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Musings Report #36 9-6-14 What Metric Are We Optimizing For?
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For those who are new to the Musings reports: they are basically a glimpse into my notebook,the unfiltered swamp where I organize future themes, sort through the dozens of stories and links submitted by readers, refine my own research and start connecting dots which appear later in the blog or in my books. As always, I hope the Musings spark new appraisals and insights. Thank you for supporting the site and for inviting me into your circle of correspondents.
What Metric Are We Optimizing For?
Correspondent Lew G. recently sent in a fascinating article that describes our propensity for optimizing whatever metric is presented as important:
Economists Don't Understand The Information Age, So Their Claims About Today's Economy Are A Joke
When you have a bad metric, even if you know it's a bad metric, you still tend to optimize for that metric. Because that's what you have. Yet optimizing for GDP could actually limit and hinder innovation, creating results that are actually negative for the well-being of the public, just because of the impact on GDP.
There are plenty of examples of questionable metrics: GDP (gross domestic product) as opposed to Gross Domestic Happiness, unemployment (rather than full-time jobs that can support families), and even test scores in education.
When the metrics--and the way they are measured--are both perverse, we get perverse incentives and perverse outputs.
By measuring GDP in the current way, it makes sense to burn the last of our cheap oil paying people to dig holes and then fill them, because the wages paid (even if they're paid with borrowed money) are counted as "economic activity."
Interestingly, the agendas, priorities and incentives established by metrics such as GDP are rarely made explicit. For example, by focusing on test results rather than life-skills and professionalism, our schools incentivize gaming test scores, as part of an implicit assumption that scoring well on tests prepares students for jobs in the real economy.
Yet the evidence strongly suggests that scoring well academically is poorly correlated to on-the-job performance, innovation, leadership, etc.
What if our education system stated this set of choices explicitly rather than implicitly? Then we'd have a clearer idea of the consequences of the metrics we've chosen to optimize. The explicit statement would be something like this:
"Instead of teaching you life-skills that are essential for successful adulthood and the eight essential skills of professionalism, we're teaching you how to take tests that advance your career in academia."
The same kind of perverse priorities and incentives are easily found in healthcare, defense, and of course economics.
Consider GDP: if I decide to ride a $100 used bicycle to work instead of buying a $30,000 auto with mostly borrowed money, the impact on GDP is horrendously negative: I didn't spend $30,000 on the car, thousands more on insurance and fuel, didn't pay a bank thousands of dollars in interest and fees, and didn't pay bridge and highway tolls, or excise taxes on the vehicle, fuel, maintenance, etc.
Yet the benefits to me and society at large are not even counted: I can save capital to invest in productive enterprises, I've taken one vehicle off the road, I've conserved precious fuel for following generations, and my health will improve from the daily exercise, very likely reducing the costs of my healthcare.
But even this unalloyed benefit is a disaster for GDP as currently measured: GDP would rise only if I become ill and need medications, procedures, tests, etc. on a regular basis.
In other words, healthy living, low-cost lifestyles and capital accumulation are catastrophes for the economy rather than tremendous benefits.
Clearly, we need an entire new set of metrics and ways of measuring them. This will instantly create an entire new set of agendas, priorities and incentives that change day-to-day choices without any coercion.
What I Learned/Gained from Readers
Correspondent Paul W. very kindly gave each student in his high-school economics class a copy of my latest book, Get a Job, Build a Real Career and Defy a Bewildering Economy. One student, Saleh I., emailed me:
"I look forward to reading more about how to be successful in today’s economy. Something doesn’t seem right with all the debt and lack of jobs for college kids and I think your books can help teach me a lot!"
I sincerely hope so--thank you, Paul, for providing your students with an alternative view of how to navigate the real economy.
