Good Reads

Here are a few interesting essays (via WSJ.com) that I thought some bright minds would appreciate. Each of the following essays were among the most-read this year.

Why We Lie - http://online.wsj.com/article/SB10001424052702304840904577422090013997320.html

What's Wrong With the Teenage Mind? - http://online.wsj.com/article/SB10001424052970203806504577181351486558984.html

Why The World Needs America - http://online.wsj.com/article/SB10001424052970203646004577213262856669448.html

Hook 'em

Mass Incarceration in America

Over the last few decades mass incarceration has become a very cost-ineffective way of keeping our streets safer. Critics have even suggested that mass incarceration promotes crime rather than suppressing it.

Since the 1980s, the percentage of Americans behind bars has gone through the roof.  Our country has the highest rate of incarceration of any country: about one in 100 adults are either in jail or prison (nearly 2.3 million). 

Three decades ago, the state of California spent 10% of its budget on higher education and about 3% on prisons. Today, the percentage spent on higher education has fallen below 8% and the prison share has risen to above 10%. The university administrators in California are actually increasing tuition to cover the deficits that they have incurred and many citizens are complaining that the state spends much more on each prisoner (roughly $50,000 each year) than they do on each student.

Some researchers agree that the increase in incarceration benefited the community initially, but they also agree that as prison sentences lengthened, the percentage of nonviolent criminals in prison increased. Half a million Americans are now in prison or jail for drug related offenses. This is a ten-fold increase since the number in 1980. In all, about 1.3 million people, more than half of those behind bars, are in prison or jail for crimes that are nonviolent.  

James Q. Wilson, a conservative social scientist who worked in the 1970s to help inspire tougher policies on prison, several years ago recommended sending more nonviolent drug offenders from prisons to treatment programs. If implemented, this could decrease the density in overpopulated prisons all over the country. 

A group called Right on Crime has an interesting opinion about nonviolent Americans who are sentenced to long prison sentences; their opinion is that long prison sentences have the unintended consequence of hardening nonviolent, low risk offenders.  I believe this opinion nails it right on head given that prison is portrayed as a violent place where one must constantly defend themselves; a prisoner would then most likely carry that newly acquired "toughness" with them into society. Also, following a long prison sentence, it's apparent that one would find much difficulty in finding a good job given their record and this might in turn cause them to seek other expenditures to make money, in ways that are most likely illegal.

Another aspect of prison incarceration that I wanted to touch on is life sentences without parole. Most countries around the world do not impose life sentences without parole, and those that do generally reserve it for very heinous crimes (mass murders, treason, terrorism, etc.). In England, there are 41 prisoners serving life sentences without parole, whereas here in the United States, some 41,000 Americans are. 

One last statistic: the United States, with less than 5% of the world's population, has nearly 25% of the world's prisoners.

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Correlation and Causation

Gullible and uneducated America is always falling victim to misleading headlines that suggest that correlation implies causation.  Two synchronized variables definitely do not imply any sort of relationship between the two.

A recent study out of Australia had the headline "Earlier Bedtimes Keep Children Slimmer."  This study showed that children who go to bed early and wake up early are less likely to be obese. Could this be true? How would you explain this?  You could quickly jump to the conclusion that the reason many kids are obese is because of the amount of sleep they're getting.  Let's examine this study a little more.

This study recorded the sleeping habits of 2,200 Australian children, ranging from ages of 9 to 16, and compared their weights and uses of free time for a little less than a week.  Each kid got roughly the same amount of sleep but the kids who went to bed late and got up late were 1.5 times more likely to become obese than the kids who went to bed early. 

Now let's consideration some possible lurking variables in the study.  What could a kid between the ages of 9 to 16 be doing late in the evening/night?  Your average kid probably won't be playing sports or doing any kind of physical activity after dinner.  So what else is there to do?  We're in the age of online gaming and social networks so one could assume that a kid could be engaging in these sedentary activities late at night.  

Hopefully I've got you thinking a little bit and you could probably think of other lurking variables that could contribute to the obesity in children that were in the study.  My conclusion: early bedtimes do not imply causation of obesity in children; rather, it is the sedentary activity late at night that causes the obesity.  

Another poor assumption about correlation and causality is polio a century ago.  It was a horrible mystery that was claiming a lot of lives, especially in children.  At the time, there was a strong line of research that suggested that ice cream was causing polio in children.  The reason for this was because polio spiked in the summer time, for reasons unknown, and ice cream sales also spiked during the summer.  Researchers saw that when more ice cream was being consumed, more kids were getting polio.  This started  an ice cream persecution trying to stop polio.  This may sound ridiculous but you see it all the time now when people are against or trying to build up something that they are sure is connected to something else but turns out it isn't. 

Last but not least; rain and umbrellas are almost always found together (they are correlated), does that mean that the umbrellas are causing rain (causation)?  No, umbrellas do not cause rain. Quite a discovery!

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Fun Fact:

In 1925, if you would have invested $1 in small-company stocks, the investment would have grown to almost $16,000 by 2006. Even the risk-averse would have gotten a decent return with bonds and Treasury bills.

Insider trading: Is it worth it?

