Incentives Matter. Indeed, They’re Everything.

Show me the incentives and I will show you the outcome. – Charlie Munger

Munger, Warren Buffett’s wise partner, thinks incentives matter; indeed, he thinks they’re everything. I wish I’d understood this at an earlier age. If I had, then I probably would have understood better myself and others and been more effective at my endeavors. And life would have been just a bit easier to navigate.

Patrick O’Shaughnessy wrote about misguided incentives.

In Vietnam, under French colonial rule, there was a rat problem. To solve the rat infestation, the French offered a bounty on rats, which could be collected by delivering a rat’s tail as proof of murder. Many bounties were paid out, but the rat problem didn’t improve. Officials soon noticed rats running around without tails–people were cutting off the tails and releasing the rats to breed, so as to increase the pool of potential bounty revenue for themselves.

The same thing happened in Colonial India: a bounty was offered on cobras because they were attacking people, which caused people to breed cobras for more bounties, and ultimately resulted in a higher cobra population when the bounty system was abandoned and the breeders released their now worthless snakes.

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Dodging the Second Great Depression and Weathering Storms

Ten years ago today Lehman Brothers filed for bankruptcy. The filing didn’t create the conditions that led to the near total collapse of our financial system and made what has become known as the Great Recession the greatest economic calamity since the Great Depression. But it was a monumental event. It transformed a recession into the Great Recession, eventually leading to stock markets losses of around 50 percent, innumerable business failures and business and personal bankruptcies, and massive unemployment (albeit nowhere near the levels of the Great Depression). And we’re still living with the fallout of the Great Recession to this day.

There is no doubt in my mind, Vera, that we were on the cusp of the Second Great Depression in 2008. But for the response of policy makers and regulators — most especially the Fed Chair and Treasury Secretary — the world easily could have slipped into another deep economic depression. All the bad economic consequences that befell us notwithstanding, we dodged the big bullet. This time.

I say this time because there will be other times to come. Economic cycles, including contractions, are unavoidable. Just ask history if you don’t believe me. Credit excesses inevitably build and build until the breaking point. Usually, those breaking points are run-of-the-mill recessions. But, occasionally, they’re bigger than that. Occasionally, they’re depressions.

Depressions and deep recessions are dangerous things. Bankruptcies multiply. Families fracture. Suicides rise. On a grander scale, they can lead to conflict and wars. Social strife. Revolutions. We know they’re bad, but we haven’t figured out a way to avoid them.

I don’t know if I’ll see another Great Recession or a depression in my lifetime. Maybe I will, maybe I won’t. But it’s almost certain you’ll see one. Maybe more than one. Continue reading

My Oh My, How Things Have Changed

(Thanks to Harry Stevens at Axios for the above chart.)

I’m still pissed at the way our Attorney General ripped our youth yesterday. So I thought it would be helpful to share some data on the ways life was so much easier for Mr. Sessions and me back in the day.

You’ll see how the cost of college has skyrocketed, Vera. And, yes, we are comparing apples to apples: all the numbers are inflation adjusted.

What isn’t shown here is the roughly $1.5 trillion of student-loan debt that our youth and others carry on their backs thanks to misguided policies emanating from Washington (both Republicans and Democrats).

You’ll see above how the median income hasn’t budged in all these years, despite the huge increases in education and health care expenses. How did we pull it off? By going deeply into debt. Which makes Sessions and his cronies happy, of course, because where some see debt others see profits.

People also have dealt with the economic headwinds by putting off marriage and buying a home. And more of our youth are living at home with their parents longer.

Yes, Mr. Sessions, let’s ridicule our youth. If we get everyone to focus on them, perhaps they won’t notice how you and your party are destroying the middle class so the wealthy can have an even larger share of the pie. Glutton!

I’m done venting now.