are super-bulls who are unlikely to do so.? As a result, the bubble might continue and grow long after most of the world has seen the insanity of it.

Thus, we have short-selling.? Short-selling allows the other 99.9% who are not owners to sell part of the asset anyway, casting their financial vote for the value of the company.? Short-selling shortens bubbles, hastens the reckoning, and in the process generally reduces the wreckage on the back end.

I am not advocating some goofy plan to bring short-selling to private equity.? What I am saying is that prices set in markets with a robust ability to sell short are going to be much more trustworthy than prices set where short-selling is not an option.

Sustainability Is Baked Right Into the Heart of Capitalism

A while back I was having a back and forth on Twitter with a Tesla supporter.? They had said that Tesla was the poster child of sustainability, I presume because since Teslas are electric that they are presumed to use less energy and produce fewer emissions.? I learned a long time ago not to try to have discussions with Tesla supporters on energy consumption -- even if the fan in question understands that electricity is not magic pixie dust summoned for free out of nowhere, they seldom understand issues with geographic variability of electrical generation sources or the difference between electrical sources for the average vs. marginal incremental load.

So I just said the company can't be very sustainable because it spends far more than it earns, ie it consumes more valuable resources than it produces (a ratio made even worse if one factors in all the taxpayer subsidies the company consumes as revenue).? The person I was tweeting with replied that this fact had nothing to do with environmental sustainability.

I would argue that financial stability has everything to do with environmental sustainability (though I will admit that this comparison is a bit hard since environmentalists seem to bend over backwards to NOT define "sustainability" very precisely).? In fact, I think that sustainability is baked right into the heart of capitalism.

The reason for this comes back to the magic of prices.? Of all the amazing, wondrous things we celebrate in the world, prices may be the most overlooked.? Just think of it: with no governing structure or top down ruling board, a single number encapsulates everything most everyone in the world knows about a particular product: both its utility and relative scarcity, both now and as anticipated in the future.? It is a consensus derived voluntarily between millions of people who never meet with each other and likely never communicate with each other.

It is amazing to me that people who talk so much about their concern for scarcity tend to be the same folks who ignore prices and even eschew markets and capitalism.? But in prices we have a number that gives us a single metric telling us the world's consensus on the current and future scarcity of any commodity.

We do know that prices can miss some things.? Perhaps most relevant today, they can fail to include the cost of emissions (ground, water, air) associated with that commodities extraction, refining and processing, and use.? But compared to the effort of trying to create some alternate structure for managing product scarcity, this is a relatively simple problem to fix (simple technically, but not necessarily politically).? Estimates of these pollution costs can be added as a tax (e.g. a carbon tax on fossil fuels to take into account climate effects of CO2 emissions) and prices will continue to work their magic but with these new factors added.

Along these lines, Andres McAffee writes about some research work by environmental scientist Jesse Ausubel.? He writes in Reason:

In 2015, Ausubel published an essay titled "The Return of Nature: How Technology Liberates the Environment." He had found substantial evidence not only that Americans were consuming fewer resources per capita but also that they were consuming less in total of some of the most important building blocks of an economy: things such as steel, copper, fertilizer, timber, and paper. Total annual U.S. consumption of all of these had been increasing rapidly prior to 1970. But since then, consumption had reached a peak and then declined.

This was unexpected, to put it mildly. "The reversal in use of some of the materials so surprised me that [a few colleagues] and I undertook a detailed study of the use of 100 commodities in the United States from 1900 to 2010," Ausubel wrote. "We found that 36 have peaked in absolute use…Another 53 commodities have peaked relative to the size of the economy, though not yet absolutely. Most of them now seem poised to fall."

The charts are great and I encourage you to read the whole thing:

Postscript:? Going back briefly to Tesla, if the company consistently spends more money that it takes in, then it means the resources it employs could be used elsewhere more productively.? Talented people who design cars could be using those talents more productively at another car company.? Or defined differently, talented people who are passionate about saving the environment could have more impact working on something else that helps the environment.? Scarce (and environmentally suspect) cobalt and other Lithium ion battery resources could be used to more impact in other applications (many of which also may be to transition the world's energy economy from fossil fuels but do it better or faster).

