A New Leaf

Stark comparison of Republican and Democratic tax plans by the Washington Post. It’s such a rare thing these days to compare tax proposals by looking at average benefit to an individual. So often it takes the form of “$X trillion tax cut will explode the deficit.” But at the end of the day, tax policy is complex – taxes affect different people in very different ways.

Reprinted here without permission:

A new working paper (pdf) by some prominent economists uses a unique education experiment in the 1980s in Tennessee to find that kindergarten class size and teacher experience have significant impacts on “adult outcomes” – among other things, the future earnings of the student about 25 years later.

The experiment randomly assigned kindergarten students to either small classes (~15 students) or large classes (~22 students). Most of the research performed on these data focus on test scores. The previous studies found a “fade-out effect” – the measurable test score bumps that students in small classes received in kindergarten reduced to near zero by later grades. This new study is surprising because it finds a significant effect that re-appears in adulthood. The small-class students were more likely to go to college, marry, purchase a house, contribute to a 401k, and they earned slightly more. Remember: this is kindergarten we are talking about.

Interestingly to me, the earnings bump is not very large for small classes over large classes. The “net present value” of the effect is about $11k per student. Not too shabby, but small compared to the almost $10k spent per student to reduce the class size in the first place. A much larger future earnings effect is found to be caused by teacher experience (and teacher “quality” as measured by test scores at the end of the kindergarten year). Their rough calculation shows that an extra year of teacher experience translated to roughly $62 of extra income per student per year – or a net present value of $34k for a class of 20 students. One might argue that by not giving kindergarten teachers annual raises of $34k, society is extracting a rent from these teachers – they are providing more long-run benefit than we are willing to pay them.

The other “explosive” result is that an above-average teacher is worth a lot more to society than a below-average teacher (as measured by kindergarten test scores). The 75th percentile teacher will increase the net present value of the 20 students in their class each year by $320,000 over the same class lead by a 25th percentile teacher.

On Friday, I reached a milestone of sorts at my local Starbucks: the barista retrieved my preferred drink without me having to ask for it. A small delight, not quite as great as asking for “the usual,” but close.

In my experience, barista-customer relationships at coffee shops evolve like so:

1. Default: the normal interaction of ordering, receiving, and paying; small talk rare.
2. Mutual Recognition: barista and customer recognize each other and treat one another with slightly more familiarity; occasional small talk; barista can sometimes anticipate the order, but still requires confirmation from customer.
3. The Usual Order: barista connects usual order to customer’s face – no confirmation required; possible variation: “Which will it be today: a latte or a cappuccino?”
4. Name Recognition: barista and customer know each other’s first names; frequent small talk.
5. Free Stuff: barista occasionally (but regularly) declines payment from customer; in some cases, social interaction between barista and customer occurs outside the coffee shop.

Coffee shops display this unique progression for a number of reasons: the habitual nature of coffee drinking (causing regular and frequent interaction), the inexpensive nature of the product (giving baristas occasional discretion in dispensing free goods), and the fact that the interaction typically happens in the morning (pre-work) or post-work evening (creating a bond between two souls – barista and customer – commiserating over the work they both hate). Most people never get past stage 1. Reaching stage 5 requires an investment of time and energy that few are willing to risk.

Over the years, I have been both a (profligate) stage 5 barista and a stage 5 customer, each with their own benefits. As a current stage 3 customer, I enjoy a bit faster and friendlier service, but nothing of much value. Stage 5 is the key: it brings real, measurable wealth.

The funny thing is, businesses figured out the “free stuff” fetish we customers have a long time ago, especially coffee shops. They even figured out how to profit from it: it’s called price discrimination. There’s nothing sinister about this kind of discrimination. It just means that businesses use clever means to charge a higher price to people willing to pay the higher price and a lower price to people who aren’t. Case in point: the free coffee card. Buy ten drinks (and collect ten stamps) and get one free. The people willing to go through the hassle of collecting ten stamps are clearly more motivated by the free stuff fetish – so they throw us a bone.

Starbucks has a different twist on this kind of loyalty program. Their “gold card” is a stored value card. You use a credit card to load money onto it, then for each transaction you pay for using the gold card, you get a star. For every 15 stars you collect, they mail you a coupon for a free drink. The brilliance of this system is that the stored value card transactions do not incur a credit card processing fee – they literally save a dime or more every time I pay them using their silly card instead of with my Visa debit card. They also get interest income on the balance that sits in my “account” before I get around to buying coffee with it. So everybody wins: they get a loyalty program that more than pays for itself and I get free stuff every once in a while.

