Month: January 2013

“Secret no-fly zone?” from AOPA arrives just in time to bolster my story about how much wealthy countries spend due to loss aversion. Afraid of a 550 lb. glider damaging a nuclear power plant, about half of all possible law enforcement agencies, including the FBI, geared up to hassle an unarmed 70-year-old citizen. He was arrested and jailed for 24 hours.

The New York Times reports today on a RAND study that found that government-mandated (and taxpayer-subsidized) electronic medical records don’t save money. I predicted this in my health care reform proposal from 2009, under “Scrap Government-mandated Health Care IT”. Because we as a society were going to invest in IT in the dumbest possible way (hundreds of incompatible systems installed nationwide, each one chosen by busy physicians), there was no way that it could be anything other than a huge waste of money.

The report, the industry, and the country refuse to deal with the deeper issue: why did we ever think that this kind of IT would save money and improve care?

There are two ways to do an electronic health record: structured and unstructured.

Let’s consider what an unstructured electronic health record would look like and cost. You’d create a directory in Google Drive or Dropbox and give doctors and hospitals access to this directory. Physicians could type into a shared Google Doc with other physicians or upload scanned output from tests, etc. It would be paperless, organized, and electronic, but not very structured. To figure out what a cholesterol test result was from 2003, for example, one might have to read through a document in English rather than executing an SQL query. What would this cost? Nothing, basically (which is why Google and Dropbox can give you these services more or less for free). How about doctors and nurses? If they can create a Google Doc and type at a computer then they can easily add notes, test results, instructions, etc.

How about structure? A system for a hospital typically costs about $100 million to install. If it serves a community of 100,000 patients that’s $1000 per patient. Physicians and other providers spend a lot of time in training and a lot of time navigating through screens to get the information into exactly the right table, so the ongoing cost in time and effort is enormous. What value in terms of health benefits is delivered for all of that effort? Epidemiologists might be happy because they can now get an answer to the question “What’s the average cholesterol level for patients in this hospital?” by typing a three-line SQL query (assuming they have first hired 10 lawyers to address patient-privacy issues!). But where is the value to the patient? Does it help to have Patient A’s cholesterol information in the same database table when treating Patient B? No. That is fundamentally why little value is delivered in exchange for the $100-200 million cost of using a structured system.

Why is IT so popular in other industries? Consider a bank. There is a lot of value to having all of the accounts in one big structured database. It then becomes easy to ask “How much money is in the bank right now?” An airline can similarly benefit from a centralized and comprehensive reservations database in order to handle queries such as “How many empty seats are there on all of our flights and can we sell an unusual two-stop route from NY to San Francisco at a low price to fill up some of those empty seats?”

Fundamentally there is not as much value to be obtained by having the ability to do a structured query into multiple patients’ data. Nor is there much value in being able to do a structured query into a single patient’s data. Unless you go to the doctor every day of your life, it really isn’t that hard to scan up and down in a big word processing document or spreadsheet and/or use conventional word processing “find in document” tools and/or use Google Drive’s “search a bunch of documents” tool. I did a quick Google search and learned that the average size of an electronic health record, not counting images (which can easily be stored by date as regular files), is between 1 and 40 MB. The absolute top end of the range is 3-5 GB “for a person with several health issues including images”. In other words, your health record could fit into the memory of a modern toaster oven. [A doctor could keep a complete synced copy of all of his or her patients’ records on a mobile telephone.] Anything this small can be searched pretty easily, either by computer programs or humans.

[I actually asked a cardiologist who had recently invested in a $30,000+ system for her solo practice and who liked the system “How would this compare to using Google Docs to share referral letters and reports with the other doctors and hospitals that you work with? And then simply scanning test results and storing those as PDFs?” She replied that the Google Docs/scanned document system would be better for her and the other doctors, both in terms of ease of access and saving time for data entry but that it wouldn’t comply with all of the government regulations for both privacy and “meaningful use”.

Separately, lest anyone think that I am simply hostile to the brave new world of computers on doctors’ desks, note that I built what is believed to be the first Web-based electronic medical record system. This 1994 effort is described in a 1996 journal paper: http://www.ncbi.nlm.nih.gov/pmc/articles/PMC116301/.]

