Jail the Venetian meteorologists!

Since the Italian justice system decided it was necessary to imprison the seismologists who failed to predict 2009's deadly L'Aquila earthquake, I think it's only fair that meteorologists also be forced to pay for their sins in the wake of the worst flooding in Venice in two decades. After all, Mother Nature is much easier to predict than Crazy Uncle Earthquake over there, right?

Why can't everyone be more like Nate Silver, huh?

[Guardian]

Punishing bad predictions

I've been a little silent on here this week, in large part because I'm really trying hard to avoid talking about the election. That's not because I'm upset with the outcome or thrilled with the outcome or anything of the sort, but more because if nothing else, this election showed me just how deeply divided our nation has become. Our President was re-elected, yes, but re-elected with only 39% of the white vote nationally—Latinos and African-Americans carried the day for President Obama. As much as we may like to pretend that we inhabit a "post-racial America", that statistic would strongly suggest otherwise.

The fact is that there are entire segments of our population—gays, womens, blacks, Latinos—who largely felt that they had little choice in this election but to vote for the incumbent. Whether their feelings were correct or not is largely an immaterial matter—the feelings alone are indicative of just how ill our current political environment has become. Because of this bitter division, I feel that it's best not to weigh in with my personal opinions about the election, expecting that they would simply inflame some readers while being redundant to others. If you've read enough of my blog, you know my political leanings already, and I therefore feel no need to reiterate them at a time when nerves are a bit frayed. I'll revisit them in the not-too-distant future, to be sure. Now just doesn't seem to be the right time.

But what I would like to talk about is predictions, a topic I actually love discussing. As you may remember, I think that the incentive structure surrounding predictions and projections is badly out of whack, which leads us to be inundated with all manner of terrible prognostications. Italy, for one, decided that they'd finally had enough:

Six Italian scientists and an ex-government official have been sentenced to six years in prison over the 2009 deadly earthquake in L'Aquila. 

A regional court found them guilty of multiple manslaughter. 

Prosecutors said the defendants gave a falsely reassuring statement before the quake, while the defence maintained there was no way to predict major quakes. 

The 6.3 magnitude quake devastated the city and killed 309 people. 

Many smaller tremors had rattled the area in the months before the quake that destroyed much of the historic centre... 

The seven - all members of the National Commission for the Forecast and Prevention of Major Risks - were accused of having provided "inaccurate, incomplete and contradictory" information about the danger of the tremors felt ahead of 6 April 2009 quake, Italian media report. 

In addition to their sentences, all have been barred from ever holding public office again, La Repubblica reports. 

In the closing statement, the prosecution quoted one of its witnesses, whose father died in the earthquake. 

It described how Guido Fioravanti had called his mother at about 11:00 on the night of the earthquake - straight after the first tremor. 

"I remember the fear in her voice. On other occasions they would have fled but that night, with my father, they repeated to themselves what the risk commission had said. And they stayed."

Well, that's certainly one way to change the incentive structure surrounding predictions. Since I've often complained that pundits never face any real consequences when their predictions turn out to be wrong, this certainly provides a pretty strong counter-example. Whether or not it's a good thing is a different matter entirely.

Ultimately, if this sort of thing gained traction throughout the world, all that it would really do is give people an incentive to never make predictions of any kind, under any circumstances. That may or may not be a good thing, and it probably takes things too far in the opposite direction.

Ultimately what we all need to do is to take responsibility for our own decisions, rather than outsourcing them to "experts" and taking their predictions at face value. The more we ignore the expertise of the punditry and rely on our own research and intuition, the better off we all will be. We'll be a better-informed, better-prepared, and generally more capable populace, and that's inarguably a good thing. But the more we try to blame others for the bad outcomes that befall us, the further we're going down the wrong path.

Personal responsibility is paramount in the world, and while this ruling may help shift around the incentive structure surrounding predictions, it does absolutely nothing to promote personal responsibility. Therefore, I can't bring myself to support the move, no matter how much I might like certain elements of it. Although, maybe if we used this logic on Ben Bernanke.... nahhhhhhh.

[BBC]

On taxation and black economies

A few months back I tried to shed some light on the problems in Greece by citing a statistic that there are more Porsche Cayennes registered in the country than taxpayers declaring an income of 50,000 euros or more. That statistic, when combined with other anecdotal evidence, shows that one of the root causes of Greece's ongoing economic problems is its government's inability to collect taxes on the economic activity that is actually occurring in the state.

An article last week regarding Italy showed that Greece is not alone in that regard.

Police fanned out across Milan in late January halting more than 350 vehicles, mostly luxury SUVs and Porsches. 

