Defenestrating Thoughts from the Bivouac

Everyone has been abuzz about the latest research which shows that boys and girls in the US are as good as each other in math. After decades of “girls can’t do math”, it really nice that we’re dispelling this horrible myth.

This news got tons of coverage from the news media. And rightly so. But in their haste to cover the story, almost all the outlets omitted something rather important, which the ScienceNow did pick up on:

Neither boys nor girls get many tough math questions on state tests now required to measure a school district’s progress under the 2002 federal No Child Left Behind law. Using a four-level rating scale, with level one being easiest, the authors said that they found no challenging level-three or -four questions on most state tests. The authors worry that means that teachers may start dropping harder math from their curriculums, because “more teachers are gearing their instruction to the test.”

There are two very important points here:

1. Today’s tests are mostly easy questions.
2. Students aren’t being taught to answer average or above average difficult questions.

Keeping this in mind, let’s revisit the conclusion that boys and girls are getting the same test results. It’s possible there’s a big, important point missing from the study.

Let’s invent a scale of 1 to 10 with which to measure mathematical ability. And for sake of argument, let’s say that the scores used to be as follows, with the boys scoring better than the girls:

• Boys - 8 out of 10
• Girls - 6 out of 10

Now, what if these are the new scores?

• Boys - 3 out of 10
• Girls - 3 out of 10

In this case, boys and girls are equal. Unfortunately, they are equally stupid. :-(

Now re-read the two important points above about students not being tested with hard questions and not be even being taught hard math. Whoa.

So, could this be what happened? Did boys and girls just score worse?

The problem here is that the reporting is relative, not absolute. We were asking, “how good are girls at math compared to boys?”; instead we should be ask “how good are girls at math?”. It’s not like K-12 math has changed that much in the past 100 years. You’d think we could figure out a way to do this objectively.

This reminds me of how SAT scores were re-balanced. The SAT is designed to have a mean score of 500 with a standard deviation of 100. Over time the median started to drop and the SAT was re-centered in 1995.

My older sister took the SAT before the rebalancing and I took it afterward. As a result, my scores are “higher” than hers; though if you convert them to the same base, we scored roughly the same. Yeah for grade inflation! :-)

Speaking of grade inflation, did you know that for a while at Princeton 46% of the grades given were A’s? Now the policy has changed so that “35% of grades in classroom work, and 55% of grades in independent work” are A’s. Yes, this seems more reasonable. :-P

After I posted this morning, I remembered the buzz a while back about how airlines would start weighing passengers and charge based on their weight. This is something that seems like it would never happen.

My guess is that some “expert” sarcastically said, “Next thing you know, they will charge passengers by weight.” And then the talking heads took the story and ran with it. And kept running.

There’s a huge overhead and headache of weighing all the customers and then charging them. Check-in times would be longer and more staff would be need. Plus, there would be all sorts of privacy concerns and lawyers would have a field day with discrimination lawsuits.

It’s much, much easier to “socialize” it and just spread out the cost across all the passengers. Which is what airlines do today anyway.

If you’re not convinced, think of this: who are the airlines’ most profitable customers? They are the guys in first and business class. And let’s be honest, most of those business guys are pretty big. How do you think they would feel about being weighed at the airport in front of everyone?

Charge for luggage? Sure, the business traveler is annoyed, but not that much; after all, he just expenses it. But you start weighing him, and you just lost a really valuable customer. Unless all the airlines start this at the same time, you’ll see a significant amount of people that go to the airline that doesn’t completely treat them like cattle.

Everyone is all abuzz about airfares. Not only are they going up, but suddenly we have additional fees for checked bags. And now some airlines are charging for things like sodas and snacks while on the flight.

The big airlines have consistently been backing themselves into a corner, by signing untenable contracts with unions, having an unnecessary diversity of equipment, and using the hub/spoke model in order to get subsidies and, in many cases, be granted a near monopoly from hub cities.

Add in rising fuel costs and the airlines can’t adjust. So they need to raise fares. This completely makes sense, if the price of one of your “raw materials” go up, sure, end-consumer prices will go up to compensate. There’s no mystery there.

What I don’t understand is adopting an a la carte pricing model while prices are going up. (A la carte pricing is when the customer purchases only individual items instead of a fixed group of offerings.) I’m not debating the merits of a la carte pricing, just the timing.

Of course, It’s very likely that if the luggage wasn’t charged extra, the basic fare would go up more to compensate. But that’s not the point. The consumer see prices going up and quality of product going down; so we have to pay more to get less.

Now if just prices went up and quality was the same, the consumer would “pay more for the same” and the consumer anger could be easily deflected to the rising oil prices.

