"System D" and taxation

I came across an interesting blog post over at Naked Capitalism this week, talking about the virtues of the so-called "Système Débrouiller" (or System D), which has become the shorthand name for the world's underground economy. Citing a TED talk from journalist Robert Neuwirth, Lambert Strether writes:

If [System D] were united in a single political system, one country, call it The United Street Sellers Republic, the USSR, or Bazarristan, it would be worth 10 trillion dollars every year, and that would make it it the second largest economy in the world after the United States.

At first glance, that's an eye-opening statistic, one that immediately makes us think of black markets and tax cheats and wink-and-a-nod cash transactions in parking lots or back alleys (and to be fair, that's in large part what Neuwirth is talking about there).

But I think that's the wrong image to evoke, and I'll instead refer back to a post of mine from earlier this year that discusses another piece of the puzzle (I was going to write a whole new blog post about this issue, but then I realized I'd already done a pretty good job of laying out the basic points, so I'm self-plagiarizing for the sake of reiteration and redundancy). The bolded emphasis is new, added by me today.

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.

"System D", at least originally, referred not to a "black market" economy as we've come to know it, but simply to what might more correctly be termed the "MacGyver economy" or the do-it-yourself economy.

If we as citizens want to avoid adding dollars to the official GDP statistics (and therefore creating taxable moments), one way to do so is to be more resourceful and do a lot more things for ourselves (or with help from our friends). If we all grow our own foods and cook them and eat them at home, there's nothing there that will ever be captured by a government GDP statistic—and yet, we've all got ourselves a full belly, same as if we went to the grocery store and loaded up a cart with fruits and veggies.

The simple fact is, the government can only measure and tax transactions for which there is some record, or where some sort of exchange (of currency) was made. What can the government do about an informal exchange of favors?

Have you ever helped a friend move? Have you ever called up your doctor friend and asked him what he thinks about your aching knees and hacking cough? Have you ever invited a friend over for drinks and asked her for some free off-the-record financial advice? All of these things have economic value, and yet they'll never be part of the formal, measured, taxable economy—none of these are taxable moments, and it's nearly impossible for the government to track the transactions down, with no record of their occurrence.

But ultimately, is there really any fundamental difference? Is our nation really any more prosperous in one case versus the more formal alternative? I'd say no, and that in fact the system in which we trust each other and exchange favors without a record may even be stronger than the alternative—a community (however small) that trusts each other implicitly and doesn't require the keeping of records is a strong community indeed.

Ultimately, this is all an issue of trust. if you think your neighbor is unlikely to hold up his end of the bargain, you'll force all of these transactions onto the record in order to protect yourself. But if you instead think it's the GOVERNMENT that's unlikely to operate in good faith, well that's a whole different issue, isn't it?

Over the next several decades, I think this dynamic will be an important one not just in Europe but throughout the world. Do we trust each other as citizens more than we trust the government, or vice versa? If it's the former, then I wouldn't expect tax revenues to be picking up any time soon, regardless of the actual level of economic activity being performed. Should be interesting to watch.

[Naked Capitalism]

On Bartolo Colon, cheating, and the human response

Yesterday, in the most unsurprising news of the sports decade, Oakland A's pitcher Bartolo Colon was suspended 50 games after testing positive for performance-enhancing drugs. This news followed on the heels of the similar suspension of San Francisco Giants' All-Star outfielder Melky Cabrera (wait... steroids... in the Bay Area?? Well, I never!), who went to some pretty extraordinary lengths to avoid punishment for his misdeeds.

For those of you not up to speed on the matter, Bartolo Colon was once a terrific pitcher, making multiple All-Star teams and even winning the AL Cy Young award in 2005 with the California/Anaheim/Los Angeles Angels. Then he got fat, injured, and generally useless, winning only 14 games (in 48 total starts) over the next four seasons with three different teams. He never threw more than 100 innings in any of those seasons, and he managed fewer than 60 in two of them.

After his ineffective 2009 season, the 36-year old Colon disappeared entirely for a year, presumed by many to be finished. But then, miraculously, amid reports of a mysterious and controversial stem cell procedure, Colon burst back onto the scene with the Yankees in 2011, making 26 effective starts (and tossing 164 innings, more than he had thrown since his Cy Young season in 2005) while helping the Yankees win their division. He continued that success this year in Oakland, where he made 24 starts (and may have made more than 30, without the suspension) while winning a team-best 10 games and posting a solid 3.43 ERA.

Great success! A modern medical miracle! All hail the mysterious and controversial stem cell procedure! Or... you know... plain old steroids. Whatever, what am I, a doctor?

Of course, by now, we shouldn't be surprised to hear about steroids in baseball, particularly among athletes from the Dominican Republic, where there's been a long line of violators at both the major league and minor league level, including stars like Manny Ramirez and Alex Rodriguez. The only thing that's surprising is that we all continue to pay any attention (or feign outrage) when news like this breaks.

At the end of the day, in any world where there are great rewards to be had, there will always be those who are willing to cut corners to get to the top. It's a dynamic that I discussed at length in this post, in which I compared Roger Clemens (oh, and screw him, but that's a story for another day) to Bernie Madoff for their willingness to break the rules. It's even less far-fetched to assume that in a place like the Dominican Republic—where economic opportunities are few and far between—we might find even more people who are willing to fudge a few things in order to find success. On a similar note, think none of the Jamaican sprinters are into some similar stuff? Yeah, think again.

And of course, the teams that employed these players knew all of this as well, and assumed that the risks of signing a guy with steroid question marks were worth the financial rewards. Every GM in baseball is in possession of a chart that predicts rates of decline in production as players age—the charts are far from perfect, but they're in wide use, and especially smart teams like the Yankees and A's are well aware that a fat and fading guy like Colon is unlikely to make a dramatic comeback without a little "chemical assistance". So they knew, we knew, and yet we as spectators did nothing to prevent Colon from taking the field, demanding nothing of MLB until this inevitable day that he tested positive for PEDs. 

So ultimately, we as spectators get the product we deserve, the product we demand. We vote with our wallets and tell MLB that everything is a-okay with us, that we don't care if half the players out there are doped up beyond all recognition. And honestly, that's fine. I see no problem with that process in principle—it's free-market economics at its best. But when we vote with our wallets, with full knowledge of what's going on out there, we lose our right to feign outrage when the curtain is pulled back.

