UK Referendum and the weaknesses of democracy

Last Thursday the United Kingdom voted to leave the European Union. This is one of the stupidest decisions ever made by a country and is going to isolate the United Kingdom from the rest of Europe. Membership in the European Union provides many benefits for the British economy, such as cheaper imports from the rest of Europe (which lowers prices) and no tariffs on European goods. Other benefits include allowing British citizens to freely live in Europe (and vice versa) along with being able to sort out continent wide issues in the Parliament of the European Union. There is no real disadvantage with the European Union being a democracy where the Parliament is directly elected by the people, but the advantages of closer trade links given the lack of war over the last 70 years is a major advantage for all Europeans in favor of union except the military industrial complex.

Vote Leave made the European Union out to be a gigantic force which destroys the United Kingdom's sovereignty. the issue however is that the voting patterns in Parliament do not demonstrate a huge division over votes by nationality. While it is true that UK MPs are on the winning side less than any other country (winning 71% of the time) the division between countries is most of the time along partisan lines, not among national lines. Guardian

This is yet another example of the problem with highly technocratic issues being put onto the ballot. Most people can vote for a candidate who represents their viewpoint who then is hired by the people to make decisions, talk to scientists, understand the issues, and then make the best decision following their conscience. While there are some issues that people can understand at a fairly good level, most of the time the reality of the situation is very complicated, and the European Union is no exception. In order for people to fully understand the costs and benefits of an initiative they need to be well informed and the media usually does a very poor job at this. Occasionally you will get a publication like the Economist or The Guardian which include scientific analyses using large sample sizes and graphs to demonstrate the difference between groups without biasing their results, but this is rare. Most other news outlets (even NPR at times) try to show all sides of the story by giving treating all voices as if they have equal validity, but all this does is confuse people and feed the false narrative that scientists can't know anything and don't know anything. I find this narrative in conversations with people when I talk about my field which I have a degree in and they say "you are so certain you are right and don't give any room for being wrong" to which I always respond that 1. I am practicing my trade, 2. (for most issues) the evidence is clear, and 3. Provide me with better evidence than I have seen and I will change my views. They never provide me with better evidence. This is a pathology on our society and we need to recognize that our world is measurable and that there are trends in economics just as much as there are trends in physics, and ignoring this is irresponsible and dangerous. The media practices this without giving a clear insight into the issues which people are required to vote on, meaning people are essentially voting blind creating a major risk for society. We have seen this before with the Alternative Vote referendum which is a better system in every single way from what Britain currently uses to elect parliament, but given the poor analysis in the media of the difference and impact of the two systems for people, and it was explained poorly by the Vote Yes campaign. Excellent blog I cannot find research testing whether people actually If people do not usually understand the Alternative Vote, (of which I am not certain) there is absolutely no way they are going to understand the complexities of international trade and the costs and benefits of the European Union which is far more complicated.

This is the problem with pure democracy. In a perfect world where people were taught how to reason and use science to find answers to questions this wouldn't be an issue. If people were willing to study and learn about issues they could learn about any subject they wanted to. People would be able to tell which news sources are actually describing the issues in a neutral manner or just acting as the mouthpiece for a political party. in that type of world referendum would be acceptable, and a perfect democracy would work for large multinational trade issues which effect everybody. In a world where many people who go to public school don't even learn calculus (which is vital to many scientific fields) this is not going to be possible. We obviously do not live in this perfect world where science education is of high quality and news outlets are fair by not by giving every fascist, communist, and fraudster a free talking stage to spread their message but instead focus on the scientific reality and are willing to call the rich and powerful out on their lies or demonstrate the evidence behind their claims. To be clear, these media outlets are outside of the norm and the majority of people do not listen to Planet Money or read the Economist which are unusual in their unbiased focusing on evidence even if it means they have to take a hard stance on an issue. The difference however is that they are very clear about why the author makes the stance using evidence, science, and reason. The difference is that with science the conclusion easily changes given new and better evidence but is impervious to public opinion, bribes, or anecdotes.

This is why the Brexit is going to happen and why Britain is about to go into a deep depression with many people losing their jobs in the near future. It is heartbreaking and scary, and we are already seeing the damage with the collapse of the Pound. I can't leave this article on an uplifting note because at this point in time there is nothing good that can possibly come from this if Cameron goes through on his decision, only less cooperation and more risk of conflict in Europe.