And I don’t understand the reasoning behind charging for soda. The justification is the weight. Well, if I’m not going to get a drink on the plane, I’m going to bring my own with me. So the weight is the same. The only difference is instead of the airline paying wholesale for the soda, I pay retail in the airport. And the airline wasn’t giving me that soda for free, you can count on that being a piece of the total airline fare.

Maybe, the airline can now staff the place with fewer stewardesses? Unlikely, those are union employees. So where’s the savings? The airline at most dropped the wholesale cost of soda on the fare. Wow, 15 cents cheaper fare. Probably not worth the PR hit in the first place.

Consider one of the orthogonal cases: suppose that airline fares were steady (or dropping). An airline could introduce a la carte pricing on rarely used things like the 2nd bag of checked luggage. Then they could drop the price and get some more business.

Alternatively, the airline could do a refund based system. When you check in and don’t have any checked luggage, the customer gets a $25 voucher for his next flight.

Both of these approaches would give you a la carte pricing with good to neutral PR.

So why did just about everyone do a la carte pricing? Because one airline did it first and was able to raise its base fares a little less than everyone. So everyone scrambled so their base fares would be inline. Stupid first mover.

Of course, every first year business student’s favorite airline, Southwest, is still doing fine and expects to make a modest profit despite the economic climate. And guess what, they don’t charge for checked luggage. Way to be a rebel Southwest! :-)

As I was thinking about my last post, I realized it was a bit of a downer. I had intended for it to be humorous instead. My personal take on the topic is that, while the sword is probably mightier than the pen in the short term, I completely agree with Victor Hugo, who says,

No army can stop an idea who’s time has come.

I can’t explain it, but not only does that sound right, it makes me feel good. :-)

For some reason, I was thinking of the old saying, “The pen is mightier than the sword.” I’ve never been a fan of this saying, since it seems wrong. Granted, written word can win “hearts and minds” better than a sword, but it’s the guy with the sword who decides which words get to be used.

After all, “history is written by the victor”. Whoever is in power generally controls the media and information flow. It doesn’t really matter that someone writes something, if it never gets distributed.

Maybe it’s more appropriate to amend the saying to be: “The pen may be mightier than the sword, but the guy with the sword decides who gets the pen.”

Sometimes I wish that there would be a tape recorder running when Crissy and I talk. We always end up cracking each other up and later can never remember what the joke was.

The other day, I was almost hit by another stupid Seattle driver and I swore rather profusely (years of playing hockey make me excellent at this). For some reason Crissy dislikes it when I swear, so in addition to giving me a very disapproving look, she asked me,

“Why don’t you use the Hindu gods’ names in vain instead? Wait, what’s Ganesha’s last name anyway?”

“Um, Ganesha doesn’t have a last name. He’s like Cher.”

<pause>

“Does he believe in life after love?” (referring, of course, to the very popular Cher song)

This of course devolved into us trying to decide the funniest Cher song that Ganesha could sing.

The whole “using God’s name in vain” thing is a little weird to Hindus. Our Gods love it when you say their name. In fact, our gods even have lots of names; the more names you use, the happier they are.

But I suppose if you said, “Parvarti! That soup is hot! I burned my mouth!”, even the easy-going Hindu gods wouldn’t be that happy. :-)

Hulu is an online video-on-demand service that offers streaming video of lots of popular shows. Since Hulu is joint venture between NBC-Universal and NewsCorp (parent of Fox), it’s not surprising that the site is dominated by their content.

Hulu seems to be designed to make money on the ads that are inserted into the shows. Each “commercial break” has one 15 to 30 second ad. Though they also have a syndication model, presumably the bulk of their money does (or should) come from the in-show ads.

Hulu has a large selection of shows and until recently they would post new episodes the morning after they originally aired. I alway thought this was a great idea, they can pick up a viewers that they wouldn’t have otherwise.

People who watch the broadcast either watch it live or Tivo it . People who’d watch Hulu either missed the episode on TV, don’t have a TV (or access to one), want to watch it again, or were watching something else. So Hulu picks up audience that the live broadcast can’t get.

So the services are complementary. And since the content is paid for by the broadcast, Hulu just needs to make back operating expenses. It’s a pretty good plan.

Now let’s go back to who the target audience of Hulu is: people who missed the episode on TV, don’t have a TV, want to watch it again, or were watching something else. What did these people do in the past? A lot of them downloaded it illegally.

So Hulu also cuts down on illegal downloads and recovers some of that “lost revenue”.

