Economists Save Lives

I came across this interesting article in the WSJ. It discusses how Nobel Laureates Alvin Roth and Lloyd Shapley’s research on matching markets enabled Yogita Patel to participate in a paired donation to help her brother receive a kidney even though she wasn’t able to donate a kidney directly to her brother.

Lagniappe : Here is a link to Dr. Alvin Roth’s Nobel lecture w/slides.

Rent Control comes to Oregon

A recent WSJ Op-Ed opines on the impact that state-wide rent control will have on the Beaver State and its residents. While I do not question the intentions of state government, I do challenge their methods and expect this decision to make housing affordability worse over the long term. The article highlights Oregon’s “inclusionary” zoning policy enacted in 2017 led to a 64% drop in permit applications to build new apartments. It is my estimation that rent control will also have a negative impact and further suppress the ability to build more housing in Oregon. I think their efforts would be better spent streamlining the permitting process to help increase the housing supply. It will be interesting to see how these policies affect migration to Washington and Idaho.

Tyler Cowen wrote a blog post highlighting the unintended, but not unexpected, consequences of rent control back in 2016.

Mihir Zavery penned a more objective article in the New York Times on February 26, 2019. I share this article because it also includes statements from Gov. Kate Brown.

Pension Facts of the Day

  1. Sarah Krouse discusses the $4 Trillion Pension Hole in her recent WSJ article.
  2. Ted Dabrowski & John Klingner highlight Chicago's $125,000/household pension debt

I think these articles demonstrate the magnitude  of the public pension funding gap at both the macro and household levels. Even those of us without public employee pensions will most likely be affected whether through future tax increases or decreases in public services as municipalities and states struggle to meet their pension obligations.

While I think it is easy to identify the problem, solving the issue will definitely be a challenge. Personally, I think the long term solution is to reduce future pension obligations by transitioning from a defined benefits to a defined contributions plan. I think both the employer (taxpayer) and the employee would be better off with a 401k style account with a large annual employer contribution. This will prevent politicians from making future pension promises to buy current votes and will eliminate the compounding effect of under-funding pension funds and overly optimistic investment returns currently plaguing pension funds. It will also protect the employee from future benefit cuts as states and municipalities are unable to meet current pension obligations.

While it may appear that this proposed solution will transfer investment risk from the employer to the employee, I would argue that the employee has always been on the hook for lower than expected investment returns. I'd also expect that through tools at discount broker's such as Charles Schwab, Vanguard, Wealthfront and Betterment that employees could get similar returns for lower fees than employer managed pension funds.

Please use comment sections to push back at my proposed solution and share other interesting articles that pertain to this topic.  

Protectionism in the News

One of the advantages of having an unpopular president is that his bad ideas get the criticism that they deserve.  Listening to the mainstream media call tariffs a tax on the American consumer was music to my ears.  Not sure where these critics were when Trump imposed tariffs on solar panels and washing machines in January. With multinational corportations that source materials and manufacture goods all over the globe, it is impossible to impose restrictions in trade without creating some unintended consequenses. 

Below I have included some articles that I particularly enjoyed reading that are critical of recent tariffs and protectionism in general. Please use the comments to share any other articles that you have come across and feel are worth sharing.

  1. Trade Wars are Easy to Win 
  2. Some Questions for Protectionists 
  3. Trump's Tariff Folly

Lucky or Good?

While many investors concede that it is difficult to outperform the market over an extended period of time, Spencer Jakab argues it is even more challenging to tell if those select few who manage to beat the market are more skilled or just lucky.

You will need a WSJ subscription to be able to read the entire article. I have included the part of the article I found most interesting below.  I think the excerpt demonstrates that we often underestimate how much data we need to prove the difference between two data sets is statistically significant. 

While it isn't always feasible to get complete information before making a decision, it is important to realize that you are acting on incomplete information rather than being fooled by randomness.  I hope this article will make you think twice about paying hefty management fees for a fund manager that has outperformed the market over the last 1-3 years.

He and two colleagues told several hundred acquaintances who worked in finance that they would flip two coins, one that was normal and the other that was weighted so it came up heads 60% of the time. They asked the people how many flips it would take them to figure out, with a 95% confidence level, which one was the 60% coin. Told to give a “quick guess,” nearly a third said fewer than 10 flips, while the median response was 40. The correct answer is 143