The same is true for us as consumers, as voters, as employees/pensioners, or even as family members. When something sounds or seems too good to be true, it very often is. And if we fail to hold people accountable when they've taken advantage of us, then frankly, we deserve what we get.

The fact is, for all the ranting that I do here on my blog about the banks, and the NCAA, and our broken political system, I continue to hold multiple bank accounts at a large bank (Wells Fargo), I'm a season ticket holder for multiple collegiate sports (at UVA), and I have never in my life voted for a third-party candidate (though that is likely to change, soon). So until I am willing to put my money where my mouth is, I too am part of the problem. The first step is recognizing it and admitting it. The next step is taking action. If we want a different world, we have to start by demanding a different world. Otherwise, we should all probably stop whining, myself included.

So until that day comes, this is America, where if you ain't cheatin', you ain't tryin'. Nice, huh?

I'm too busy to write a blog post

Guys, I'd really like to write a blog post for you today, but I'm just way too busy. Maybe tomorrow, I don't know. Sorry, I'd really like to help, but you know... busy.

Busyness serves as a kind of existential reassurance, a hedge against emptiness; obviously your life cannot possibly be silly or trivial or meaningless if you are so busy, completely booked, in demand every hour of the day.

Damn straight. I'm important, see? Unfortunately, all this busyness has me totally stressed out, so I'll probably need to go to a stress-reduction workshop or something to cool down.

So what can you do about the stress and frustration that comes from unmet expectations? You have two choices: Either change the reality around you or change your expectations...

But often the reality around you is difficult to change...In my experience, trying to change reality isn't usually a stress reliever, it's a stress creator. A small thing — like changing my seat on an airplane — can be such a pain that even if it works it's often not worth the struggle. And the bigger things — like getting more accomplished in a day — can be even more frustrating. That last example is especially frustrating because it's an expectation I have of myself so I really believe it should be in my control.

Which leaves us with what I've come to believe is the best strategy for reducing stress: Change your expectations...

If changing your expectations proves too hard, your next best move is to get some perspective.

Imagine a scale from 1-10 with 10 being the worst reality you can imagine. Like living in a war zone or being in the World Trade Center on 9/11. Maybe 9 is a serious illness that most probably will result in death. Perhaps 8 is something that will forever alter your life, like going to jail or an accident that puts you in a wheelchair. Let's say 7 is something that temporarily alters your life like losing your job or having to move out of a home you can no longer afford.

Do you see where I'm going with this?

No, dude, I don't at all see where you're going with this. You're taking forever and I'm way too busy to just sit around reading your whole article. Can't you just give me the Cliff Notes or something?

Incidentally, that HBR article is one of the better things I've read from HBR in a while (if you remember, I've been a little tough on them in the past), and I recommend you take a look at it. Unless you, like me, are just way too busy, in which case... you're probably not still reading anyway.

[NY Times]
[HBR]

The lipstick effect

Remember when I told you that all studies were B.S.? Forget everything I said. This series of studies is awesome, and I absolutely love that the result has been replicated in multiple experiments. Brought to my attention by Tyler Cowen:

In 2008, when many companies reported record declines in sales amidst a global economic recession, L’Oréal, one of the world’s largest cosmetic manufacturers, was somehow immune to the downturn. In fact, L’Oréal enjoyed a sales growth of 5.3% that year—why? Why was L’Oréal the apparent beneficiary of a worldwide economic crisis? 

Dating back to the Great Depression, times of recession have consistently yielded anomalous gains for the beauty products industry, even while consumers reign in spending on household goods and recreational products. Journalists have dubbed this curiosity the “lipstick effect.” I recently sought to test the lipstick effect in a series of studies, the results of which were published in the Journal of Personality and Social Psychology. Our findings confirmed that the lipstick effect is not only real, but deeply rooted in women’s mating psychology... 

Four separate experiments, along with real-world data... consistently supported the lipstick effect, as college-age women, when primed with news of economic instability, reported an increased desire to buy attractiveness-enhancing goods, along with a decreased desire to purchase goods that do not enhance one’s physical appearance. Our experiments also found that this increased desire for beauty products, clothing and accessories was fully mediated by a heightened preference for mates with resources. 

While many journalists who have written about the lipstick effect have theorized that it represents women’s therapeutic spending on cheap indulgences, we found that the lipstick effect applies specifically to products that enhance beauty, even when those products are more expensive. Recession cues increased women’s desire to buy high-end cosmetics and designer clothing, but not to buy budget-line beauty products, which were rated less effective at improving one’s appearance. 

Furthermore, we discovered that the lipstick effect and a woman’s desire to attract a mate with resources are unrelated to her independent resource access. Women of both higher and lower socioeconomic status expressed an increased desire to buy luxury beauty products when primed with recession cues. This suggests that an uncertain economic climate leads women to heighten mate attraction effort irrespective of their own resource need.

This cracks me up. What's funny about these studies is that I'm absolutely certain that what's going on is completely subconscious--the women probably don't even realize what they're doing, but do it anyway. Such is the wonder of our amazing brains, and the strange cross-wirings that generations of evolution have created.

As much as we all like to think that we are agents of our own destiny, making rational decisions based on complete information, consumer psychology studies consistently find the opposite. We are in fact subject to and guided by a strange mix of psychological motivations, many of which we don't even realize or recognize. Intelligent marketers take advantage of these psychological neuroses, consistently advertising to us in ways that we don't even notice. Good stuff.

[Scientific American]
(h/t Marginal Revolution)

The Language of Food (Quote of the Week)

Tyler Cowen of the always-interesting Marginal Revolution blog tipped me off to the Language of Food blog--a creation of Stanford professor Dan Jurafsky, who teaches an occasional linguistics course under the same name (I'm a nerd, so yeah I checked the syllabus and have been trying to track down some of his assigned readings).

Jurafsky has some fascinating insights into the way we talk about, market, and derive names for the foods we eat (and the processes we use to create them). What's the difference between "roasting" and "baking"? Why do we come up with names like "Rocky Road" and "Mississippi Mud" for our ice creams? And what the hell does "all natural" mean? These are the types of questions that Jurafsky aims to tackle on his blog, and I for one found some of his posts to be fascinating (if somewhat academically wonky).