Now, Hulu did something I can’t understand. The only show I watched regularly on Hulu is Battlestar Galactica. Crissy and I just get limited cable, so I can’t see the broadcasts on the SciFi network (which is owned by NBC). So, for me to see it, I have to watch at a friend’s place or rent/borrow the DVDs when they come out.

Since the show is on Friday night (seriously, what’s up with that?), I miss episodes frequently. Since the show is a serial, it’s tough to miss episodes and really annoying to watch out of order.

Now with Hulu, if I miss an episode, I can watch it online the next day. Everything is great: I get to see my show and Hulu gets to show me ads.

Just recently though, Hulu changed their policy. New episodes are now posted 8 days after the broadcast. I’m fine with a delay before the show is online, but 8 days just seems stupid: by the time an episode is posted online, the next episode has aired.

So I can never catch up! It seems like it’s in NBC’s better interest if people are watching the broadcast version, so why would they prevent me from doing this? It’s a serial! I don’t want to watch it out of order. So now I’m stuck watching it on Hulu.

Aside from being annoyed about the delay in watching my show, I don’t understand the business model.

Let’s assume that Hulu viewers are less profitable than broadcast viewers. Why 8 days instead of 1 day? Let’s look at our use cases again:

• People who missed the episode on TV - now they are going to miss all the episode broadcasts, unless they watch episodes out of order
• People who don’t have a TV - doesn’t matter what the delay is, they will never see the broadcast
• People who want to watch it again - they already watched the broadcast, so you made your money already
• People who were watching something else - still not going to get them

Now the major downside, people will start downloading it illegally again! In fact, that’s exactly what the comments on the Battlestar page on Hulu say.

What if our assumption is wrong and Hulu viewers are more profitable than broadcast viewers. If that were so, NBC would try to put content on as soon as possible following the broadcast, if not earlier. They certainly wouldn’t posted it later!

Last, let’s consider DVD sales. If NBC was worried about losing DVD sales, the time gap doesn’t make a difference. It’s solely the availability that matters. Currently, NBC only has 4 episodes posted, so that shouldn’t affect future DVD sales.

I wish I knew that the reasoning was here. My guess is that someone thinks that Hulu is cannibalizing broadcast viewership. I think this assumption is wrong; plus it’s really tough to measure, for example, how do you know that a Hulu hit isn’t someone who also saw the broadcast? After all, broadcast viewership is really tough to measure for medium- and long-tail programming.

And what about conversions? Someone may see the episode on Hulu and then start watching the broadcast.

Oh well… and please remember, I haven’t see last week’s episode yet. Don’t tell me what happened. :-)

The latest Fed action to inject “liquidity” of $200 billion via a Term Auction Facility (TAF) is really, really stupid. And the fact that the market went up is a sign that stock investors are not just irrational, they really don’t think for themselves.

Basically, the Fed is lending the banks US Treasuries, and taking some of the banks’ assets as a collateral. Given all the bond rating mess that’s happening, it shouldn’t be a surprise that the bank assets the Fed is picking up are at least partially bad. It’s possible that most of the assets are bad.

So two important things follow from this:

1. The banks are in big trouble. The bank couldn’t use its own assets to get liquidity on the open market. Or in other words, the open market wouldn’t touch their assets, because they are over-valued and possibly worthless. So the Fed has to “buy it”.
2. If the banks owe the Fed this much money ($200 billion is a lot), the Fed now owns a significant amount of the banks. This is like a home loan: the bank owns the home until you pay off the debt. Basically now, the Fed is nationalizing the banks.

So if the banks can’t repay the loan, the Fed has to eat the cost. And that means the taxpayers have to eat it. Basically, we’re looking at a taxpayer bailout of the banks.

But yesterday the market shot straight up. How is the Fed action good news? If the headline read, “$200 billion taxpayer bailout for the banks”, would the market go up? Probably not. Even the dumbest investor wouldn’t say, “Woohoo! The taxpayers had to give the banks $200 billion to kept them solvent temporarily! Buy, buy, buy!”

Keep in mind, this $200 billion is inflationary. The Fed just printed this money out of thin air. That’s massive inflationary pressure.

Unfortunately, this is a losing battle. The problem isn’t liquidity. It’s much more fundamental than that. The banks struggling to remain solvent. They don’t have the assets to cover their liabilities. Liquidity is a short term fix, but only delays the inevitable.

Keep in mind, the average recession has a 30% decrease in equities. So far, we’ll only seen 15%. You think that this recession will be “easier” than the rest? I doubt it.

Update

I just realized that isn’t a TAF, but something new: Term Securities Lending Facility (TSLF). This is an exchange program with a holding period of 28 days. It’s not strictly a cash influsion; rather the banks can take the treasuries that the Fed gives them and then sell them on the open market.