If you dig around in the official Starbucks annual filings, you’ll find some other interesting tidbits. For example, Starbucks made $26 million in 2009 on card values that are unlikely to be redeemed – i.e. the 25 cents left on a card that hasn’t been used in 4 years, or whatever the rule is. The rule used is, of course, “determined by management.” Twenty-six million dollars is double the amount from the previous year. (This is likely one of their “cookie jar” accounts that Starbucks management can legally manipulate to beat their target earnings numbers. That’s another post for another day.) Total “deferred revenue” (which is where Starbucks card balances show up) amount to about $389 million.

Other businesses offer similar loyalty programs. Frequent flyers of particular airlines collect points, which they can use for free flights or, increasingly, merchandise or gift cards. Even debit cards are in the on points game these days. And these points have value – they can be exchanged for valuable things, after all, much like currency. The key is that airlines can control very carefully how and when the miles can be exchanged. Whereas Starbucks simply gives you a free drink of your choice, airlines institute black-out dates during which you cannot redeem miles for travel and can change the “price” of goods at a moment’s notice.

I can’t verify the numbers in this table, but they are roughly equal to other quotes from around the interweb. They show that the total outstanding number of airline miles was over 14 trillion (that’s a “t”) back in 2005 and growing at a nice smooth exponential rate. For a standard domestic 30,000-mile ticket, 14 trillion miles represents more than 450 million free tickets.

All that loyalty is starting to look costly. These airlines are carrying a huge liability (something they owe) in the form of airline miles. They wold love to reduce it somehow other than giving out all the free tickets owed. According to United Airline’s 2009 annual report, they did just that back in 2007 – reaping $246 million by simply changing the “inactive account” limit from 36 months to 18 months (see footnote (a) on page 44). United claims a total of $4.2 billion in “Mileage Plus deferred revenue” (page 76) – basically, the value of all those miles on the books, that they someday owe their customers for being loyal. This liability is more than the total shareholder deficit of $2.8 billion. In other words, if not for the frequent flyer program, United Airlines might be worth something.

In the end, we continue to chase free stuff by paying for it. In the meantime, I get my morning coffee without lifting a finger, and feel for a moment, well, important.

I’m sitting in my living room this afternoon, enjoying a perfect Berkeley afternoon, sad that Bruce and Dawn could only stay one night, and organizing my messy hard disk full of files. Here’s something I wrote in May 2006, but never published or sent to anyone, probably in response to something I saw in the news. I only vaguely recall writing it, but I think I still had law school on the brain at the time.

National identity and cultural identity are no longer congruent. There is no doubt that they were in centuries past, and that they are still in many places, but only coincidentally and usually at the expense of a minority population. This is a central consequence of the first amendment of the U.S. Constitution: that government (nation) must protect the rights of free assembly, speech, and religion (components of culture).

As such, the notion of a “national language” is only useful to the extent that it facilitates the efficient functioning of government (a famously insufficient condition, unfortunately). Note that commerce is exempt from this stipulation except where commerce and government intersect, that is, in the enforcement of contracts. Contracts themselves, however, are culturally neutral by design; a merchant need not speak english to expect that I pay him for his wares.

But what of the social contract that citizens of a nation undertake in their collective effort to coexist? I believe that it should not be subject to the imposition of a national language. Nations should make every reasonable effort to make the governing of their people independent of culture.

To that end, president bush should not insist that the national anthem be sung only in english.

During my recent visit to India, I was struck by the number of “institutes.” Brand new, under construction, or carved out of a random space in a bustling small-town main street, these schools were almost unanimously technical colleges – post-high school institutions offering courses in computer science, “systems management,” or other similar-sounding disciplines. It was as if they couldn’t build them fast enough. The reason I know what programs were available is that they all used English-language signage and many even went so far as to raise enormous road-side billboards advertising happy and beautiful young backpack-toting Indians taking classes at the “Institution of IT and Management Group of Institutions” or some such convoluted name. (They all sounded alike after a while.) With all of the schools come the school buses – literally clogging the highway between Delhi and Agra.