Here's an excerpt from his most recent post, which considered the language used in the marketing of potato chips:

The political season is well upon us and that means a lot of politicians talking about strugglin' and rollin' up our sleeves, especially when speaking to working class audiences. Since the pioneering work of sociolinguists like Bill Labov, linguists have studied the ways we chose variants, like "-in" to project a working class authenticity but "-ing" to project an educated or professional persona...

This use of linguistic variables to mark identity and authenticity occurs in the language of food as well. Josh Freedman, a young political researcher, was an even younger freshman in my Language of Food seminar at Stanford four years ago when he became interested in how the language of food advertising reflects socio-economic class...

Josh and I looked at 12 bags of potato chips, 6 more expensive (Boulder, Dirty, Kettle Brand, Popchips, Terra, Season's, averaging 68 cents per ounce) and 6 less expensive (Hawaiian, Herr's, Lays, Tim's, Utz, and Wise, averaging 40 cents per ounce). We coded up all the advertising text from the back of the chips and then examined how the words differed between the two classes of chips.

What factors characterized expensive chips? You may be surprised to learn that potato chips are a health food; almost all chips (expensive or not) emphasized the healthiness of their products by using phrases like "low fat", "healthier", "no cholesterol", or "lowest sodium level". But these health-related claims  occur on expensive chips 6 times as often as on inexpensive chips (6 times per bag versus once per bag). This difference in health language is not, as far as we can tell, due to actual differences in the chips. No chips in our sample contain trans fats, but only 2 out of the 6 inexpensive chips talk about it. By contrast, every one of the 6 expensive chips mentions the lack of trans fats.

Expensive chips also turn out to be much more natural. Phrases such as "natural", "real", or "nothing artificial" are 2.5 times more likely to be mentioned on expensive bags (7 times on each expensive bag but under 3 times on each inexpensive bag).

Finally, expensive chips are 5 times more likely to distinguish themselves from other chips, using comparative phrases like "less fat than other leading brands", "best in America", "in a class of their own". or "a crunchy bite you won't find in any other chip". Where text on the inexpensive chips focuses on the chips themselves, ads for expensive chips emphasize their differences from "lesser" chips...

In his famous book "Distinction", sociologist Pierre Bourdieu showed that our position in society heavily influences our tastes, whether in food, music, film, or art.  He argues that "hip" or "fashionable" tastes are just a away for the upper class to display their high status, to distinguish themselves from other classes. Taste, says Bourdieu, is "first and foremost... negation... of the tastes of others". The fact that expensive chip advertising is full of comparison (less fat, finest potatoes) and negation (not, no, never, don't) suggests that Bourdieu is right, that the notion of upper class taste in food advertising is defined by contrast with tastes of other classes; what it is to be upper class is to be not working class.  

Potato chips as a vehicle for drawing societal metaphors and understanding class distinctions? Now that's a nerdy concept I can get behind. "Taste... is first and foremost... negation... of the tastes of others". That's so simple and yet so profound. In fact... I'm going to make it my Quote of the Week. So there.

[Language of Food]  
(h/t Marginal Revolution)

"Real" value vs. perceived value

Clip of the Week isn't until tomorrow, but that doesn't mean I can't post a video clip here today, right? Okay, cool. Besides, this one's a bit longer than the typical Clip of the Week fare, checking in at just over 15 minutes.

It's a TED talk from ad executive Rory Sutherland (Ogilvy & Mather), who gives a very insightful and wickedly funny speech about the differences between "real" and perceived value--and when they can in fact be interchangeable. It's one of the more entertaining TED talks I've seen, and I think it asks some tough questions about our current culture of consumerism. Worth a watch for sure.



To be fair, over the long term any product or concept does need to have some real value in order to survive, but that doesn't make perceived value any less important in the mind of the consumer. I wonder how often any of us thinks about how easily our perceptions can be shaped.

(h/t Barry Ritholtz)

Martin Luther King + Bin Laden + Internet = Confusion

I've written (and marveled) here before at the amazing rate at which information--even and especially bad information--can fly around the internet, being posted and re-posted and picked apart in a bizarre but rapid game of telephone that makes "light speed" seem like the slow boat to China.

This dynamic is particularly noticeable and relevant when major news items are breaking, so it should come as little surprise that it reared its ugly head in the aftermath of Osama bin Laden's death. In short, a line that wasn't spoken by Martin Luther King, Jr. became attributed to the civil rights hero, and all hell broke loose in trying to determine what had happened.

Megan McArdle of The Atlantic has the full details, and she should know them--she was intimately involved in the initial chaos.

Yesterday, I saw a quote from Martin Luther King Jr. fly across my twitter feed:  "I mourn the loss of thousands of precious lives, but I will not rejoice in the death of one, not even an enemy." - Martin Luther King, Jr".  I was about to retweet it, but I hesitated.  It didn't sound right.  After some googling, I determined that it was probably fake, which I blogged about last night...

It turns out I was far too uncharitable in my search for a motive behind the fake quote.  I assumed that someone had made it up on purpose.  Honi soit qui mal y pense.

Had I seen the quote on Facebook, rather than Twitter, I might have guessed at the truth. On the other hand, had I seen it on Facebook, I might not have realized it was fake, because it was appended to a long string of genuine speech from MLK Jr.  Here's the quote as most people on Facebook saw it:

I will mourn the loss of thousands of precious lives, but I will not rejoice in the death of one, not even an enemy. Returning hate for hate multiplies hate, adding deeper darkness to a night already devoid of stars. Darkness cannot drive out darkness; only light can do that. Hate cannot drive out hate, only love can do that.

Everything except the first sentence is found in King's book, Strength to Love, and seems to have been said originally in a 1957 sermon he gave on loving your enemies.  Unlike the first quotation, it does sound like King, and it was easy to assume that the whole thing came from him.

So how did they get mixed together?

Thanks to Jessica Dovey, a Facebook user, that's how.  And contrary to my initial assumption, it wasn't malicious.  Ms. Dovey, a 24-year old Penn State graduate who now teaches English to middle schoolers in Kobe, Japan, posted a very timely and moving thought on her Facebook status, and then followed it up with the Martin Luther King Jr. quote.  

I will mourn the loss of thousands of precious lives, but I will not rejoice in the death of one, not even an enemy. "Returning hate for hate multiplies hate, adding deeper darkness to a night already devoid of stars. Darkness cannot drive out darkness; only light can do that. Hate cannot drive out hate, only love can do that." MLK Jr.

