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Saturday, June 30, 2012

A Quick Hit

An excellent interview appeared in the opinion pages of the Wall Street Journal today. And I think it's a much needed reminder that two intelligent people can look at the same problem and develop two different conclusions.

I encounter this problem occasionally when I hang out with some of my more liberal minded friends. Many times I'm introduced as their "Republican" friend even though I'm not a Republican or even a conservative. I'm a libertarian. But most people's political ideology have a hard time fitting libertarianism into the traditional left-center-right political spectrum.

In my mind, most people who avidly follow politics are severely Catholic in the sense that, as mentioned in the interview, "politics is more like religion than like shopping". A person can't pick and choose issues that they like. They have to buy into the whole ideology or else they are a political opponent.

It's unfortunate that the current state of politics is like that, and I suspect that it's always been that since the founding of the Republic.

Friday, June 29, 2012

The Ruling

As a foreword, I just want to say that this was a case where Intrade was irrationally exuberant. Even though I thought Roberts would almost definitely join the side that would strike down the individual mandate as unconstitutional, I would have never put up 3 to 1 odds against it. I guess even those with money on the line can be fallible.

But let's get right into the decision. A 5-4 ruling in favor of the PPACA. What surprised me is that the swing voter Justice Kennedy sided with the conservative court, while Roberts sided with the liberal side. At this point, the media can't claim that Roberts isn't what he says he is: an umpire who calls strikes and balls.

To keep up with the sports metaphor, I think Roberts really dropped the ball on this. The problem with his reasoning is that he essentially opens the back door to unlimited Federal power. By ruling that Congress can tax inaction (in addition to their uncontested power to tax action), he has essentially ruled that the Federal government can create any law so long as noncompliance with the law is subject to a tax.

In other words, "we can't make you do anything. But we can sure as hell make you wish you did." Even though Roberts ruled that Congress doesn't have the power to force commerce under the Interstate Commerce Clause, he ruled that Congress can do anything under their powers of taxation. The logic is baffling, and I can't understand how Roberts was able to reconcile that with his view of Federalism.

Maybe the simplest answer is that Roberts is a strict constructionist. Nothing matters except the letter of the law. And to be perfectly clear, there is nothing in the Constitution that says Congress can't impose a tax on inaction. To square that away with being unconstitutional, a Justice would have to say that the Federal government does have enumerated powers, and those enumerated powers were created due to Federalism, where upon the states would have the broadest powers while the Federal government's laws would be narrow and specific in scope.

Ultimately, the Supreme Court has the final say in any law, and they ruled for the health reform law. And you can spin this in such a way that Roberts did exercise judicial restraint in not striking down a law that was passed by a majority of elected lawmakers. Roberts made no such opinion on the effectiveness of the law, only the legality of it.

From that perspective, he truly did fulfill his duty as an umpire. And while I think his logical reasoning was flawed, or at least permits unlimited Federal power, which violates the spirit of the Constitution if not the letter of it, it still is an issue of democracy.

We the people have the power to repeal or affirm the PPACA. Judicial restraint requires big citizenship to make government function properly. If the Supreme Court rules it legal, then it's up to the voters to elect officials who want to repeal that law. We deserve the government we get, and the upcoming elections will decide how free Americans want their country to be.

Thursday, June 28, 2012

Short Memories and Lasting Consequences

The US Supreme Court is due to rule on the PPACA today, and you can expect a post on that subject tomorrow. But today, I want to talk about anti-trust law and its consequences on the private sector. Let's start with the last major anti-trust litigation brought on by the Justice Department: United States vs Microsoft.

In May of 1998, Justice filed a set of legal actions against Microsoft, alleging wrongdoing under the Sherman Anti-Trust Act of 1890. The issue primarily revolved around the bundling of Internet Explorer with Windows. In hindsight, the affair seems ridiculously misguided. But the case serves as another reminder of the power that the Federal government has to make or break the largest corporations.

 A year later, a Federal judge ruled against Microsoft and later ordered the breakup of Microsoft into two separate companies. Microsoft appealed the ruling and spent more time in court to avoid the fission of the company. Later, under the Bush Administration, Justice announced its intention to allow Microsoft to remain as one entity and instead settled with Microsoft out of court.

A sector of the economy that was mostly unregulated suddenly became incredibly regulated. The case in the US spawned similar action in the EU, and Microsoft wound up spending multiple years and hundreds of millions of dollars in litigation fees. Other companies began buying up patents both to protect themselves against litigation and to litigate other companies. The door had been kicked open, and on the other side was an incredibly expensive and litigious new world.

Again, with the benefit of hindsight, we can see how foolish the issue was. Apple, now the largest and most influential tech company, exerts a much greater degree of control over the integration of its operating system, hardware, and auxiliary software than Microsoft ever did. And Microsoft's dominance in the internet browser market has been steadily eroded if not completely shattered by competitors like Firefox, Chrome, Safari, and Opera.