At checkpoints, including one adjacent to the fashionable Corso Como, the police got the driver’s license and registration, which they passed on to the national tax agency. The tax authorities will use the data to check if the cars’ owners had declared enough income -- and of course paid the right amount of income taxes -- to justify their lifestyles. 

It was at least the fifth raid targeting wealthy Italians since a Dec. 30 sweep at the posh Cortina d’Ampezzo ski resort, where 251 high-end cars were stopped, including Ferrari and Lamborghini supercars, Bloomberg Businessweek reports in its Feb. 13 issue. Rome, Portofino on the Italian Riviera and Florence have also been targeted.

Italy is getting aggressive with its tax evasion crackdown, and it's a necessary step--depending on the estimate, the underground "Black Economy" (or, "System D") accounts for 20 to 30% of all economic activity in the country. However, it's unclear whether Italy's efforts will be sufficient in the long run to solve its significant debt problems.

Ultimately, the strength of a state depends entirely on its ability to collect taxes from its citizens. One could argue that the United States is relatively strong in this regard (its "Black Economy" is nowhere near the levels of Italy and Greece), but it still does not collect nearly enough tax to pay its annual bills. If it in fact tried to raise its tax rates in order to close that gap--as Italy is now trying to do, in effect--it might find that the "Black Economy" would grow significantly as a result.

Those who argue that raising tax rates would harm economic growth are therefore certainly correct, although perhaps not in the way they might imagine. Instead of actually decreasing the overall amount of economic activity, a higher tax rate might just lead to a decrease in the amount of "official" economic activity, as more and more transactions went off the record. It's quite possible (if not probable) that's what happened in Italy over the last decade, which would help explain the nation's pitiful "official" economic statistics.

If citizens (of any nation) begin to feel that their tax burden is too high--or that their government is misusing their tax dollars--they will always find ways to avoid paying their tax bill. Sometimes this will be through outright misrepresentation and fraud, but often it will be much more subtle and therefore much harder to prove. If a mechanic fixes a friend's car for free, with the understanding that his doctor friend will return the favor in the future by dispensing free medical care, the level of "economic activity" (in terms of favors exchanged) is the same whether or not cash actually changes hands. But in one case, the government can collect taxes on the transactions, and in the other case, the government cannot (at least not easily).

The choice to do these transactions "on the record" or "off the record" depends entirely on the mechanic and the doctor's respective faith in their government, and whether they feel that their leaders are operating in good faith with respect to taxation. Unfortunately, once that good faith bond has been broken, it can be incredibly difficult to restore, as Italy and Greece are now learning. As the U.S. tries to solve its own deficit and debt problems, it too will end up facing a similar dilemma--how can it extract more money from its citizens without pushing more economic activity down into the underground, beyond its reach?

The strength of the state, ultimately, is only as good as the citizens' belief in that state and its leaders. Break that bond, and the state can suffer even as many of its citizens continue to thrive--at least in the short run. But in the long run, both the state and its citizens suffer together, and that's where Italy and Greece now find themselves.

[Bloomberg]

Fun facts about Europe

While I've been on hiatus, the world has kept its eyes focused on the slow-motion trainwreck that is Europe. This is essentially rubbernecking writ large, and I have to admit that I'm as hopelessly intrigued as anyone else (even if I am worried about the future financial well-being of the world, and also the potential for political bickering to turn violent).

So, once again, it's time for that old favorite Crimson Cavalier game, "Fun Facts About...". Our first installment of this game covered Greece, and the second round focused on Italy. Now, in our third attempt at "Fun Facts", we cover the entire Eurozone, with a little help from this New York Times infographic.

Did you know that only 28% of working age Portuguese have graduated from high school? Or that Finland has only reported a budget deficit in two of the last 10 years (no wonder they have very little interest in bailing out Italy and Greece)?

The major disparities between these countries underscores the difficulty in coming up with a one-size-fits-all agreement that suits all parties. And lest we in the United States think we're immune from this kind of divisiveness and bickering, I think I'll set to work on a USA version of this map--I think I'll be able to come up with some pretty amazing fun facts for many of our states.

[NY Times]

Goldman rules the world

I've never exactly tried to hide my feelings about Goldman Sachs (see here, here, here, and... you know what, there's a lot of it), but I've gotta hand it to them--they're experts at expanding their global domination. While you were sleeping, it turns out Goldman's been busy completely taking over Europe.