Summary of the Blog This Past Week
Stocks Have Reached a Permanently High Plateau 9/6/14
Here's Why the Market Could Crash--Not in Two Years, But Now 9/5/14
Have We Reached a Financial Singularity? 9/4/14
Central Bank Monetary Policy Enables Us to Put Off Real Reforms 9/3/14
The Underbelly of Corporate America: Insider Selling, Stock Buy-Backs, Dodgy Profits 9/2/14
Labor Day 2014: In Praise of Messiness 9/1/14
Best Thing That Happened To Me This Week
Labor Day BBQ with friends on Sunday and lunch with family on Monday. Inviting friends over forces us to clean the house, cook a decent meal, so it's a triple-play: clean house, good food, and enjoyable company.
Market Musings: Megaphone Top, or Runaway Bull?
It's unusual for the market to noodle around for 9 straight days in a narrow trading range, and yet that's what's happened. A few marginal new highs have been notched in the last two weeks of trading, but nothing that signaled "breakout" or "breakdown."
Rather, overbought conditions have been worked off and a continuation of the steady ascent higher seems to be in the cards. Put another way: extremes in bullish sentiment, the USD/JPY pair, etc., all got more extreme. That's the problem with divergences: they can continue becoming more divergent for quite some time.
The only fly in the ointment in this bullish nirvana is the megaphone topping pattern that's been traced out in the past 5 days of trading. Megaphones are also called "broadening tops," and they're a common topping pattern.
This short-term pattern suggests the SPX could shoot up at Moday's open to 2014 or so, which would complete the pattern. At that point, for the megaphone to play out, the SPX would have to reverse sharply and drop below the lower band of the megaphone.
What could cause such a reversal? All the good news and bad news seems fully priced in, so perhaps there is no catalyst for reversal. If there is a "surprise" reversal (few expect anything but more bullish uptrend), it may be something not yet priced in, or simply exhaustion of a move that has already run for 20 days. By my count, the longest such run in recent years lasted 23 days, so the uptrend seems due for a breather on this simple basis.
Which will it be--a surprise reversal or more of the same Bull run? Technically, it's high drama.
From Left Field
Private prisons suing states for millions if they don’t stay full -- privatization doesn't benefit the public or the common good in all cases; this is a case in point....
Otherworldly view of a giant Californian wildfire -- and this wasn't even a big one...
3-D Printers Making Jets and Bikes Drive Demand for Metal -- feedstock is a lot cheaper than the final goods...
Dropping Oil Prices Threaten Moscow’s Budget -- ouch--resource curse at work...
Unlikely Bedfellows: Mines That Run On Solar Or Wind Power -- generate energy at the point of consumption--very efficient....
Oil industry on borrowed time as switch to gas and solar accelerates (via Mark G.) -- the optimistic view...
A $10,169 blood test is everything wrong with American health care (via Ishabaka)
For those without coverage (or those whose coverage only covers a certain percent of the bill), price variation matters a lot. Getting a $10,000 blood test can put a patient into bankruptcy. But right now, our health care system doesn't have the mechanisms to limit those high charges — nor would the patient likely have the tools to know the cost of his or her blood test to begin with.
"There's no other industry where you see this kind of extreme variation," Hsia says. "And nobody has ever really challenged it. It shows an extreme inefficiency, and something we really need to change."
'Slate' Criticizes the 'Home-Cooked Family Dinner': Joel Salatin Responds
Victimhood escalates to stratospheric whining with Amanda Marcotte's recent Slate post titled Let's Stop Idealizing the Home-Cooked Family Dinner.
A 4-Year Old Reviews the French Laundry Restaurant (via Nicole D.) -- The French Laundry in Napa Valley CA is widely considered one of the best restaurants in the world...
Spacedrum by Yuki Koshimoto (3:06)
The Surf Coasters w/ Ruiko: "Black Sand Beach" - Huntington Beach Pier 2014 (2:25) (via John F.) Japanese surf-rock band....
Nasubi, The Naked Eggplant-Man Who Lived Off Sweepstakes (via Steve T.) -- the insanity of Japanese 'reality' shows...
"People of privilege will always risk their complete destruction rather than surrender any material part of their advantage." – John Kenneth Galbraith
Thanks for reading--
charles |
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