The problem with anti-trust legislation and litigation is that the government (among many others) is absolutely terrible at predicting the future. Nobody can reasonably ascertain which industries and companies will dominate the corporate landscape in any long term time frame. When the government can exert that much control over the affairs of corporations, who can blame the corporations for trying to lobby the government to achieve a desirable outcome?

This brings me to Citizens United vs FEC, where the USSC ruled that corporations could spend unlimited amounts of money trying to influence political campaigns and the government. Many people criticize the ruling with hyperbolic proclamations such as it being the death knell for democracy. But what they overlook is the fact that corporations are only as political as they have to be.

A company such as Exxon-Mobil won't bat an eye spending millions upon millions of dollars lobbying Congress and the regulatory agencies to implement policy that benefits their company. But as a company, there is literally nothing they can do to influence, with reasonable certainty, the actions of a sitting President. The President has many constituencies that he must answer to, oil is just one of them.

It's much easier to influence a Congressman or a Senator in an oil friendly state/district. And it's even easier to work through the bureaucracy, where a lowly government official can be swayed by a nice dinner, promises of a cushy consulting job in the private sector after their public career is over, and just the feeling of importance by being courted by a huge special interest.

Ultimately, it's government that holds the keys to the kingdom. And when it has the power to legislate or regulate companies into and out of existence, it has to exercise extreme caution lest it ruins the confidence of the private sector. The modern economy is built almost entirely upon perception and trust. And when government breaches that, it takes so much effort to get back to the status quo ante.

Government has to be careful, especially when it wants to compel a person or organization to do something that they don't want to do. Their actions have far reaching consequences, even if they forget about it in a few years.

Wednesday, June 27, 2012

A Bout of Irrational Exuberance?

I was going to write something about the incredible unfairness of most sports leagues, but I got bogged down in a quagmire of numbers and I'm too tired to make a proper analysis of it. So I'll make it short and sweet today.

Intrade, a prediction market where people can trade and speculate on the outcomes of future events, is perhaps one of my favorite websites ever. And the most activity happens on politics. Currently, the most actively traded contract on it is the Supreme Court ruling on the individual mandate of the Patient Protection and Affordable Care Act (aka Obamacare).


The market has settled in the mid 70s to rule the mandate as unconstitutional, which baffles me. Because as far as I can tell, the people betting on the outcome are basing their confidence on two things:

1. Justice Kennedy's hostile questioning of Donald Verrilli, the Solicitor General charged with the task of arguing in favor of the PPACA in front of the court.

2. Justice Ginsburg's open musings on severability on the third day of verbal arguments.

Arguably #2 implies that the Court has moved passed the issue of ruling the individual mandate as unconstitutional and has to deal with the far messier issue of what to do with the rest of the law after overturning the mandate.

Most people are assuming it's going to be a 5-4 split decision either way (with some saying that Justice Roberts might make it a 6-3 in favor of the mandate just to write the majority opinion, which makes little sense to me), and I don't see how you can give another person 4 to 1 odds that the mandate won't be overturned. It seems incredibly risky to me.

I have always maintained that the value of a person's opinion is directly related to how much money that person is willing to bet on their opinion, which is why I think political pundits are essentially worthless. And a lot of people are betting a lot of money that the Court is going to rule against Obamacare, at least the individual mandate portion of it.

For the most part, I think I have a pretty accurate grasp on reality and seeing things "how they are" and not how I wish they could be. But the speculators on Intrade must be seeing something I don't, because there's no way I'd put up 4 to 1 odds on them affirming the individual mandate.

Monday, June 25, 2012

Building a Bigger, Better CNN

It's no secret to anyone following cable news ratings (all five of us) that CNN's ratings are in the toilet. In fact, its regular viewership has been steadily decreasing for a few years now. The numbers released last month paint a grim picture. Let's put that picture into a handy dandy Excel chart.

 
 Prime time defined as between 8 and 10 PM,  Source

I didn't bother with total viewership because advertisers don't care about how many old people are watching television. They care about people with disposable income whose buying patterns and brand loyalties aren't yet set in stone. Traditionally, advertisers and programmers look at the headline 18-49 demographic rating when discussing rates with networks, but the 25-34 demographic is the most valuable. But I digress.

As you can see, CNN is 3rd behind FNC and MSNBC in average viewership. But there is still a bright spot. Despite its middling ratings, its brand perception is still tops in the cable news game. And its viewership tends to be wealthier and more educated than those watching Fox, although they are remarkably similar with those who watch MSNBC.

This is an age old problem, and I'm going to explain CNN's dilemma using the Chinese concept of "face". Roughly translated to reputation, face is public perception of a person or family in China. When a prominent family, which has a reputation for being wealthy, ceases to be wealthy, often it takes a while before the family's face realigns with the family's current situation. Losing face is often just as painful for the family as losing its wealth.