At some point, someone cut and pasted the quote, and--for reasons that I, appropriately chastened, will not speculate on--stripped out the quotation marks.  The rest was internet history.  24 hours later, the quote brought back over 9,000 hits on Google.

Eventually, it made its way onto Twitter, and since the 140-character limit precluded quoting the whole thing, people stripped it down to the most timely and appropriate part: the fake quote. That's where I saw it.

The speed of dissemination is breathtaking: mangled to meme in less than two days.  Also remarkable is how defensive people got about the quote. The thread for my post now has over 600 comments, and by my rough estimate, at least a third of them are people posting that I need to print a retraction, because of the non-fake part of the quotation.  But I didn't quote that part; I was only interested in the too-timely bit I'd seen twittered.

Crazy. McArdle goes on to discuss just how heated the "yes, he said it", "no, he didn't" rhetoric got, with some people even going so far as to explain (obviously, incorrectly) exactly what he was speaking about and why.

It's strange (though increasingly common) to see a misunderstanding like this develop a life of its own via Facebook, Twitter, and various internet message boards. But I think there's interesting stuff here beyond just the usual "isn't the internet crazy?" musings.

Namely, why should the speaker of a phrase matter so much in our response to that phrase? Shouldn't the sentiment and meaning of words be the same, regardless of who in fact spoke them? Should we disregard statements or feelings regarding non-violence just because they weren't uttered by King or Gandhi? Would they be any less meaningful had they been written by an anonymous blogger, or more ironically, a vicious dictator?

The answer, of course, depends on who you ask. We all have a certain number of pre-determined biases with which we approach situations like these--just as we Americans are bound to respond differently to the Osama news than Pakistanis or Saudis, so too are different Americans from varying backgrounds likely to have different responses.

The power of a quotation like this, reputedly from Dr. King, is that it begs us all to drop our "us vs. them" biases and to begin thinking about things in more universal terms. The emotions of 9/11 and Osama bin Laden are very fresh in all of our minds, and that fact has a tendency to skew the way we think about things, and how we interpret outcomes. The civil rights movement, on the other hand, is more distant and historical. Enough time has passed that we can think about things with clear minds, and consider both sides of the situation more capably than if we were still in the midst of it.

Who spoke a phrase, then, is less important in terms of the meaning of the words, and more important in terms of how we frame them. When we see "MLK" attached to a quotation, we read it much differently--much more divorced from our inherent biases--than if we saw "Barack Obama" or "Sarah Palin" or even "Matt Damon" in MLK's place.

It's difficult for us to read any words, or hear any statements, without first passing them through a filter of our experiences--in fact, it's basic human nature to do exactly that. By attaching a different name onto the end then, all we are doing is placing a different lens or a different filter on the camera.

Words should carry the same meaning regardless of who spoke them, but our experiences and biases won't allow it to be so. That's what allows a controversy like this to take root in the first place. It may be difficult if not impossible for us to hear the bin Laden news without remembering the emotions of 9/11, but I think it's important for all of us to try.

[The Atlantic]

Our bizarre brains, part 2

I wrote last week about our bizarre brains, and how the mental shortcuts we use can sometimes lead us to make some strange decisions and/or determinations. Following in that same vein, I was directed to this study by multiple internet sources. To summarize the study, a pair of researchers at NYU's Stern School of Business have been engaging in ongoing research into the impact of product reviews on internet product sales. Long story short, they've found some weird stuff (emphasis mine):

In our recent (award-winning) WWW2011 paper “Towards a Theory Model for Product Search”, we noticed that demand for a hotel increases if the online reviews on TripAdvisor and Travelocity are well-written, without spelling errors; this holds no matter if the review is positive or negative. In our TKDE paper “Estimating the Helpfulness and Economic Impact of Product Reviews: Mining Text and Reviewer Characteristics“, we observed similar trends for products sold and reviewed on Amazon.com.

What's going on here? Why would a well-written negative review increase our demand for the product in question? Could it be that we just want to buy what the smart people bought, regardless of whether or not they liked it? Or is it simply that well-written reviews lend legitimacy to the product, and let us know that others have made the decision to purchase it? Are we just constantly seeking strength in (perceived) numbers?

The researchers themselves seem to subscribe to the latter theory. They write:

A review that is well-written tends to inspire confidence about the product, even if the review is negative. Typically such reviews are perceived as objective and thorough. So, if we have a high-quality, but negative, review this may serve as a guarantee that the negative aspects of the product are not that bad after all.

I think that all of this is strange, but somehow unsurprising. Articles, reviews, tweets, and other internet information give us a relative dearth of tools with which to verify their veracity and authenticity. We are thus very vulnerable to bad information, a dynamic that I've covered here at some length before.

There are really only three pieces of information that we can rely on to determine if any internet site is reputable or not--the domain name (we'll trust "ESPN.com" before we trust "baseballdudes.com", for example), the quality of the site design (no Geocities pages, please), and last but not least the grammar and spelling of the site's content.

Unfortunately for us, almost all of these things can be faked. But more often than not, we're on autopilot to look for those three markers of legitimacy. If we see bad spelling and grammar, we dismiss the site in question almost immediately (assuming we actually know the rules of grammar ourselves, which is a completely different story). But if the grammar and spelling are on point, we're more likely to stick around and read, and from that point on all bets are off.

I think that's really what's at play here. It's not so much that demand, per se, increases as a result of a well-written negative review--it's just that we're more likely to stick around on the site and read some more if we perceive an aura of legitimacy.

How do I even know that the blog this information was originally posted on was real or that the research was in fact real research, done properly? I don't. But the site seemed professional enough, and their links to outside articles and items seemed to indicate that these were real people who had done real research. But then again, maybe I've just been duped. Who knows for sure? Yeah... our brains are bizarre.

[Behind-The-Enemy-Lines blog]
(h/t Marginal Revolution, Freakonomics)

Our bizarre brains

A little light reading while we sit and wonder whether our government is going to shut down...

An article earlier this week in the New York Times wondered why we (more specifically, food manufacturers) cram all sorts of artificial coloring into our foods, when they do nothing to impact the flavor and may in fact cause increased hyperactivity in children (yikes).

Without the artificial coloring FD&C Yellow No. 6, Cheetos Crunchy Cheese Flavored Snacks would look like the shriveled larvae of a large insect. Not surprisingly, in taste tests, people derived little pleasure from eating them.