I've already mentioned here before (in this blog post) that there's a ridiculous revolving door between Goldman Sachs and Washington, to the point where it's literally impossible to determine where Goldman ends and the federal government begins. Now, it seems that the revolving door dynamic has jumped across the Atlantic, and gone to work on the European governments, one by one. Per The Independent:

The author (Stephen Foley) goes on to write that:

Even before the upheaval in Italy, there was no sign of Goldman Sachs living down its nickname as "the Vampire Squid", and now that its tentacles reach to the top of the eurozone, sceptical voices are raising questions over its influence. The political decisions taken in the coming weeks will determine if the eurozone can and will pay its debts – and Goldman's interests are intricately tied up with the answer to that question.

Simon Johnson, the former International Monetary Fund economist, in his book 13 Bankers, argued that Goldman Sachs and the other large banks had become so close to government in the run-up to the financial crisis that the US was effectively an oligarchy. At least European politicians aren't "bought and paid for" by corporations, as in the US, he says. "Instead what you have in Europe is a shared world-view among the policy elite and the bankers, a shared set of goals and mutual reinforcement of illusions."

This is The Goldman Sachs Project. Put simply, it is to hug governments close. Every business wants to advance its interests with the regulators that can stymie them and the politicians who can give them a tax break, but this is no mere lobbying effort. Goldman is there to provide advice for governments and to provide financing, to send its people into public service and to dangle lucrative jobs in front of people coming out of government. The Project is to create such a deep exchange of people and ideas and money that it is impossible to tell the difference between the public interest and the Goldman Sachs interest.

Now, I'd be going a little too far if I were to suggest that Goldman deliberately brokered deals that saddled these incompetent governments with too much debt so that they could later roll into town when the inevitable crisis hit and "save" the governments with their financial genius, thereby ensuring that their devilish plan of taking over the world would proceed on schedule... wouldn't I? That is far-fetched, right? Wait, is it? Jesus, I don't even know anymore...

I've gotta say, if this is indeed all part of an evil master plan (and you know what, even if it isn't), I really just have to hand it to them--these guys are good. Welcome to the Goldman universe.

[The Independent]

Italy

We've all had plenty of fun at Greece's expense lately, and with good reason--the country is a mess. But this week, it seems that Italy is ready to take center stage as Europe's poster child for incompetence. If you're wondering why, this statistic ought to give you an idea:

Between 2000 and 2010 Italy’s average growth, measured by GDP at constant prices, was just 0.25% a year. Of all the countries in the world, only Haiti and Zimbabwe did worse.

Um... yikes. To put that statistic in perspective, you're talking about one country whose citizens have resorted to eating mud cookies to survive, and another country that became an international laughing stock when its hyperinflation got so bad that it had to print a 200 million dollar note... and then Italy.

Italy's economic growth statistics are in stark contrast to the image that many of us likely have of the country--I myself spent time there last November, and I had a great time drinking wine and eating cheese and homemade pasta in a beautiful setting. Come to think of it, all of the locals were drinking wine and eating cheese, too. At lunchtime. On a Tuesday. You know, this is all starting to make a lot of sense...

[The Economist]

More jokes in the mainstream media

It's getting a little crazy how the mainstream media keeps accidentally publishing articles that were supposed to run in The Onion, isn't it? First there was this article about the North Carolina governor's suggestion that we suspend Congressional elections so that our elected officials can keep doing the great job they've been doing. That was good for a laugh.

Now there's this article in Businessweek, discussing the Italian government's plan to begin drug testing the country's stock traders, because obviously their cocaine use--and not the government's excessive use of debt--is to blame for recent stock market volatility.

An undersecretary for Italian Prime Minister Silvio Berlusconi has proposed a drug-testing program for stock traders, citing studies that point to a “worrisome” link between substance abuse and market fluctuations.

Some Italians may have entrusted savings to people “not capable of making decisions” due to drug use, Carlo Giovanardi said in a phone interview today from Belluno, Italy.

Giovanardi, who’s responsible for the government’s family and drug-abuse prevention policy, said he plans to contact regulators and industry groups working with the stock exchange to discuss the drug-testing plan. The program could be developed without the passage of a new law, he said.

This is good stuff. It gets even better and more Onion-y, and I took the liberty of editing the next paragraph for Businessweek.

Giovanardi, who last year promoted a voluntary drug test for members of parliament, also cited “U.S. studies” suggesting recent market turmoil may have been amplified by “people politicians and central bankers who’ve lost touch with reality” due to drug use. The undersecretary said cocaine use has a “devastating” effect on individuals politicians, leading to “brain meltdown.”

There. That's better. Seriously, I'm getting really tired of the misdirection plays being employed by politicians around the world to distract from the core problem of too much government debt. It's not the debt that's the problem... it's CHINA! No, it's the IMMIGRANTS! No, it's those drug-popping stock traders, they're the real problem!!

When did our whole political process become an episode of The Simpsons? This is really rich stuff, guys. Keep up the good work, leaders of the free world.

[Businessweek]