In this posting from two years ago, I wondered anecdotally whether it could possibly be a good idea for the U.S. government to encourage able-bodied people to stay home and play Xbox for 99 weeks rather than work. The crux of my argument was “It seems strange to pay someone for 99 weeks and hope that somehow the employers that didn’t want them when they were fresh out of work would somehow want them after two years of idleness.”

It seems that the academic eggheads have weighed in on the same issue with some actual data. http://economix.blogs.nytimes.com/2013/01/11/why-the-unemployment-rate-is-so-high/ is by a professor at UC Berkeley and a former economist for President Clinton. She concludes that the current unemployment situation is pretty much normal except that “during the current recovery the normal relationship has broken down for the long-term unemployed — the increase in the vacancy rate has produced a smaller-than-expected decline in the long-term unemployment rate” and “Another recent study found that the likelihood that a job applicant receives a call-back for an interview significantly decreases with the duration of his or her unemployment.” I.e., nobody wants to hire someone who has spent the past 99 weeks staying home and playing Xbox.

[The author herself is illustrative of why the U.S. is moribund. After staring at data that shows the long-term unemployment problem was pretty much created by government action she does not say “So we should be like Singapore and simply not have unemployment insurance. Then people who lose a job would be motivated to find another one quickly, even if it was not the work that they most liked to do.” Instead she holds out hope for an even bigger government intervention: “… That’s what the Federal Reserve is worried about. It’s too bad that more members of Congress don’t share this concern.”]

Folks: I’ve spent my life reviewing camera bags that are attached to the photographer (me). Now that I’m older and wiser I realize that the correct way to use a camera bag is to have it be attached to an assistant (i.e., someone younger and stronger!). Suppose that I have an assistant who can carry a small photo backpack or similar. Let’s say that bag needs to hold a Canon 5D, 24-70/2.8, 70-200/2.8, 300/4, 1.4 teleconverter, and 16-35/2.8 (to keep the size manageable maybe the 24-70 could be replaced with a 50/1.4). It should have a rain cover in case the weather turns bad. But most importantly I want to be able to put a lens away and take out a new lens while the backpack is still on the assistant’s back.

Has anyone found a good photo backpack to be used like this? There are a lot of good photo backpacks, but the classic ones are designed to be taken off, set down on the ground, and then unzipped for flat access (if you did this while the bag was still attached to someone, the lenses would tend to fall out). The newer designs tend to innovate by trying to make it easier for the person wearing the backpack to get to some part of it, but that’s not quite what I want.

Happy 2013. Time to evaluate investment ideas, particularly in light of the new tax code. The Federal Reserve Bank has announced plans to print money until unemployment rates are reduced to less upsetting levels. They say that they can do this without creating inflation, but these are the same folks who created the 1970s inflation and who missed the problems that led up to the Collapse of 2008. The potential for inflation argues in favor of equities rather than bonds. (Disclosure: I am a child of the 1970s and the Jimmy Carter “malaise” years so I probably have an irrational fear of inflation.) With tax rates on income having been increased, but capital gains rates still being reasonably low, stocks again look more attractive than bonds. The question then becomes… what stocks to buy?

As the Secretary for the MIT Class of 1982, I recently received a report on our school’s $10 billion endowment. It seems that the professional money managers have put just 6 percent of the money into bonds, 8 percent into U.S. equity, and 17 percent into international equity. So it looks as though they are favoring international but the waters are muddied by the fact that the school has 12 percent of its portfolio in real estate (e.g., office buildings in Cambridge) and 8 percent in “real assets” (gold bricks? forests?). There is another 25 percent of private equity (feeding the next Mitt Romney with fat fees) and 23 percent in scary hedge fund-type stuff. MIT seems bullish on its neighborhood (the Cambridge real estate) but bearish on the U.S. as a whole (just 8 percent faith in the S&P 500 and smaller cap stocks). The annualized return of this endowment has been 9.7 percent over the last 10 years. Vanguard says that its Total Stock Market domestic equities fund has returned 8 percent, by contrast.