Their fingers did not turn orange. And their brains did not register much cheese flavor, even though the Cheetos tasted just as they did with food coloring.

“People ranked the taste as bland and said that they weren’t much fun to eat,” said Brian Wansink, a professor at Cornell University and director of the university’s Food and Brand Lab.

Naked Cheetos would not seem to have much commercial future. Nor might some brands of pickles. The pickling process turns them an unappetizing gray. Dye is responsible for their robust green. Gummi worms without artificial coloring would look, like, well, muddily translucent worms. Jell-O would emerge out of the refrigerator a watery tan...

“Color is such a crucial part of the eating experience that banning dyes would take much of the pleasure out of life,” said Kantha Shelke, a food chemist and spokeswoman for the Institute of Food Technologists...

Indeed, color often defines flavor in taste tests. When tasteless yellow coloring is added to vanilla pudding, consumers say it tastes like banana or lemon pudding. And when mango or lemon flavoring is added to white pudding, most consumers say that it tastes like vanilla pudding. Color creates a psychological expectation for a certain flavor that is often impossible to dislodge, Dr. Shelke said.

“Color can actually override the other parts of the eating experience,” she said in an interview.

First of all, I had no idea pickles were often dyed green. That's actually kind of gross. But more importantly, this is just one of those crazy times where I have no response but to shake my head and say "people are weird". Our brains are funny, complex organs that often behave in ways that surprise, confuse, or frustrate us. Even that seems a little weird when you think about it--the brain is so bizarre that it regularly confuses itself.

But this article's finding also speaks to the power of prejudice, which I think is something that we need to be careful of in all aspects of life. We perceive something that is vanilla-flavored to be lemon, simply because we changed the color--that's harmlessly weird in this context, but it could in fact be dangerous under different circumstances. I don't want to push this analogy too far in the direction of its clear racial implications, but it's hard not to draw that comparison.

Throughout our lives, we condition our brains to operate more efficiently, which often means relying on shortcuts and heuristics that serve us well most of the time. Assuming that something is vanilla (or bland) simply because it is white saves us the effort of actually tasting and analyzing it. It's easy to put our brains on autopilot and let these shortcuts guide the way, but sometimes doing so can get us in trouble. If there are exceptions to what our brain perceives as rules, it's easy to get caught off-guard. Our brains are simply trying to do the best they can to construct order amid a world of chaos, but sometimes they fail; we need to be aware of our brains' fallibility, so that we don't become victim to it.

Then again, maybe I'm reading too much into this. Maybe Cheetos just suck.

[New York Times]

P.S.- Upon further reflection, I still refuse to believe that Crystal Pepsi would've tasted good to me if it had just had a little caramel color...that stuff tasted like poison.

On Japanese culture

In the aftermath of the devastating Japanese earthquake and tsunami, one of the more interesting dynamics for me has been the series of reports that essentially no looting whatsoever has taken place in the affected areas. This is definitely a remarkable observation, especially in contrast to the widespread looting following dramatic disasters in other nations (most notably the Chilean earthquake and Hurricane Katrina).

The apparent show of solidarity certainly speaks well of the Japanese people, and it also seems to present a learning opportunity for the rest of the world. The question for all of us is, what makes the Japanese different? Jim Picht at the Washington Times passed along a provocative--and somewhat controversial--take on the matter.

There's substantial internet chatter on the subject, and the chatter is disturbing. The answer most people seem to settle on is, "race." Many argue that Japanese homogeneity is a strength, diversity a weakness. The Japanese aren't looting because they're all one big happy culture with none of the predation that occurs when people of different cultures look longingly at each others' possessions.

I'm not sure I completely buy the underlying thesis here; I think that there are factors far beyond simply race and ethnicity that explain the dramatic difference between Japanese self-sacrifice and team emphasis (the "bushido" code) and America's "rugged individualism". That said, there's something to the idea that "same likes same", and Picht's piece got me to think more broadly about the role of American multiculturalism, and whether the myth of the "melting pot" has indeed been a net positive for our country at large.

Throughout our nation's history, we have struggled with issues of race and ethnicity (not to mention religion), often pretending that we are tolerant when in fact we display quite the opposite in our actions. One of the perceived benefits of diversity and multiculturalism--whether in an academic, cultural, or professional setting--is that the fusion of different ideas can breed innovation, creativity, and productivity that would otherwise be impossible. And having spent a lot of time in diverse environments, I have definitely seen and experienced the diversity "idea cauldron" at its best.

But at times, these varying "different ideas" simply breed conflict and resentment, and can in fact be counter-productive to the task at hand. Just staying in the business world, homogeneous Japan is by many measures light years ahead of the United States in terms of innovation, especially in the technological realm (most notably robotics and consumer electronics). Could it be that we in the United States are overstating the benefits of cultural and intellectual diversity? If multiculturalism doesn't help us to innovate and progress as a society--but does breed racism and resentment--what's the point? Does it just mean we have a better selection of restaurants?

Throughout our nation's history, we have in fact generally been quite suspicious and dismissive of the immigrant class--we treated the post-potato famine Irish as if they were less than human, and today we deride Mexicans and other Hispanics as "wetbacks", often assuming they are illegal immigrants even if they are in fact legal and hard-working.

The more I thought about the matter, the more I began to wonder if the benefits to our society from immigration and multiculturalism might be purely economic. The fact is, a large portion of this nation was built and developed largely on the basis of free slave labor, a dynamic that has become even more clear to me since I moved from New England to Virginia. Many of the South's most beautiful buildings were either directly built by slave labor, or at the very least built using financial gains from the tobacco business, an industry made lucrative by that same unpaid labor class. (Yes, I spent the weekend at a wedding at Duke University, a beautiful campus and institution financed in large part by tobacco money, so my mind was already on this topic).

I wonder whether our nation has ever really recovered--economically speaking--from the abolition of slavery. Whether or not we like it, we NEED an underpaid working class in order for the rest of us to profit and prosper the way that we are used to. But as that working class grows and develops in power and influence--like the Irish so famously did--we need to find a new underclass to fill the thankless jobs they once performed. Naturally, we typically turn to the newest immigrant class for that role--and when they're not available for some reason, we look overseas to China or India or name-your-oppressed-impoverished-country.