Project timelines and cost overruns

Everywhere you look nowadays you see a common pattern, cities need more infrastructure to keep up with their rapid growth, so local governments plan to build more infrastructure to fit their needs, and then hire private companies for construction. I have nothing against hiring private companies as long as the bidding process is fair, but whether you look at Seattle's mass transit, Berlin's airport, The Dulles-Washington rail link, or so many other cases of needed infrastructure being delayed for years or even decades, the costs start to run into the billions of dollars. The opportunity cost of not getting such programs done also tends to be significantly higher.

Here are a few ideas for how to get projects done on time.

1. There will be a completely open bidding process where different contractors will bid for building the project and give their design plans, with details on how many people will be able to be served by the project, the cost of designing the project with a complete breakdown, how it fits into the general plan of the city and region, and how long it will take to complete the project. The contractor with the best benefit/cost ratio will get the job.
2. Contractors are required to finish the project by the deadline and to have all necessary safety features installed. Failing to finish the project by the deadline will give them the choice of finishing with extra charges for not being proper, or handing the job to another company and penalizing the company for not finishing the job. Environmental disasters will of course be acceptable reasons for not finishing a project on time. (eg you are working a project at a city on the Gulf Coast and a hurricane destroys your project)
3. Contractors will receive a bonus for finishing the job early and completely.

This is a major environmental and economic issue. There are projects that need to get done now, and there are many high speed rail lines which need to be built. It is ridiculous that the US lacks high-speed rail (which is internationally defined as going a minimum of 150 km/hr) and that Canada lacks sufficient mass transit between Montreal and Windsor. We need government and contractors to be responsible.

Further reading:

http://www.dcd.com/oleary/oleary_jf_2002.html is a good summary like what I have posted here.

The reality of buying bonds

I was watching John Oliver this evening as I was waiting for my dinner to cook and as I was eating. He was talking about financial advising (which is an application of my education in economics) and as usual most of his show was absolutely right. He was right about fiduciaries, how small fees in the beginning of a retirement plan adds up to millions of dollars over a career, and how index funds are usually the best way to go for safety which is growth.

The short video at the end was right about these, but there was one thing it was absolutely wrong on, and that is the claim of buying bonds to ward off risk when you retire. While it sounds really good to know exactly how much you will have next year and it sounds secure, it is easily debunked by asking this question, would you rather lose 40% of $10,000,000 or keep 100% of $2,000,00 this year? Knowing that in the long term index funds always beat bonds, and that the S&P 500 reclaimed all of its growth in the beginning of 2013 from the 2008 crash and is now roughly 48% above its peak value before 2008 and that it is showing no signs of stopping (given our positive bond yield curve which predicts no recession in the near future) there is absolutely no reason not to invest in this index fund.

This comes down to opportunity cost ultimately, money that you don't earn because of a lower interest rate is at the end of the day the same thing as money you lost. It doesn't matter if you had and lost or just never made money, and the reality is that there is no 10 year period where a bond portfolio has beat the S&P 500 or NASDAQ. It just doesn't happen. And there is no reason to expect the future will be any different. Assuming that we don't have a massive unprecedented change in the stock market I calculated how this would look for people who start investing at 25 and then compared the stock plan versus stocks and bonds. The first one is a simple index fund getting 8% interest a year (which is what you should expect on average in the long run) and then you are withdrawing three times your cost of living (which since I assume you will own your house by that point is fairly low) from your porfolio. This person retires with a net worth of over $740,000 and will get more interest than they need to spend, making retirement an option. This is without an employer matching plan which if someone has they then they obviously will have a stable retirement which is what I prove in the second sheet with a 50% employer matching program where the person retires with a portfolio worth over a million dollars.

The third and fourth sheet however use what the Daily Show recommended, and the difference in the amount of interest you earn in the long run by moving your retirement fund into bonds is enough to put you on the verge of bankruptcy if you maintain a middle class lifestyle.

Another note with my work is that people should put as much money as possible into their account, and only putting $2000 away the first year is not really that much compared to what people should be putting away. 10-20% of your income is usually affordable for long-term investment and you should always put away as much as possible. This is the bare minimum amount in order to make a point. Plus, there are other ways to finance housing which can also make a huge difference in your ability to save.

At the end of the day, the mathematical reality is that moving your money into bonds once you already have enough money to support yourself is a very bad strategy. Most people do not know how to predict the economy, only professional economists have the tools to do that, and it takes more than a 5 minute Youtube video to learn to do it safely. You have to understand how the economy is structured, where all of the general principles come from, and even then most trained economists don't use them appropriately. The only time proven strategy which is used by millionaires which doesn't put your future at risk is to have a straight index fund in capital, be it domestic or a diversified international portfolio in a buy and hold strategy. Randomly picking stocks beats most financial advisors because they are trying to beat the market without understanding the underlying reality of how the economy works and they end up doing everything after the market has adjusted.

