Grey Swan

Elections are typically dominated by a few key issues. These issues can range from foreign policy to gay rights. Since peoples beliefs on so called ‘moral issues’ are much more firmly held than beliefs on other topics, election years which are about such issues tend to elect bad leaders. Why?

The above graph plots how a person feels about a domestic issue like abortion, over time. If someone is pro-choice now, they tend to be pro choice tomorrow. The graph is stylized, but in reality, the more competent a leader who socially differs from you, the less you like this leader. This is because they are more likely to better coordinate attacks on your beliefs. Unfortunately, this can not only lead to voting for someone who you think is incompetent, it is also partially zero sum. If abortion is made illegal, many people will be happier, but about an equal proportion of people will be less happy. So there is pressure to elect a candidate you agree with regardless of their ability.

Consider a foreign policy issue like the Iraq war*. Unlike moral issues, most Americans change their belief on one policy or another based on what they think will be the better option. For example, I (may) think that if we leave Iraq now, we will be better off because I do not believe our continued presence in the region will make a difference. I realize that this is mostly an educated guess. It is virtually impossible to prognosticate the future. Rather, I believe that on average leaving will be better than staying, but if things go really well when we stay it may be better than if things go badly when we leave. Consequently, the competence of a countries leaders will play a large part in exactly how well things go. There is pressure to elect a leader based on their competance more than their beliefs.

This is crucial. Issues like foreign policy make people vote for leaders based on their perceived ability. Moral issues puts pressure on people to vote for people they agree with.

The above analysis makes the 2000 presidential election clear. It was widely agreed that Gore was more competent. The Bush campaign realized the best way to beat Gore was to make the election about moral issues like personal character, a persons right to choose, etc. This worked. In 2006 the Republicans were no longer able to focus on moral issues. It had become clear they were both incompetant and in disagreement with the majority of voters. The Democrats gained a majority in both houses.

*The above graph charts the likely trajectory of events over time given two distinct decisions – stay in Iraq or leave immediately. Worse leaders will push our time-trajectory on the lower path, better leaders will push it on the higher one. Over time, a competent leader making a choice I disagree with may do better (from my perspective) than a poor leader making a decision I agree with.

Daily news reports stress that the price of luxury good tends to increase faster than the rate of inflation. Increasingly, middle and upper middle class families are being priced out of the luxury good market altogether. Why? I believe that a combination of age old factors and new trends are the root cause. This includes the relative and zero-sum nature of status, societal stratification, rising wages, and the increasingly rapid and free flow of information. The combination of these factors leads to an unmitigated arms race for high status.

In a previous blog I explained that status is achieved relatively*. The result is that wealthy people demonstrate their greater buying power by purchasing more luxurious goods than their neighbors. This may be in the form of large items like a brand named car, or small ones like a new and exotic bottled water. The underlying problem is that these goods do not necessarily get significantly better as their price increases, they just get more exclusive.

When we couple this with the rapidly expanding wealth of our nations elites, we begin to see why luxury prices are spiraling out of control. A decade ago bottled water was considered a luxury good. This was not because it was so expensive, but because it was so ridiculous. Bottled water? Its free out of the tap! A person needed to have money to ‘throw away’ to buy such an item. Today, many people consider bottled water a necessity. What do the rich drink? They drink Voss. Voss costs about three times as much as Poland spring, but it is certainly not three times as good. Its just preferred because it’s exclusive. I currently think that a five dollar bottle of water is ridiculous, but maybe I won’t in a few years. Water illustrates my point so clearly because it so clearly remains the same. Its just water! The main contribution that higher wages have made to the rising cost of luxury goods is creating more demand (more money) for the same ‘number of items’ – status. Consequently, the cost of these goods increases. In the proceeding paragraph I explain how factors compounding the rising wage rate lead to an arms race over status.

Stratification plays an important role in placing similar people in competition with each other. If a poor person lives next to a billionaire, not only can they not compete status-wise (at least not materially), they also won’t. There is no point. In our current society however, people with similar incomes are more and more likely to live near each other. Placing direct social competitors in close proximity with one another increases the importance of status items. People have much greater need to prove themselves because they are surrounded by peers.

The last part of my theory is that the spread of news and information compounds the aforementioned issues. The media continuously displays the styles of the wealthy and the famous. This constant bombardment of information essentially increases the pool of competition for status items. Instead of simply competing in our local community, we now have to compete on a much larger scale. We don’t just want to have a nicer phone than our neighbor, we want a nicer phone than Steve Jobs (the iPhone). Since status is zero sum** but competition for items that grant status continues we have a positive feedback loop. What was good enough today to impress ones friends may be the laughing stock of tomorrow.

**Most people would rather make 100,000 dollars in a community where everyone else made 80,000, than 120,000 dollars in a society where everyone else made the same. The idea is (and this must have evolutionary roots) that being fitter than ones peers may be better than being fitter in general, at least as long as ones survival is not threatened.