I really hope that our history of immigration and multiculturalism aren't so crass and simplistic as my last paragraph may have suggested, but I do wonder if America is less of a melting pot and more of an economic exploitation machine. You work hard at a slave wage, I profit and enjoy the fruits of your labor. So I put it to you--what ARE the long-term benefits of American multiculturalism?

[Washington Times]

Putting a price on safety, Part 2 (inflation gets personal)

Back in December, I wrote about the safety dynamic at airports, and how the tension between security and efficiency meant that we were effectively placing a price on our own safety. In the post, I made mention of the necessity for many businesses to place a number on the value of a human life. For a refresher:

Many attempts have been made to quantify the value of human life--a task which, unseemly as it may be, is necessary in fields from insurance to air travel and beyond--with estimates ranging anywhere from $1.54 million to $5 to 8 million. To run a profitable business (including an airline), it is absolutely essential to understand what value potential employees and customers will place on their own lives, as well as the lives of others. If you value human lives too little, you will find yourselves outcast as corporate pariahs, and end up in the poorhouse. But at the other extreme, if you value safety significantly more highly than do your customers, you are almost certain to lose customers as well--such is the predicament that our airlines now face.

That dynamic has managed to work its way back into the conversation, as an article from yesterday's New York Times attests.

To protests from business and praise from unions, environmentalists and consumer groups, one agency after another has ratcheted up the price of life, justifying tougher — and more costly — standards.

The Environmental Protection Agency set the value of a life at $9.1 million last year in proposing tighter restrictions on air pollution. The agency used numbers as low as $6.8 million during the George W. Bush administration.

The Food and Drug Administration declared that life was worth $7.9 million last year, up from $5 million in 2008, in proposing warning labels on cigarette packages featuring images of cancer victims.

The Transportation Department has used values of around $6 million to justify recent decisions to impose regulations that the Bush administration had rejected as too expensive, like requiring stronger roofs on cars.

And the numbers may keep climbing. In December, the E.P.A. said it might set the value of preventing cancer deaths 50 percent higher than other deaths, because cancer kills slowly. A report last year financed by the Department of Homeland Security suggested that the value of preventing deaths from terrorism might be 100 percent higher than other deaths.

First of all, well played, Homeland Security. Your attempts at self-justification know no bounds--terror deaths are twice as "valuable" as other deaths? Sure, guys. Whatever makes you feel alright about your bloated budget.

But setting all of the bizarre, chest-pounding, bureaucratic "our cause is more important than your cause" competitiveness in Washington aside for a bit, the economist in me looks at this situation and wonders. With the persistent population growth that our country and the world continues to experience, shouldn't the value of a human life be declining if anything, given the increased supply? That is, of course, unless demand for human beings is growing, which... doesn't really seem to be the case.

Yeah, I know, we're talking about human beings here, so it probably seems crass to apply supply-and-demand curve logic to the human condition. But economists are crass by nature--it's the "dismal science" for a reason--and that character flaw doesn't mean that their insights can't be valuable.

Ultimately, I take this as more of a sign that inflation via a debased dollar is very real, and applies not only to corn, gold, cotton, oats, sugar and oil, but to human lives as well. So, yeah. Inflation just got personal. Good work, Bernanke.

[New York Times]

Interactive view of the US federal budget

I mentioned in passing in a post last week that most Americans suffer from a certain type of cognitive dissonance when it comes to the federal budget (and by extension, our deficit and debt)--essentially, we humans are just very bad at visualizing really big numbers. Hence this video, which I also shared in last week's post.

For those of us who think that we can solve our budgetary woes simply by "trimming the fat", the New York Times is here to help, with an interactive view of President Obama's 2012 budget proposal. The green rectangles indicate increases from 2010, while the red rectangles indicate cuts from the 2010 budget. Notice that the majority of the red spaces are small, where the majority of the green spaces are quite large.

The graphic isn't embeddable, so you'll have to click on this link to play around with it. Personally, the more time I spend perusing the graphic, the more hopeless it all starts to seem.

You can't balance a budget by going out to dinner less often but also buying a bigger house--that's essentially what this budget is trying to do. Most Americans--and apparently politicians, too--seem to think that we can solve our deficit problems by making our smaller programs more efficient, while letting our bigger programs (Medicare, Defense, and ahem, interest on our debt) grow ever larger. That's a losing proposition, akin to bailing out a sinking ship using a leaky bucket.

The only way we will ever be able to balance our budget is by hacking away at the big green rectangles--that's simple mathematics, because you better believe we aren't balancing it through tax increases. It won't be easy or fun, but we literally don't have a choice.

[New York Times]

I'm dreaming of a green Christmas

The New York Times renewed an old debate over the weekend, citing a recent study that examined whether it is more environmentally friendly to have a real Christmas tree or a fake Christmas tree.

Sales of fake trees are expected to approach 13 million this year, a record, as quality improves and they get more convenient, with features like built-in lights and easy collapsibility. All told, well over 50 million artificial Christmas trees will grace living rooms and dens this season, according to the industry’s main trade group, compared to about 30 million real trees.

Kim Jones, who was shopping for a tree at a Target store in Brooklyn this week, was convinced that she was doing the planet a favor by buying a $200 fake balsam fir made in China instead of buying a carbon-sipping pine that had been cut down for one season’s revelry.

“I’m very environmentally conscious,” Ms. Jones said. “I’ll keep it for 10 years, and that’s 10 trees that won’t be cut down.”

But Ms. Jones and the millions of others buying fake trees might not be doing the environment any favors.

In the most definitive study of the perennial real vs. fake question, an environmental consulting firm in Montreal found that an artificial tree would have to be reused for more than 20 years to be greener than buying a fresh-cut tree annually. The calculations included greenhouse gas emissions, use of resources and human health impacts.

“The natural tree is a better option,” said Jean-Sebastien Trudel, founder of the firm, Ellipsos, that released the independent study last year.

Ironic, isn't it?

As usual, I think this is indicative of a broader issue. "Sustainability" has become a common buzzword lately, but it's unclear exactly what that means. Ambiguity is everywhere, and consumers and businesses are often unwilling or unable to consider all of the impacts of their choices.

One striking example is the Toyota Prius, an enduring symbol of sustainable energy usage which, because of the environmental costs of producing and disposing of its battery, is not nearly as "green" as one might think. One study even indicated that the Prius might perversely be more damaging to the environment than the Hummer, that great symbol of energy waste and excess.