I Think I Would Prefer to Pay Commissions

Several years ago, a new brokerage called Robinhood successfully began penetrating the millennial market for stock trading with a zero brokerage fee model.? In recent weeks, Fidelity, TD Ameritrade and Interactive Brokers have all followed suit (I have accounts with the latter two).? This sounds cool until one sits back and wonders how these companies expect to make money instead.

We know one way Robinhood does it -- they route consumer stock orders to large companies who pay for this order flow.

Payment for order flow is a decades-old practice that can be traced to the early years of electronic trading. It was?pioneered by Bernie Madoff?at his regulated securities firm. (He later became infamous for a multibillion-dollar Ponzi scheme he ran on the side.)

Read more: How high-speed traders are transforming the stock market?

Here's how it works: Retail brokers like Robinhood focus on recruiting customers and building the trading interface, but don't actually execute their clients' orders. They outsource that to firmsincluding Citadel, Two Sigma and?Wolverine Securitiesthat pay for the right to handle those trades. While?orders from large, sophisticated investors can burn the market maker who executes the trade, retail trades are considered relatively safe.

These firms earn a tiny bit of money off each transaction, often 1 cent or less per share. Some see payment for order flow as a critical piece of market infrastructure—facilitating the fast and cheap buying and selling of stocks. But critics of high-frequency trading have long argued that the practice actually hurts the little guy, to the advantage of large firms.

Federal rules dictate that brokers must seek the best execution for clients’ trades, but finding the best price possible is not necessarily a requirement. Consumer advocates say the system creates an incentive for brokers to route orders to the market maker that pays the most.

During last year’s fourth quarter, regulatory disclosures indicated that Robinhood shipped virtually all of its orders for stock trades to four high-speed market makers. The bulk was bought by Citadel, which paid Robinhood an average of “less than $0.0024 per share" on the trades it was routed in that quarter. Those small numbers add up—Robinhood’s users have executed more than $150 billion in transactions.

While companies like TD Ameritrade also accept money for order flow, these payments are far less than the ones helping to keep Robinhood afloat, though that may change now.

I am sure if I bothered to Google search, I could find articles and studies that go both ways as to whether this directed order flow costs a retail investor (in the form of a slightly worse transaction price) more or less than a $5 or $12 commission.? Here is my default on this, and it goes back to the saying that if you don't see the sucker at the poker table, then you are it.? If something is opaque in the financial world, it is not very likely it is breaking in favor of the retail investor.? As such, I would MUCH rather a cost a I see that is well defined than one I do not.

Why You Are Seeing All Those Videos of Teslas Wandering Dangerously Through Parking Lots

As I promised readers of this blog, I have mostly taken my Tesla obsession offline from this blog and, when I need to, scratch that itch on Twitter.? But there is an interesting story developing in the Tesla world that I think gets at the heart of the unseriousness, perhaps even amorality, of its management.? For those of you who follow all things $TSLAQ on Twitter, there is likely to be little new for you here.

When last I blogged about Tesla, it was struggling to still be the growth company that its equity valuation implied.? Last year I wrote a fairly comprehensive take on why I thought Tesla was done as a growth company (I argued, among other things, that Q32018 might be their high water mark -- remember that in a second).? That was intended to be my last post as my kids were worried about my obsessive behavior, but I just couldn't resist posting in May when Musk announced that Tesla was no longer really a car company and would be a robotaxi company by 2020 with a million automated rideshare vehicles on the road.

That was not the end of Tesla news this year.? Since that time it has become increasingly clear what I have said form the very day the acquisition of SolarCity was announced, that that transaction was a thinly-veiled bailout of Musk and his family to the detriment of Tesla shareholders.? And for added bonus points, Tesla was recently sued by Walmart when its SolarCity installations on the roofs of various Walmart stores started catching on fire and threatening to burn the stores down.? And I don't even think I have mentioned on this blog the Musk fake $420 buyout announcement or the Musk "pedo" lawsuit by the Thai cave diver hero.