Insider trading is the act of trading stock or other securities based on information that has not yet been released to the public.  This non-public information can allow individuals to either profit or avoid a potential loss. For example, if a publicly traded pharmaceutical company has given early warning to a hedge fund that a drug trial has failed and the fund sells all their shares, that's insider trading.

The United States is generally viewed as the country with the strictest laws on insider trading in order insure that every American has a fair shot at making profits. Depending on the severity of the case, punishments usually result in a monetary penalty and jail time.

In 2001, according to the SEC (Securities and Exchange Commission, not the overrated football conference), Martha Stewart avoided a loss of a little under $50,000 by selling all 3,928 shares of her ImClone Systems stock, after receiving material, nonpublic information from Peter Bacanovic, who was Stewart's broker.  The day following Martha's trades, the stock plummeted 16%.

In 2003, Stewart was indicted by the government on nine counts, including charges of securities fraud and obstruction of justice. She was sentenced to serve a five-month term in a federal correctional facility and a two-year period of supervised release.

Others, such as Jess Skilling, the former president of Enron, served longer imprisonments. In 2006, Jeff was convicted of multiple federal felony charges relating to Enron's financial collapse, and is now serving a 24-year prison sentence. 

Just how common is insider trading?

"Insider trading has been increasing in recent years, in part because of the aggressiveness of hedge funds seeking out opportunities," says Robert Prentice, professor of business law and ethics at McCombs School of Business.

The problem with insider trading is that it hurts people's confidence in the markets and hurts economic growth. However, with the recent conviction of Raj Rajaratnam, founder of the Galleon Group hedge fund management firm, it appears that this problem is finally getting under control (even though some may argue that the punishments do not fit the crime).

Hook 'em

Is Welfare fair? (Do you even work, bro?)

"Welfare queen" is a term that was first introduced to the media by former president Ronald Reagan. In the 1970s, a "welfare queen" was a woman who had eighty names, thirty addresses, twelve Social Security cards, was on medicaid, food stamps, and was collecting veteran's benefits on four non-existing deceased husbands. This was the description that was used by Reagan while he was describing a woman from the south side of Chicago (a woman that matched this description was never found). As the 80s and 90s rolled around, the description of a "welfare queen" evolved into a woman who had more kids in order to benefit from a higher welfare check. Conservatives have argued that welfare recipients have an incentive to have more children because they get a higher check. However, I believe this to be inaccurate, given that a welfare mother can expect an additional $90 per month in increased AFDC payments for another child. Think about how much it takes to raise a child; would a woman really want to go through 9 months of pregnancy just to benefit from an additional $90 a month? Conservatives believe so, but a study by the U.S. Bureau of the Census found that AFDC families are virtually the same size as an average American family. Myth debunked.

The reason I bring up this topic is because I wanted to touch on the topic of stereotypes towards welfare recipients. I came across a comment that bothered me this morning on a message board; this comment implied that welfare recipients shouldn't vote because they did not work. Actually, many welfare recipients DO work but receive wages that are insufficient to provide for their family. 

Walmart's intentional low wages force their employees to need about $420,000 per year, PER STORE, totaling to $2.66 billion annually in food stamps and other taxpayer assistance. All this while the Walton family is sitting on hundreds of BILLIONS, I repeat, hundreds of BILLIONS. Why should American taxpayers subsidize Walmart employees when Walmart has plenty of money to pay them themselves?

Hook 'em

Fiscal Cliff Hangover

The title of this blog might be a little misleading because of the fact that we have yet to go over the Fiscal Cliff.  However, I have a bit of a hangover from the media coverage of the cliff.  I'm an avid viewer of CNBC and sure enough, they have a Fiscal Cliff countdown going on throughout the day. First off, I'm not trying to downplay the potential effects that the FC (I'll abbreviate it for now) will have on the economy, but I'm getting increasingly irritated on the lack of new information the media is provided.  Also, I feel as if the media is already assuming that we are going over the FC when it appears to be a 50/50 chance since Speaker of the House John Boehner and President Obama have appeared to "attempt" to compromise in the past few days. I was initially hoping for an increase in the top marginal tax rate (from 35% to 39%) but maybe Boehner and Obama can agree on something around 37% for top income earners.

Current tax rates for capital gains and dividends are also at stake.  For now, capital gains and dividend taxes are at 15% for the wealthy.  If we fall off the cliff, top income earners can see capital gains taxes increase to 20% and dividend taxes would go up to around 39%.  In fear of the cliff, many companies are now offering special dividends to investors this month to avoid the tax increases; another example of people assuming we are going over the cliff.  Better to be safe than sorry I guess?  I've stated a few facts and opinions so now I'll get to the punchline; I don't think an expiration to the Bush tax cuts for the wealthy will be as bad for the economy as some think. A tax increase for your $1 per share dividend? Spare me.  Again, these tax increase mainly affect the wealthy (aka the "job creators").  Investments in stocks are bets, and regardless of the tax rates, Americans love bets. Vegas anyone?

In my opinion, to avoid the FC we must return to Clinton-era tax rates for the wealthy, with a top marginal rate of 39.6% vs the Bush-era 35%. Clinton was an age of balanced budgets and economic growth.

 Hook 'em.