Even compact fluorescent light bulbs, which are an absolute slam dunk in terms of energy usage (and materials used because of their long lives) present a huge problem in terms of disposal, because of the small amounts of toxic mercury used in the bulbs.

Furthermore, the recent push towards using ethanol instead of petroleum led to huge spikes in the price of corn, which increased food costs for everyone. How "sustainable" is any policy that makes it more difficult or expensive for the affected individuals to eat?

In the best case, this ambiguity will mean decades of confusion for consumers, governments, and businesses as they try to determine the second- and third-level impacts of their actions and policies. In the worst case, unscrupulous companies could add to the problem by taking advantage of consumers' lack of scientific knowledge to specifically portray a product as environmentally-friendly or "sustainable", when in fact is not.

I'll always remember one particular "sustainability drive" when I was in business school, where well-meaning students and administrators posted large sheets of paper throughout the halls of the school soliciting other students' "ideas for sustainability". The brainstorm was of course a "raise awareness" event whose organizers' hearts were in the right place, but I couldn't help but take out a pen and write "maybe don't waste reams of paper when trying to raise awareness of sustainability".

Sure, I was being a jerk, but I think that instance simply shows the manner and extent to which even well-intentioned companies and individuals can inadvertently cause as much or more harm than they prevent. Don't just assume that something that is portrayed as "green" or "sustainable" actually is; to the extent possible, do your own research and determine for yourself what the ultimate impact is or might be. Relying on other people to tell us what's best is, in essence, unsustainable.


[New York Times]

More subconscious signaling

I wrote a bit last week about "implicit bias", a phenomenon that leads us to subconsciously favor one group or type over another when we are making quick decisions, whether or not we are aware of it (or if it makes any sense).

From my time in business school, I learned about the extent to which marketers study and play to the strange quirks of behavioral psychology (something I briefly addressed in my inaugural post on this blog). Clearly, understanding how people think (even and especially subconsciously) can be extremely lucrative and profitable.

This cool infographic (brought to my attention here) does a fantastic job of summarizing how color influences and affects our purchasing decisions. Keep it in mind when you're doing your gift shopping this holiday season (click here for bigger version; for some reason the one I uploaded came out smaller).

[Good.is]

Putting a price on safety

My wife and I just got back into town after a weekend trip to Chicago, where we braved some pretty special weather conditions to watch my Patriots beat the Bears at frigid Soldier Field (visual evidence included at the end of this post). We were lucky to get back home without incident given the conditions, but also given our own lack of planning.

We arrived at the airport about 50 minutes before takeoff and immediately knew we had a problem. The American Airlines terminal at O'Hare (easily my least favorite airport in the country--I typically avoid it all costs) was absolutely jam-packed with people, and the security screening line was overflowing, at least 30 minutes long by our estimate. We should have seen that coming and left additional time--given that 1,700 flights were canceled in Chicago yesterday because of the weather--but alas, we didn't.

With little chance of making it through the security line in time to make our flight, we decided to plead with an American Airlines representative to allow us to bypass the line. She graciously allowed us to do so and ushered us to the front of the line (along with a couple of other passengers in similar predicaments), incensing the ID-checking TSA agent at his post. The tension between the American Airlines representatives and the TSA employees was palpable, as there was a protracted back-and-forth argument between the two. To me, this brief incident spoke to a more fundamental conflict between the airlines and the TSA, and between business profitability and safety more broadly.

From the standpoint of the American Airlines representatives, allowing us to cut the security line just made logical business sense. With so many passengers already stranded as a result of the weekend weather, adding two more standby passengers to the rolls certainly wouldn't help matters for the airline--allowing us to make our flight while keeping us happy was a slam-dunk from a customer service perspective. But the TSA could care less if any of us make it to our flights on time--they receive no additional benefits if we do, and they are incentivized only to make certain that the flights that do take off are as safe as possible.

You can say what you want about the TSA's tactics and the efficacy of their screenings in general (I certainly have a long list of personal gripes, better left for another post), but it is indisputable that the safety of the planes is their one and only concern. If they had it their way, security lines would probably always stretch for over an hour, and it would be the passenger's responsibility to budget enough time. But airline passengers (and the airlines themselves) clearly won't stand for that. With a growing number of protesters to the TSA's "enhanced security measures" (it's no coincidence that Amtrak ridership along the eastern seaboard is soaring of late), the tension between profitability and security is becoming more clear by the day.

Passengers will ultimately decide for themselves how much security they are comfortable with, and vote with their wallets in response. The TSA doesn't necessarily care if airline ridership decreases in the short term, but the airlines clearly do (and over the long run, if nobody's flying, there is no TSA). The airlines and the airports need to maximize ridership in order to survive--especially with high fuel costs and low-cost providers squeezing margins--and they therefore must aim to find the proper balance between making their planes safe and keeping the flight experience efficient and painless.

We might say things like "you can't put a price on safety", but in reality we do so unconsciously every day in the choices we make. We choose to drive to work instead of walking, even though we're clearly taking a safety risk by doing so. But we instinctively "know" that the benefits (both financial and otherwise) of driving outweigh the costs of somewhat compromised safety. We may not actively sit down and write an Excel model to determine the value that we place on our own safety, but this certainly does not mean that we don't actually do it.

I remember an economics course in my college days that spoke at length of the strange intersections between economics and morals, and a frequent question therein was "what is the value of a human life"? We may be tempted to answer that it is "infinite", but in reality we know that is not the case, either practically or economically speaking. At some point, we need to make a determination as to how much we are willing (or not willing) to spend or sacrifice in the name of enhanced security.

Many attempts have been made to quantify the value of human life--a task which, unseemly as it may be, is necessary in fields from insurance to air travel and beyond--with estimates ranging anywhere from $1.54 million to $5 to 8 million. To run a profitable business (including an airline), it is absolutely essential to understand what value potential employees and customers will place on their own lives, as well as the lives of others. If you value human lives too little, you will find yourselves outcast as corporate pariahs, and end up in the poorhouse. But at the other extreme, if you value safety significantly more highly than do your customers, you are almost certain to lose customers as well--such is the predicament that our airlines now face.