So obviously I continue to be tempted out of my vow of silence.? And it is happening again.? Several days ago, in fact just before the end of Tesla's 3rd quarter, Tesla released by OTA update a "Smart Summon" feature in its cars, part of a package of autonomous driving features Tesla has promised for years and for which many Tesla owners paid in advance with their purchase (many years ago).

Smart Summon is a sort of automated car valet.? When one comes out of, say, the mall she can pull out the Tesla app, hit a button, and have their Tesla start up and drive itself to them.? ?Unfortunately, this feature sometimes works and sometimes is a real fail (here and here, for example).? Already people are reporting damage claims to their car when in summon mode, though Musk and his enablers in the hipster media claim its all operator error. This by the way is right out of the Musk playbook:? go on social media and hype Tesla autonomous driving uses that go beyond the terms and conditions, and then defend themselves in court that users violated the terms and conditions (Musk taking his hands off steering wheel in a 60 Minutes show demonstration and Musk retweeting people having sex in a Tesla while in autonomous driving mode are just two examples).

So why would Tesla release what appears to be at-best beta software that could easily lead to people getting hurt?? One reason is that Musk is totally steeped in the Silicon Valley "fake it before you make it" culture, all the way back to Paypal.? ?Given its paint and reliability issues, the Tesla Model 3 should arguably have been tested for much longer than it was before release, just as one example.? And certainly there was a lot of pressure on Musk as he has been promising this release as imminent for months, and some folks have been waiting literally years since they first paid for the feature to actually get it.

The problem with this is that there is a difference between the consequences of screwing up at Paypal and screwing up with a motor car.? A half-baked Paypal feature might have led to someone not being able to pay for their beanie baby they bought on eBay.? A half-baked summon product can lead to children getting run over (just as a half-baked Theranos product led to thousands of people with potentially life-threatening diseases getting false and misleading blood tests).? At some point there is going to have to be a reckoning of where to draw the line against this culture -- perhaps Tesla will give us that opportunity.

But I (and many others) think there is another reason this was rushed to market.? To understand this reason, we need to put together four pieces of data

  • Tesla has collected over a billion dollars in pre-payments for autonomous technologies like Smart Summon.? Because customers have not gotten an actual product, these sit on its balance sheet and have not been recognized as revenue in Tesla's financial reports.? Releasing Smart Summon could allow Tesla to recognize some of this billion dollars as revenue in the quarter it was released, which happens to have been, just barely, the third quarter.
  • In the third quarter of 2018, Tesla really starting selling the Model 3 in mass.? It had a big quarter as it worked through years of pent up orders, and a profitable quarter in part because it focused all its production on fulfilling only the highest margin variants in the order queue.? Remember what I said above -- because it was blowing through all its pent up orders and selling an unusually profitable mix, I predicted Q32018 might be its high water mark.? Even with record unit deliveries in Q32019, Tesla's revenue and profit is likely to be down year over year.
  • Tesla's stock, while down substantially over where it was a year ago, still trades at sky-high valuations for a company that is a) in the auto industry, which typically trades for very low multiples; and b) loses billions of dollars with little prospect of making any money.? The reason it has such high valuations is expectations of growth that Tesla fans have for the stock.? Obvious evidence of stalled growth could knock a huge percentage of the value off the stock, perhaps even driving it below Musk's margin call price.
  • In the SolarCity story linked above, we found out just how far Musk is willing to go and how many ethical corners he will cut to defend his investment in a failing growth company.

My hypothesis is that Musk demanded that Tesla rush release of Smart Summon, whatever condition it was in, to market before the end of the third quarter so he can book hundreds of millions of dollars of customer pre-payments as revenue in the quarter and perhaps prevent a year over year revenue decline.? Yes, that would be super cynical, but this is the man that essentially faked the solar shingle product in order to get Tesla shareholders to bail him out of his soon-to-be bankrupt SolarCity position.

Trade carefully.? As disclosure I am current short Tesla via long-dated put options.

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