Many European countries offer free education to those who want it. The idea is that education is good, and the more educated people get, the better. Since education is costly however, this is not necessarily true.

The main problem with education is that it is a partially zero-sum pursuit.

While classes in computer science and engineering may teach skills applicable in the job market, most classes don’t. Instead, they claim to ‘teach you how to think’. I am a little dubious. Not only have studies showed no increase in intelligence from college, having been through the experience myself I can say that the majority of time is spent learning specific facts that are quickly forgotten. My point is that while college may offer some true benefits to a person’s future productivity, the real purpose of schools is to credential a candidates drive and aptitude. For a certification, 160,000 dollars is a lot of money. Consequently, by simply educating more people two things are likely to happen:

1. Top students may have to get higher degrees than previously to distinguish themselves. Since college is mostly about people jostling for post-college job positions, if more people go to college it will be hard to distinguish the good job candidates from the bad ones. This might force the best to move up a notch in educational attainment to prove there worth. Since the reason for additional education is better credentials, this will be costly in money in time but not provide a sufficient (if any) productivity boost.
2. There will be more people who spend four years learning nothing at a great cost. Since college is mostly a case of zero-sum competition, additional people attending college costs money without increasing the true productivity of these students. This is a net loss.

If we think about it, the root problem with trying to educate everyone is that the students remain the same. Education does not make people smarter, and many jobs require aptitude rather than knowledge (you learn what you need to know on the job). Consequently, having more educated people does not necessarily lead to a better workforce. Education becomes an unproductive arms race.

According to Wikipedia the number of H-1B Visas the US grants each year are decreasing. An H-1B visa permits educated non-citizens the right to work in our country. The concept is that these visas are necessary for the United States to stay competitive in high knowledge industries. Unfortunately, the current system both exploits Americans and under-utilizes foreigners.

The H-1B is essentially a reverse brain drain system. Since everyone agrees a brain drain is bad for a country, isn’t the reverse good? Maybe. If the foreign nationals move to our country to work, pay taxes, and live here permanently, it’s probably a good idea. If they come for a few years to work, pay taxes, get educated, and leave, it’s bad. Unfortunately the latter description seems to be true. While nearly 90 percent of undergrads in top schools are Americans, at the grad level only 50 percent are. The key problem is:

If foreign nationals crowd out American students from top schools but eventually return home, they are actually reducing the long term pool of educated workers. This is exactly what the program is intended to avoid.

What we need are more educated (and smart) Americans, not less. Why? People who produce more than they extract are increasing the average wealth of our country. The current program does this in the short run, but not in the long run. How do we fix this problem?

1. H-1B Visas need to be contain a path to citizenship. We want smart foreigners to stay in America and pay taxes year after year after year.
2. There should be more H-1B visas to garner more of the worlds best and brightest.
3. Universities should be required a maximum amount of foreign students. E.G. 20 percent. This way we give an incentive for foreigners to use their own education systems before coming to America. It would also prevent the crowding out of long term educated American labor.

N.B. The problem is that it takes a while for an H-1B visa holder to repay the cost he imposes on Americans. E.G. they consume subsidized education (many schools claim the cost of an education is below there full bill charge), they crowd out places in univerities, they out-compete Americans for jobs, etc. In the long run these policies work because unlike gardening, ‘smart’ jobs tend not to be zero-sum, so wages of Americans ought not to be depressed.

I used data from the National Longitudinal Survey of Youth to examine how IQ affects income. The survey takes a set of young people in 1979 (late teens to early twenties) and interviews them on a broad range of issues every few years. While surveys have continued beyond 1996, I only have data up to that year.

In the simple linear regression of Income vs. IQ a clear trend emerges – income diverges by IQ as we age*. This may seem counterintuitive – doesn’t raw intellect matter less and less as we get older? Apparently the answer is no. Perhaps this is because the smartest people continue learning at a faster rate as they age, or perhaps this is because it takes a while for there salary to catch up to the value of work produced. E.G., A McDonalds employee is unlikely to be paid below the value of their production. However, many financial companies use strongly hierarchal structures that effectually underpay recent college graduates. Adoption studies confirm a similar trend: Adopted children’s financial outcome decreasingly correlates with their adoptive parents and increasingly correlates with tested aptitude.

What about education? The problem with controlling for education in the data is that smart people tend to get educated more. Anyone with an IQ over 130 who fails to graduate college likely has other uncontrolled variables that decrease their income outlook. Consequently, we would expect a systematic downward bias in our results. Running the regressions shows just this – IQ decreases in importance but continues to be important.

The unfortunate aspect of the above analysis is that education matters less than many people think. Spending more and more on education meets decreasing returns because the raw material – the people who are being educated – stays the same.

*Note that IQ only explains about 15 percent of all variation in income – other factors continue to be very important.