MIT seems to favor international over U.S. stocks. Is this thumbs down on future U.S. growth reasonable? Naively one would think that the bigger and richer a country is the easier it would be for that country to keep getting bigger and richer. The country has a huge capital base, educated people, fantastic infrastructure, etc., that poorer countries cannot hope to match. Yet we do see Europe and the U.S. both more or less stalled out while much of the rest of the world booms (today’s New York Times: “Unemployment in the euro zone rose to a new record in November”).

Why is it that rich established countries stagnate and leave room for the upstarts? Mancur Olson claimed that it was interest groups tapping into government, e.g., companies, farmers, or unions obtaining favorable regulations that enable them to collect more money than in a market economy. I wonder if his analysis is simultaneously incomplete and overly complex.

Let’s start by considering a primitive economy. The only way to get an income is to work or to get a voluntary contribution from person who is working, e.g., a family member or close friend. As an economy advances, additional mechanisms for earning a cash or cash-equivalent income are developed. Let’s consider some of what we’ve got in the U.S. right now:

• “I am old and worked for at least a few years.” : collect Social Security
• “I drove a city bus from age 18-41.” : collect full pension from Massachusetts public transit system
• “I am disabled.” : collect Social Security Disability Insurance
• “I am able-bodied, ready to work, had a job 1.5 years ago, but don’t have a job now.” : collect unemployment insurance
• “Twenty years ago, I was married.” : collect alimony
• “Twenty two years ago, I had a child.” : collect child support (Massachusetts at least enables a parent to collect child support until a child reaches the age of 23)
• “I am poor.” : collect free or nearly free house, medical care, food, etc. (partial list)

One can argue about the merits of these various schemes, but it seems beyond doubt that in the aggregate they reduce the percentage of people in our economy who are working. Much of this effect, e.g., above-market public employee salaries and pensions, Mancur Olson budgeted for in his analysis.

Something that Olson did not consider at all, however, if memory serves, is loss aversion and the fact that wealthy societies have much more to fret about losing. Loss aversion is a massive cognitive flaw that leads to a lot of terrible decisions (see Thinking, Fast and Slow by the Nobel laureate Daniel Kahneman for a good overview). In the simplest form, an investor would be reluctant to sell a stock that they believe is likely to go down because to do so would lock in a $10/share loss already suffered. Kahneman cites research showing loss aversion will lead companies to spend millions in legal fees defending lawsuits that they expect to lose, simply because the idea of confronting the loss is too painful (so they end up losing the case, paying twice as much as they would have paid to settle it, and then paying legal fees on top).

Let’s look at where the U.S. has been beefing up spending in recent years. We spend more than any other country on health care though we know that none of it will make us healthier or feel better day to day. So really we are spending because we are afraid of losing our health or our lives. We can say that 1 percent of GDP is spent on actual health care and the other 17 percent is spent on loss aversion (total of 18 percent of GDP is spent on health care in the U.S.). How about military? We spend money because we don’t want someone invading the U.S. and taking everything that we have worked for. We spend money because we are afraid of losing our influence in the world. I think we can chalk up all military spending and all of the spending on the Iraq and Afghanistan wars to loss aversion. That’s somewhere around 5 percent of GDP (worldwide average is closer to 2.5 percent).

We spend a lot on firefighters to prevent the loss of houses and commercial buildings. We spend a lot on police, district attorneys, criminal defense lawyers, and prisons to avoid losses due to crime. A country without such expensive buildings and/or expensive property to steal would probably not invest so much in fire and police protection.

Then let’s look at private security guards (roughly 2 million in the U.S., says Wikipedia). Are you waiting in line at the guard’s desk in the lobby of a skyscraper rather than going in and engaging in a meeting? That’s a drag on potential economic growth both because you’re not working and because the security guard is being paid to make sure that you don’t do something bad to the expensive building or the expensive property inside. We’ve got a lot of fancy airplanes and airports, more so than a up-and-coming country, but then we end up having to spend billions to protect it (more than $8 billion on the Transportation Security Agency plus whatever individual airports and airlines are spending).

Planning, zoning, and environmental delays are all part of loss aversion as well. We don’t want to lose open space, members of an endangered species, or some good feature of our neighborhood. So it took us about 10 years after the 9/11 attacks to begin rebuilding the World Trade Center. By contrast, one construction firm in China “put up a 15-story hotel in just 48 hours back in 2010 and a 30-story tower in 15 days in 2011” (now they are planning to build the world’s largest skyscraper, 220 stories high, in 90 days).