And in 28 days, this action will be repeated. And again and again. And so the banks never have to repay their loans, until they have the assets to do it. This could only work if the banks’ mortgage backed securities become worth their face value again. This seems unlikely. I think we’re just delaying the inevitable. At some point the banks are going to have to face the music.

A while ago, I wrote about inflation and thought it was be interesting (or depressing) to revisit it. Though the Bureau of Labor Statistics (BLS) Inflation Calculator is most likely understating real inflation, it’s still alarming data. Crissy and I plan to have our first child in one to two years. For us to have the same real income my parents at the same point in their life (two years before their first child was born was born), we need to make over 4 times than my parents did.

Why? Because $1 from 1974 is worth $4.21 today according to the BLS.

And that’s just cash flow. Inflation is eating away at our savings as well, since money in the bank is losing value via the inflation tax.

The current recession is interesting. From my limited understanding of economics, economic downturns can be inflationary or deflationary. And, of course, as we learned from the 70’s it can be the dreaded stagflation. Not one seems to agree on what we’ll see this time around. My hunch is that we’ll see substantial deflation as “paper assets” disappear.

The Fed will continuing trying to print our way out of trouble and will keep lowering rates. I think, at best, this will do nothing and at worst, we’ll see stagflation.

Why do I say deflation is likely?

First, the downturn in housing is likely just starting. As house prices drop, more people have negative equity on their house: they will be “underwater”, since they owe more than the house is worth. When this happens there is an economic incentive to “walk away”. The lendor takes a loss since the original asset (the loan) is replaced with a repossessed house worth less than loan value. That lost worth is a deflationary event — the money is now gone.

This should follow in losses in unsecured debt like student loans, car loans, and credit card debt. If people can’t make their mortgage payments, they probably can’t make these payments. So again, the lendor takes a loss on their original investment; another deflationary event.

I expect the same thing to happen to commercial real estate. If money is tight, the market can support less stores. What will happen to all the new strip malls? They will likely sit vacant. So the builders lose money and at best can sell these for a loss.

This same analysis applies to the monoline insurers, banks, and hedge funds — basically anyone that touches SIVs.

Alternatively, the Fed could keep printing dollars and saddle us with stagflation. I really hope that doesn’t happen.

As you can probably tell from the title of this post, this will be a another rant about stupid government. And if you read closely, hopefully you’ll be tickled by my clever use of the word “tackle” in the title. :-)

A quick summary in case you weren’t paying attention to thePatriots cheating scandal and associated drama that’s sweeping through the NFL:

• In September, the Patriots were discovered breaking NFL rules regarding filming an opponents sideline during a game.
• Then, the league commissioner slapped the team and coach with one of the larger fines in league history.
• The Patriots responded with an insincere apology.
• The commissioner went on national TV basically accusing the team of dragging its feet in handing over evidence and threatening them with even more fines.
• A few days later, the NFL announced it had destroyed all evidence and refused to say what the evidence contained.

Basically since then, the league won’t answer anymore questions. It seems likely that the cheating was much worse than originally thought and the league decided that the PR cost of stonewalling is less than the PR cost of coming clean.

Which means to someone like me, I want to know what happened! Especially since I don’t like the Patriots due to their lack of sportsmanship. All season long they would run up the score after the game had been decided, by keeping their starters in and trying to get more and more points. It’s just shameful.

Anyway, back to the point of this post. Congress is now threatening to get involved similar to the Congressional Hearing about steroid use in baseball. And that raises the questions of “Why should Congress get involved?” and “Don’t they have anything better to do?”

Let’s start with “Don’t they have anything better to do?”. Well, yes. But politicians would rather do easy things that generate headlines than actual useful work like balance the budget or end the war. It’s sad, but true.

The next question, “Why should Congress get involved?”. I’m assuming that the justification is that NFL is a government created and allowed monopoly and is heavily subsidized (stadiums, broadcasts, etc). Even though strictly speaking no laws were broken, just NFL rules, the broadcast license stipulates that anything presented as live competition can’t have any “pre-arrangement” or “cheating”. In other words it can’t be fake.

And of course, the kicker, “Why is the federal government granting monopoly license to entertainment?” It’s not really sanctioned by the constitution unless you have a liberal reading of the interstate commerce clause. It probably comes down to the same reason a lot of things happen in the government, rich owners (team owners) needs something and the bribe Congress (”lobby”) to make it happen.

So sad. On the upside, maybe the investigation will show that the Patriots are really bad cheaters and they will “lose” some of their Super Bowl wins. Bad sportsmanship and cheating should never be rewarded.