But if there is one iron law of investing it is the principle of opportunity cost which is why you should never buy a bond for a long-term investment.

My proof on why this strategy doesn't work:
https://docs.google.com/spreadsheets/d/1xd4XSPvh9PwC6zv5JTXvWHdxih_mqWYS94rKzsTsXGA/edit?usp=sharing

Bond Yield Curves and Media

As I woke up today, I started by reading this article with the BBC which is arguing that because we are seeing negative interest rates that we are headed for a financial crisis. The issue with this is that the real signal for economic downturns is a negative yield curve, such as when your 30 year bond gives you a lower return than your 15 year bond (for example). It is not when your bond yield is below 0. All that I see the market return is that demand for bonds is too high, and the demand is so large right now the cost of holding bonds rises to the point past our arbitrary 0 lower bound which turns out to have been a fundamentally wrong assumption. The amazing thing is that even though bonds literally cost lenders money (those who buy bonds from governments, companies, etc.) people are still going to bonds.

This is uncharted territory. It is impossible for economists to know what this means because it has never happened before. It is possible that the lack of faith in markets is a sign of a weak economy in the near future, or it is just due to a shift in the supply and demand for bonds. If governments issued more bonds we would see interest rates rise, and given how all of Europe is gripped in an anti-debt paranoia currently with their right wing governments this doesn't seem unreasonable to me. Greek debt has stabilized over the last few years, Japan's debt/GDP ratio grew by only 3% last year, the US is in the grips of people in Congress who are on an anti-debt crusade, Germany's deficit is almost nothing, so it looks a lot to me like we have a reduced supply of bonds which will make them more expensive. Also, with inflation as low as today it means a negative yield curve is not as big of a deal as it would have been in 1982.

I doubt that it is due to an increase in demand for bonds fleeing to safety from a rough economy about to go to Armageddon because we have never seen people flee to bonds for safety to the point where they reach such low rates of inflation before.

Another thing is looking at the long term, it seems like we have been in a period of decreasing bond yield for 30 years. Whether one looks at Germany, The United Kingdom, Japan, France, Canada, Australia, or the United States, one find the same pattern of unusually high interest rates in the early 1980s and a continual decline since then back to what are actually more normal nominal bond yield prices. We have also seen the rate of inflation go down significantly from the early 1980s, meaning that it seems like bonds change their prices slower than the economy as a whole. We might have been watching 30 years of recovery from what a very volatile period with record unemployment and record inflation of the 1981-1985 period. Getting back to no significant return on bonds might be simply a return to the old normal. The change in the bond yield price also doesn't appear to me to be in line with recessions, and mostly random in the short term rises and declines. This current drop in bond prices could be part of the long term trend of volatility. This time it just hit a negative rate which makes people freak out because we haven't seen US bond prices below 4% in over 50 years.

Also, there is a lot of misinformation rolling out, first from the BBC:

There is also a potential problem about large losses being incurred by the funds that own bonds with negative yields. The problem is that the price of a bond and the yield move in opposite directions. So if those negative yields turned sharply upwards, above zero, their prices would fall and the bondholders would lose.

The author is correct that the price of a bond inverse of the yield curve. So a higher yield curve is a lower price to hold a bond (price in this case is best seen as opportunity costs) and he is right that the price of bonds will fall if yields go up. However, he puts a very peculiar and completely incorrect spin at the end of this where he says bondholders will lose. He is arguing that if bondholders get a better return for their money they are losing. This is backwards and incorrect. Bondholders would like to see higher interest rates for their money, which seems obvious to me, but apparently the economic editors of the BBC want to get a lower return for their money. Given their coverage of the austerity crisis, their claimed imminent secession of Scotland that dominated their website last year, and the little BREXIT that couldn't (given betting odds and the polls) I'm not surprised they will let something as completely wrong as this statement get out. I'm going to delete the app from my phone for such reliable ludicrousy, though given the fun of debunking such claims I might keep them. TBD

On the same lines in economic lala land, The Wall Street Journal by our favorite hate mogul Rupert Murdoch has an equally crazy statement.

The narrowing gap between short-term and long-term rates may not be the signal it once was, but the Federal Reserve should still pay heed to it

The first issue with this mess is that we have no proof or evidence that negative yield curves are no longer a signal, and looking in history all negative yield curves have been followed by recession or are currently negative. They are ignoring hundreds of years of research in this statement and a magazine which claims to be about finance should no better than this. The editors of the Wall Street Journal obviously don't know much about economics or are lying to their readers.