As a society we spend a huge amount of money on insurance (and then billions more to bail out AIG!), but I couldn’t find a good source for property and casualty insurance total revenues.

[It is actually kind of hard to come up with government spending that does not fall into either the “paying someone for doing something other than work” or the “loss aversion” categories. Education is the only sizable government program that comes most easily to mind (parks and recreation are obvious as well, but they are tiny in terms of dollars). Since government is over 40 percent of GDP that means a huge chunk of national income spent on loss aversion even before private expenditures kick in.]

The more that you have, the more than you worry about losing it. It seems to be true for individuals. Not too many college students have renter’s insurance, for example. It also seems to be true of societies and loss aversion may ultimately impose a drag on the economy comparable to the interest groups that Mancur Olson cited.

How as investors can we put this theory into practice? We could invest in countries that are really poor. Congo and Zimbabwe, for example, are at the bottom of the CIA’s list of countries ranked by purchasing power parity. They probably aren’t spending too much on insurance to protect whatever is left of their societies, but on the other hand they aren’t easy places to do business. What about the middle income nations? They should have enough money to support a decent physical and legal infrastructure but not so much money that they spend most of their time and effort protecting what they’ve already got. If we were to say that we wanted to invest in countries that had purchasing-power adjusted incomes of between $5000 and $25,000 per year, what would we have? Nauru and Syria are first on the list. That doesn’t seem very practical. We could further refine our criteria and say that the country has to be big enough to have a stock market, needs to have a government that the inhabitants accept, and cannot have its income based purely on a natural resource of some sort. Now we’re looking at countries such as Jordan, Armenia, Georgia, Belize, China, Ecuador towards the bottom. Brazil, Costa Rica, Panama, and Uruguay are in the middle. Botswana, Russia, Latvia, Chile, Argentina, Croatia, Hungary, Poland, Estonia, Portugal are near the top. Maybe we need some more refinement that the country has to be on its way up rather than on its way down or stagnating. So we get rid of Argentina and Portugal, for example, because workers there will be depressed thinking about the good old days.

Finally we have the challenge as individual investors of finding a way to buy stocks in companies that are headquartered in and/or mostly do business in these countries.

So… questions for the readers:

1. does this theory of why rich countries stagnate make sense/add anything to Mancur Olson’s time-honored analysis?
2. are middle-income countries likely to grow faster than the U.S. and Europe?
3. if so, what’s a reasonable way to invest in that growth?

[This posting is also available in a Czech translation.]

I sent an email recently to a couple of my favorite 17-year-olds (two of three triplets). They’re applying to colleges and anxious about where they’ll be accepted. I thought my email might be of interest to others, so I’m posting it below.

There are a few interesting new reviews on DxOMark:

• Canon EOS M “mirrorless” camera
• Nikon 28/1.8 lens
• Canon 28/2.8 lens

The Canon M turns in a dismal sensor quality score, with a dynamic range of 11.2 Evs. That is two f-stops worse than the Sony NEX-6. The Sony (which I own and like, especially for photographing toddlers due to the flip-up waist-level viewfinder (something else the Canon lacks; its screen is fixed)) does everything better than the Canon: color depth, dynamic range, low-light performance.

If that were not bad enough, the latest Nikon 28mm prime lens turns in a fantastic performance, 19 perceptual megapixels compared to just 15 megapixels for Canon’s 28/2.8 (more than one f-stop slower). The Nikon also handily outperforms a manual focus Zeiss 28/2 lens that costs twice as much.

[Separately, I just discovered an amazingly bad user interface feature of my Canon EOS 5D Mark III. When recording simultaneously to two cards, e.g., RAW to the CF card and JPEG to the SD card, if one deletes a goofed-up out-of-focus or eyes-closed image it is deleted only from one card. So you come home with 500 RAWs and 600 JPEGs, for example.]

A friend invited me on a minibus tour of Israel and Jordan with her three children, an 11-year-old friend of the oldest daughter, and about 20 members of her extended family. I hadn’t been to Israel since teaching a class there in 2003.