Seeing the “outsourcing” debate from the US side of the media equation, the complaint is usually: outsourcing costs US jobs and lowers US wages and is therefore bad. I also see some of the inner workings of “outsourcing” in my capacity at a large multi-national firm: we hire more freely in “low cost centers” and think really hard before approving hires in places like the US, where wages are much higher. (The good news is that we are busily hiring on all continents, including North America.) This just makes sense, and has nothing to do with morality or ethics, nor does it involve “sweat shops” or shady practices of that nature. We want smart people, we want to make them happy (by paying and treating them well), and we want to minimize costs. So we are pleased to hire from a pool of very smart people in, among other places, India.

What is often overlooked is the transformative effect these circumstances have on the country where the workers are hired. What I’ll call the “Nike narrative” goes something like this: “Not only are Americans suffering because they lose the outsourced jobs, but the recipients of the jobs are likewise miserable. The only winner is the corporation.” This is certainly true in many cases. Based on my experience with practices in the non-manufacturing industries, however – the service and “knowledge” sectors like software, media, and customer support – employees are very well-paid relative to their peers, and the jobs are very competitive. Oster and Millet (2010) of the University of Chicago report that starting salaries at what they call “IT enabled services” firms is about twice the average per capita income. Think about that. “You can get a 100% raise if you study X instead of Y.” In the US, starting salaries twice the per capita income – about $95,000 per year – are generally available only to people who spend many years in school: doctors or lawyers, for example. (Wall Street professionals are an anomaly, in my opinion: they make out-sized salaries for no apparent reason.)

What Oster and Millet find is that the explosion in these sectors in India – from 56,000 in 1991 to 2.3 million in 2010 – is causing localized effects in the demand for education, specifically English-language education. Every time a new “ITES” firm opens, the nearby English-language schools see a spike in enrollment the next year. Though the paper does not investigate it specifically, the demand for education in India is not only localized around these IT firms: nationwide, the percentage of the population completing primary school has increased from 64% to about 86% over the past two decades. If you believe human progress is not an illusion, I think this would count as a dramatic victory.

A new service has appeared, called Kwedit, which allows the borrower to buy (usually virtual) goods now and pay for them by printing a barcode and paying cash at a 7-Eleven store.

The service has been adopted by a small handful of online games with target audiences in the 12-14 age group. The idea is to bypass parents, aka the keepers of the credit cards. These children can thus purchase items for their virtual pets, for example.

Now an eighth grader, on her own, can use a Kwedit Promise to buy a virtual 40-pound bag of Purina Puppy Chow. The chow exists only as a photograph of a Purina package, but FooPets instructs its users that the care and feeding of the digital pets they’ve adopted should be regarded as a serious matter. “Your FooPet is a real creature that lives online,” the company’s Web site says. It’s ontological nonsense, but the money that is paid for the pixels is certainly real.

On the one hand, kids need to learn lessons about money and credit. Perhaps if they get in over their heads, they will learn a valuable early lesson in effective money management. Better now, when there are no real consequences, than later, when they default on their mortgage. Right?

But something stinks about this, beyond the fact that 12-year-olds shouldn’t be frequenting 7-Elevens. Kids are vulnerable — they are powerfully swayed by “ontological nonsense.” (But aren’t we all?) We can’t expect them to make reasonable choices, nor can we even expect them to learn the right lesson from their errors when they make unreasonable choices.

Should corporate interests really be allowed to so directly engage minors in this way? Yes, teens can buy candy at the store on their own. But they can’t buy candy on credit. I suppose it’s legal, but there’s something wrong here I can’t put my finger on.

Unless you’ve been hiding under a rock, you are probably aware of the precipitous decline of print news circulation over the past decade, almost universally attributed to the ubiquitous and free news any joe with a mobile phone can access nowadays. Here’s a rather stunning visual.

Some unsurprising trends: the Los Angeles Times is an absolute horrorshow. Not shown: the Boston Globe disappearing off the bottom of this chart, in a two decade decline from 521,000 in 1990 to 264,105 this year.

Sad to see the LA Times doing such a dreadful business – I think they have the best online design of any major news outlet. Certainly better than my local paper, and a lot less blood-red-awful than that other media loser, the lowest-rated cable news provider, CNN.