Stick to the fundamentals, stick to what we know. Do not make big assumptions that "this is the big one" or that all historical knowledge of what works is now invalid because aliens or whatever. People who go assuming this time is different every six months tend to be wrong and people who stick with the basic economic theory have a very annoying habit of being right in our predictions. I do not see evidence that we are looking at an economic recession, however I do see evidence in a decline of available bonds which raises the price of government debt and a continuing 35 year long trajectory of declining bond prices which we are still observing.

Warren wants to be VP

Elizabeth Warren recently said she would be willing to be Hillary Clinton's Vice President.

I fully plan on voting for Clinton because I don't want to see a Donald Trump Presidency. Though Warren as VP makes absolutely no sense to me, John Nance Garner was Vice President under President Franklin Roosevelt, and I bet no one reading this post knows who John Nance Garner was. (unless they are over 90 years old) This is because the Vice Presidency is a very boring position. Most Americans don't know who even President Lincoln's Vice President was, and given how much we hear from George HW Bush's Vice President (whose name I forget, even though I was technically alive at the very end of his term) further demonstrates how absolutely useless this position is most of the time.



Granted, sometimes you have a President who is notable, like Dick Cheney who was frequently talked about, Former President-elect Al Gore who had the election stolen from him, or the war criminal George HW Bush who betrayed our country in his dealings with Iran as part of the Reagan administration, but if the Vice President under the half of FDR's term where he did the New Deal is not a common household name, than I see no reason for us to put someone as talented as Elizabeth Warren in a position which significantly reduces her power and authority. She is already one of the most recognized figures in the country, the most respected politician in the country, and is frequently featured on late night talk shows and on the news. There is absolutely no advantage to her being Vice President and I hope that she will rethink this decision before giving up her seat on the Finance Committee, which is a far more powerful position ultimately.

I love Warren, she is my favorite American politician of today, I wish she was in Clinton's place right now, and I want her to do everything she can to do the right thing in preventing fraud which she is so remarkably good at. This is the reason why I do not want her to be Vice President because we need her to be in the most powerful positions possible to fight for US.

Steel

It goes without saying that steel is an important material in the global economy as it is used in construction of countless items every day. The price of steel will then affect the global economy as a whole by changing the costs of production which changes the amount of good which get manufactured in the world. For comparison, oil reserves are in multiple locations around the world, no one country has an absolute advantage in oil reserves. The United States has the largest amount currently (according to the latest information from the Energy Information Administration) with just over 15% of global oil production in 2014. No one country has an absolute advantage over oil production and the improvements in technology which have allowed fracking to be less expensive over the last two years has been one major advantage in decreasing oil prices along with the increase of Saudi oil production.

Steel is similar to oil in that it has reserves around the world, but the demand for steel has dropped significantly over the last few years, leaving China with its large subsidies for steel production as producing over half the world’s steel, a significant difference from 10 years ago. The United States government is calling now for China to end its steel subsidy which will increase the ability of other countries to produce more steel profitably.

If China follows the United States’ demands and decrease their production of steel we will see the price of steel rise, which will protect the 150,000 Americans currently working in steel. If American steel production decreased as a result of China’s exports to the United States the question of how many American jobs will be lost is currently under debate. An increase in the cost of steel would directly affect construction by making it less profitable to build new buildings, which employs over 6,000,000 Americans. Keeping the cost of steel low means we can make more buildings which employs people in construction, and even just a 5% drop in American construction workers from an increase in the cost of steel would be twice the number of Americans currently employed in steel production. On top of the effect to Americans employed in construction, another 1.5 million Americans are employed in car manufacturing which uses steel as a factor input and would decline if the cost of steel were to increase because more expensive cars will lead to fewer cars being bought.

This puts American politicians in a place of choosing who we support more or don’t. We can protect our steel workers or we can protect our auto and construction workers. Instead of the politically popular choice of lambasting China for increasing production it would be more beneficial for American workers to ensure we have programs available so people in industries which have a decrease in employment can go get retrained to work in industries which are not as vulnerable to imports. By helping more people become specialized they will get better wages and have more job security. We will also end up with a higher GDP. This does cost the American government money in the short term, but the increase in GDP will mean that we can have higher tax revenues in the future which will help the program pay for itself. Paying to subsidize steel production will not have the same long-term positive effect on GDP.

References

EIA
BBC
World Steel
Statista iron ore by country
Forbes
Auto Alliance