The first difference observed was changing planes on Christmas morning in the Rome airport. To judge by the decaying terminal, Italy is well on its way to Third World status. I had expected to be interrogated by security personnel prior to getting on the Rome-Tel Aviv leg, but no special security procedures were applied. The only thing unusual was a group of portly Orthodox Jews davening, which prompted a slender American woman to ask “Is there something about Orthodox Judaism that prohibits them from working out?” For my part, watching these folks boarding the plane from stairways at both ends and trying to get settled in their seats, I observed that “Southwest Airlines would go bankrupt if most of their customers were Orthodox.” As with flights into DCA, we were told that we couldn’t get out of our seats once we entered Israeli airspace. Given that Israel is about the size of New Jersey this didn’t amount to much. Overall it was a big reduction in security from my 2000 and 2003 visits, where before getting on the Europe-Tel Aviv flight I was made to open up my laptop and give the security officials a PowerPoint presentation on programming the Oracle database.

The gleaming new terminal in Tel Aviv stands in stark contrast to what the Italians have going for them, a good reminder of high quickly an advanced country can decline and how quickly a motivated country can grow (Israel was a poor nation with a big welfare state and a lot of regulations strangling business; a combination of deregulation and the immigration of well-educated citizens from Russia has fueled a boom since about 1990). Questions by the immigration officer were perfunctory.

On a trip to Israel in 1992 I remember picking up hitchhiking soldiers carrying rifles. Today the soldiers get free bus rides back home and are seldom out and about in uniforms. One of my friend’s nieces is a beautiful long-haired stylishly-dressed 20-year-old. At lunch I asked her what she did with her life. “Three days a week I am at home with my mommy and daddy. The other four days I train soldiers how to unpack, assemble, aim, and fire a 70-kilogram M47 gun. At a Bar Mitzvah celebration in the Old City of Jerusalem, somehow a 5′ tall teenager in civilian clothes was wandering around with what we would call an “assault rifle” (magazine taped to the side, so plainly not loaded). One of our American gang clucked disapprovingly “Why is that child carrying a gun?” My friend’s brother, who lives in Tel Aviv, said “Oh, it probably belongs to one of the adults and they are just letting the kid have a little fun carrying the rifle.”

A $25 30-minute flight to Eilat involved a 30-minute wait in a security line. Despite the fact that no family with children has ever caused a terrorist attack on an airliner (a pregnant Irishwoman unwittingly carrying a bomb is the closest incident that comes to mind), my friend, her husband, and their three child (6-12; all with U.S. passports) were interrogated at some length.

After following in the footsteps of Indiana Jones at Petra, we flew back to the U.S. from Amman, Jordan so I can’t comment on what security might be in place for international flights departing Tel Aviv.

[Overall it was a very pleasant trip. This generation of Israelis seems to have lost some of the hard edge that their forebears had and consequently the hotel and restaurant experience is more welcoming. Also, thanks to the miracle of Android and iOS, no child was ever heard to say “Are we there yet?”]

According to this White House press release, the federal government is ringing in the new year by simultaneously raising tax rates (i.e., penalizing people for working) and extending payments to two million people who do not work (i.e., rewarding people for playing Xbox). Has this ever happened before at any time in the history of the U.S. (or anywhere else in the world for that matter)?

[Separately, this might be a good time to look at Gregory Mankiw’s October 2010 calculation of his total marginal tax rate as 90 percent (nytimes). Mankiw had already budgeted for the 39.6 percent federal tax rate. He also had budgeted for the 3.8 percent Obamacare supplemental income tax. Mankiw estimated that estate taxes would be 40 percent at the time of his demise, but with the federal estate tax increase to 40 percent and the Massachusetts estate tax rate being 11.2 percent, Mankiw’s 2010 estimate overstates the amount that his children will receive. Instead of $1,000 it will be closer to $830 and the overall tax rate will be 92 percent rather than 90 percent. Mankiw did not say what his children will do with the money. If they spend it here in the U.S., they will likely be subject to a European-style value-added tax (the U.S. can’t run a European-style welfare state forever without European taxes) of around 20 percent. So the $830 will really be $664 and Mankiw’s marginal tax rate is 93.3 percent.]