I love McSweeney’s defiant response:

Issue 33 of McSweeney’s Quarterly will be a one-time-only, Sunday-edition sized newspaper—the San Francisco Panorama. It’ll have news (actual news, tied to the day it comes out) and sports and arts coverage, and comics (sixteen pages of glorious, full-color comics, from Chris Ware and Dan Clowes and Art Spiegelman and many others besides) and a magazine and a weekend guide, and will basically be an attempt to demonstrate all the great things print journalism can (still) do, with as much first-rate writing and reportage and design (and posters and games and on-location Antarctic travelogues) as we can get in there.

…just $55.

“Why?” is a natural question to ask of any blogger, or for that matter, any writer. The answer is “To be read.”

In the pre-interweb business of writing, there is this unfortunate hurdle between question and answer called “publishing.” For a novelist, the process is an onerous trudge through the world of editors and publishers, only rarely ending in an item even available to be read, let alone commercial success. (Congratulations, by the way, to my dear old friend Jael Maack on the sale of her debut novel, Simmer.) An academic writer fences with anonymous peer reviewers and journal editors. A screenwriter grovels for attention from producers and film agents.

A blogger faces no barrier to publishing, except having a working internet connection and perhaps a functioning mouse with which to click the “Publish” button. Anything can be broadcast across the Tubes, and everything is; the marginal cost is not much more than zero. One trade-off is quality – I, blogger, have no editor (other than the red dotted lines warning me of mis-spelled words), no exogenous critical authority.

As for the problem of how to be read, the key trade-off is marketing – who even knows that I have written something, and thus who will read it? Novelists are to a greater or lesser degree provided with marketing machinery by the publisher. Academics have a built-in readership in the journal subscriber list. Screenwriters’ success is rewarded with a film, distributed and marketed by a whole separate set of interested parties.

For a blogger, readership is established via two mutually reinforcing channels: the Subscriber and the Hyperlink. Subscribers are readers who visit the blog as a starting point – they include the stream of entries in their RSS feeds, or save the URL in their browser’s bookmarks. They visit often, at least as often as new posts appear. They post links to your blog on their blog, attracting Hyperlink readers.

A Hyperlink reader is someone who reads a blog because it is a destination – the end-point of a journey that began somewhere else, on some other site. Some of these Hyperlink readers become Subscribers (hence the bit about these being mutually reinforcing).

My Brush with the Vast Pool of Readers on the Interweb

Another difference between interweb and pre-interweb writers is the availability of statistics to prove the existence of readers, which somehow justifies the whole enterprise. It is only because of my “Blog Stats” that I was even made aware of my own brush with that vast pool of interweb readers.

• April 17, 2009: Published Conjecture – an observation made on the commuter train one evening.
• August 3, 2009: Popular local blogger Jason Kottke publishes The Hot Waitress Index, a Freakonomics-style post on various odd every-day correlations with the macroeconomy, including the prevalence of hot waitresses.
• August 3, 2009: I send an email to Jason (who does not enable comments on his blog) alerting him to my related piece.
• August 4, 2009: Jason updates his post with a link to Conjecture.
• September 3, 2009: Daniel Finkelstein, in his blog for the TimesOnline (UK), includes Conjecture as number 3 in his list of 10 strangest ways to measure a recession (he reused a lot of Kottke’s links, with attribution).

Weekly visitors to "A New Leaf"

I have to admit, I have some deep sense of satisfaction from this episode, as if I made some meaningful contribution to the interweb. And, of course, because I was read.

Billion Dollar Gram

Billions of dollars are hard to imagine. Expand your mind, then, with this remarkable illustration which manages to put these vast sums in perspective. Especially well done is the careful layout of fortunes, encouraging comparisons between unrelated items. For example, the internet porn industry is roughly the size of foreign aid given by large countries. And “Feed every child in the world for a year” is slightly less than the sum of “Beijing Olympics” and “Video Games Market.”

Some numbers seem startlingly small, in the grand scheme of things: “Save the Amazon” at $21 billion is only a bit bigger than “Yoga Industry” at $18 billion.

But the headline comparison, in my mind – even more important than the enormous looming yellow square representing the losses associated with the financial crisis – is this:

• $465 billion: Feed and educate every child on Earth for 5 years.
• $3,000 billion: Iraq war estimated total.

Of course, this seems like an absurd trade-off until you see the “Iraq War (predicted cost 2003)” is “only” $60 billion. The lesson, it seems, is that the predicted cost of a war could be off by a factor of 50. To say nothing of the trade-offs made with human lives, war is a risky bet for a government to take; perhaps riskier even than bank bailouts and stimulus plans.