Simply put, the tighter and more onerous airport security procedures become, the less likely passengers will be to fly. I personally no longer fly to a destination that I can drive to in 10 hours or fewer, unless absolutely necessary--the time and hassle of the security measures just isn't worth it to me, and I'm certainly not the only one. I do recognize that there are risks to flying, but I'm simply not willing to paralyze myself in order to maximize my safety (I also think that, in an ironic twist, long security lines mean that the incredibly crowded "non-secure" areas in airports are officially among the most dangerous places you could possibly hope to be, but I digress).

We instinctively shy away from seemingly crass efforts to quantify the value of human life, but then we turn around and callously rely on risk/reward shortcuts with every choice we make in our daily lives--cooking with gas, talking on cell phones, eating fast food... all present safety risks, but in all cases we must decide if the benefits outweigh the costs. Safety does have a price, and figuring out what that price might be is a central and vital business planning problem. I'm just glad that--for one moment at least--profitability and practicality took the lead over safety and enabled me and my wife to make it to our flight on time. I'm glad to be home.

A great one from the Journal of Consumer Research

As you can probably tell from my lack of posts yesterday, I'm not yet fully recovered from my trip back from Italy. I fell asleep at my desk about five times yesterday, and I'm still pretty out of it. But I came across this study from the Journal of Consumer Research, and the abstract alone was intriguing enough for me to write a post about it. Essentially, the researchers conclude that credit cards make you fat (though they use bigger and more confusing words...how I miss academia). Emphasis is mine.

Some food items that are commonly considered unhealthy also tend to elicit impulsive responses. The pain of paying in cash can curb impulsive urges to purchase such unhealthy food products. Credit card payments, in contrast, are relatively painless and weaken impulse control. Consequently, consumers are more likely to buy unhealthy food products when they pay by credit card than when they pay in cash. Results from four studies support these hypotheses. Analysis of actual shopping behavior of 1,000 households over a period of 6 months revealed that shopping baskets have a larger proportion of food items rated as impulsive and unhealthy when shoppers use credit or debit cards to pay for the purchases (study 1). Follow-up experiments (studies 2–4) show that the vice-regulation effect of cash payments is mediated by pain of payment and moderated by chronic sensitivity to pain of payment.

I wonder further if our shift from a cash-based economy to a credit (or debit)-based economy has further increased the amount of impulse buying across all categories. It's a lot easier to throw down a credit card and sign on a dotted line than it is to go to the bank, withdraw cash, and then physically hand over the bills. This dynamic is especially acute on larger purchases, where we'd certainly think a little longer before handing over $500 for a handbag (for example) if we had to do in hard currency.

Even if we are living within our means (and many who use credit cards are not, which is a whole separate issue), it seems that the increased use of plastic has meant worse consumer choices. We are more likely to spend conspicuously, to make large purchases, and apparently to buy junk food with cards than with cash. Obviously the increased use of credit (and fractional reserve banking) has enabled the growth of our economy that we now hold dear, but I wonder if some of the unintended consequences of credit are worse than we might appreciate. Strange unintended consequences like this one are particularly troubling.


[Journal of Consumer Research]
(h/t Naked Capitalism)

Sacrificing friends post

I came across this article several months ago, but never got around to posting it or commenting on it. Since I'm clearing out the old backlog so that you'll all have something to read while I'm out of the country, this seemed like as good a time as any to finally post it.

Falling in love comes at the cost of losing close friends, because romantic partners absorb time that would otherwise be invested in platonic relationships, researchers say. 

A new partner pushes out two close friends on average, leaving lovers with a smaller inner circle of people they can turn to in times of crisis, a study found. 

The research, led by Robin Dunbar, head of the Institute of Cognitive and Evolutionary Anthropology at Oxford University, showed that men and women were equally likely to lose their closest friends when they started a new relationship. 

Previous research by Dunbar's group has shown that people typically have five very close relationships – that is, people whom they would turn to if they were in emotional or financial trouble. 

"If you go into a romantic relationship, it costs you two friends. Those who have romantic relationships, instead of having the typical five 'core set' of relationships only have four. And of those, one is the new person who's come into their life," said Dunbar.

So, we lose friends when we get married, which is in large part the result of personal choice. What I wonder is, what about the other side of the equation? In other words, what if we don't get married? We've all had friends who either became less fun or disappeared completely after entering into a serious relationship (or getting married). It's never fun, but according to this research, it's inevitable.

As our closest friends get married, how do we avoid finding ourselves on the "two close friends" chopping block? Are we destined to lose friends by the year, even if we don't get married, as our close friends gradually cut us off in order to spend more time with their wives (or husbands)? I certainly hope not, but I think it's worth asking.

It would be sad indeed if we were forced to choose between getting married on the one hand or living an increasingly lonely unmarried life on the other. Is that what this research suggests? I'd be interested to hear your thoughts...

[Guardian]

Wall Street and Main Street, at odds again...

Courtesy of Michael Panzner over at Financial Armageddon comes this provocative graphic, which displays a growing disconnect between stock prices and the public perception of our economic health. The "Present Situations Index" that the graphic cites is a monthly release compiled by The Conference Board since 1967. One of three major "Consumer Confidence" statistics, it is typically closely watched by market professionals, as it is a fairly reliable indicator of consumer attitudes.

It's tempting to attribute this growing gap to behavioral or psychological factors--"consumers don't trust Wall Street any more", "persistent unemployment is a drag on the consumer's psyche", "the fat cats are getting rich off the little guy", etc.--but I don't think this is all that's going on here.

Since the onset of the financial crisis, the Fed and our government have engaged in a significant and consistent dollar debasement policy. I've written about this here before, and it's again relevant here. Essentially, while nominal stock prices have risen back to pre-crisis levels (creating the widening gap), this is not indicative of more valuable companies or a more robust economy. It is simply a measurement anomaly--we continue to measure the S&P 500 Index in dollars, the dollar is worth less now, so the S&P 500 Index is worth more of those dollars. In real terms, it has barely budged from its lows--just like our confidence.

Rising asset prices do not, by themselves, indicate a healthy economy--it's a game that our Fed is playing that simply isn't working in the consumer's mind. In other words, "Main Street" gets the game this time, and won't play along. While I'd love to say that this is a gap that is bound to close--and no, I don't mean via a market crash, I mean via an increase in consumer confidence-- I don't think it's the case. Unless we reverse the debasement of the dollar, the gap in this chart is almost guaranteed to continue growing.


[Financial Armageddon]