CNN's face is its reputation as the best damn source of news on TV. Its pioneering of the 24/7 news cycle is still regarded with a mixture of reverence and abomination among the old pros and veterans of the industry. Unfortunately CNN itself bought into the hype, culminating in the breathlessly arrogant slogan "the best political team on television" during the 2008 election cycle.

When a big event happens, people tune into CNN. But it struggles to compete in the big event-less news cycle. That's because the general public regards CNN as a news source, not a narrative source. Unfortunately for CNN, news is fast becoming commoditized while narratives are still differentiated by the audience.

Charismatic media personalities on Fox and MSNBC will command their own organic audience by spinning a narrative using their own considerable oratorical skills. CNN, however, prefers its media personalities to be relatively devoid of actual personality and charisma. CNN prefers to project an image of competence and intelligence at the expense of personality. It's essentially the Mitt Romney of cable news networks.

So we've established that Fox and MSNBC are essentially the Sarah Palins of the news world. The problem is that CNN failed to change as the game changed. News is about being informed. Narratives are about being entertained. And as any political junkie can attest, Sarah Palin is nothing if not entertaining.

As I speak, CNN is in the process of finding its new day-to-day operations chief. And that new chief is going to shake things up. There's an obvious option: Raid and annihilate MSNBC and reposition CNN as the "liberal" news narrative agency to Fox's "conservative" network while maintaining just enough real highbrow reporting and journalism to keep its "premier news source" halo.

 It's the "safe" and risk averse option. It's also the one, in my opinion, that's most likely to fail with the added risk of ruining its brand perception.

Conventional political wisdom is that claiming the middle ground has essentially become impossible. You have to co-opt the left or the right to gain and maintain political power, because while the moderates can swing an election one way or the other, there aren't enough of them to beat back an organized challenger from either the left or the right.

What CNN needs is a game changer. Let Fox and MSNBC have their daily media personalities. CNN needs to get a diverse cast of charismatic narrative-makers to do weekly shows.  By getting a rotating cast of personalities, CNN can vastly expand its audience reach. A diverse cast talking about diverse issues will bring new sets of eyeballs to the TV screen. And try and get as many guest anchors and personalities as possible. Allow them to play off the fixed personalities, a la Real Time With Bill Maher.

Second, the public face of CNN also needs to change. It's old, stodgy, and professional to a fault. That's exactly what you want in Big Event journalism. But it's terrible for the daily news cycle. Bring out the pro's pros for the Big Events, but keep them in cryo until then and go in a new direction for the daily grind. Don't go young, or quirky, or enthusiastic. Go interesting. Challenge the status quo and change the topic of conversation while eventually working it back into a set narrative. Look to the WSJ's A-Hed for an idea of what I'm talking about.

Do that, and CNN will reclaim its mantle as the king of cable news both in terms of face and reality.

Sunday, June 24, 2012

Saving Houses


About two weeks ago, various US news outlets reported that median US net worth declined about 40% between 2007 and 2010. That puts wealth levels for the 50th percentile of American households at 1992 levels. 

20 years of wealth accumulation gone in 3. Certain political pundits decried this as the erosion of the American dream. And many of them acted as if this was some huge scandal. Fingers were pointed and goats scaped, but the reality doesn’t measure up with the fiction. The truth is much more mundane and vaguely dispiriting.

Take a look at the Case-Shiller Index, which tracks the aggregate price levels of 20 major US real estate markets.

 
 Compiled in MS Excel using data from Standard and Poor’s

 
Uncanny isn’t it? Home prices declined 30.3% during the same time period. The correlation I’ve just pointed out suggests that the wealth decline of the 50th percentile is almost entirely attributable to the decline in home prices. 

The vast majority of most Americans’ wealth is tied into their home equity. For decades, the American dream was symbolized as a nuclear family with 2-3 children, a single family home, and a pair of automobiles. A brokerage account usually didn’t factor in that particular dream.

And it’s a pity that it didn’t. Because the S&P 500 declined only about 3.3% during that 4 year span. And if you had half of your portfolio in a mix of investment grade bonds, you’d actually have a small positive return.

Since 1950, housing prices have tended to rise at the rate of inflation. During that same time, Treasurys and the S&P 500 index have both vastly outpaced inflation. The reason why is simple.

Stocks and bonds are a means of raising money for investment for economic activity. Investments grow the economy. A growing economy allows the people who used that money to repay their lenders and investors from an economy that was larger than what it was before the investment.

But real estate is someplace that people live or work in. It has a primary purpose that isn’t directly related to investing. It’s unrealistic, as a whole, for real estate to serve its primary purpose and also appreciate beyond the rate of inflation. The strength of an economy is not measured by real estate. It’s measured by the activity that occurs within that real estate.

When President Bush pushed his “ownership society”, he wanted Americans to own houses. That was his (and, admittedly, a lot of others’) version of the American dream. But it’s becoming increasingly clear that that version of the American dream doesn’t work for most people. 

But I think he did have the right idea. Americans need to own things. In lieu of owning houses, perhaps Americans should consider owning stocks and bonds.