Economic Understanding

Everyday we see on the news some reference to economic results or statistics. These should be of interest to everyone, not just those Wall Street tycoons and rich investors. Whether shopping at the grocery store, filling the car with gas or looking for a new job, economics affects our lives in so many ways.

One basic tenet of economics is the law of supply and demand. 

In a free market, the relationship between supply and demand determines the price of goods and services. Things that are scarce cost more because people who own them can wait to get the best offer from the highest bidder. Things that are common cost less because people who need them have a choice of sources; they can take their time to shop around for the best deal. As the supply of a product increases, the price goes down, simply because there is more of it. The opposite is also true.

This idea of supply and demand is behind many price changes, but it hits close to home when it affects jobs and wages. 

A couple of weeks ago the Business Insider ran a headline that made the point clearly: “The US unemployment rate fell to 3.7%, a 48-year low, in September.  What should be good news is bad news for the fast food and retail industry.” Why would it be bad news for the likes of McDonalds and Wal-Mart? The answer is supply and demand.

When the unemployment rate drops to today’s historic lows, the supply of available workers has decreased. That pushes up the cost of hiring people, that is, buying their services. Many of those jobs typically do not require a high level of education. Needed skills can be learned on the job. But with openings at many potential employers, workers would wisely look to where they could get the best deal – selling their skills to the highest bidder as fast-food locations and retail outlets compete for their time and loyalty.

But there is a downside to this as well. As I have written often before, there is no magic money tree.

The Business Insider continues: “Companies are giving workers higher pay and better benefits to compete – and trying to figure out how to cut labor hours by replacing employees with robots.” The higher wages and benefits must be paid for somehow. Do they pass along the added costs to their customers by raising prices? Do they try to absorb the added costs by making their operation more efficient? In the first case, it would be illegal to collude with their competition to get everyone to raise prices. They must continue to compete honestly. In the second case, using robots is one answer. Fast-food restaurants, grocery stores, banks and others have already increased the amount of self-service they expect from their customers.

Neither of these options is evil. People have raised prices and used automation for years. They are just trying to stay in business. Long distance phone calls used to be very expensive until they replaced operators with computers. Now distance is not even a consideration.

But what happens when the controlling factor is not supply and demand, when instead the government forces or coerces companies to pay more? For example when Senator Bernie Sanders wants McDonald's to raise its minimum wage to $15 an hour, they have the same options, raise prices or find ways to reduce overall labor costs. 

Notice that when Amazon came under the same pressure, they did promise all workers a $15 minimum wage. But according to CNBC, “the company is getting rid of incentive pay and stock option awards.” Although Amazon denies it, many workers complained that they will make less with the pay raise than they did before with the other benefits.

With a little economic understanding, none of this comes as a surprise, but people continue to act like there really is some magic money tree and that any well intentioned changes just make the world a better place with no ramifications whatsoever. Then, when the robots fire up and companies are only willing to hire people with $15-an-hour skills to fill the few jobs that are left, where do young people go for a first job experience? Where do today's fast-food workers find other employment?

One More Time – The Placebo Effect

Way back in early 2012, I first brought up the placebo effect – the tendency of the body to heal itself when belief in the cure is strong. How it works is still a mystery but that it does work is indisputable.

The example I used over 6 years ago was a $30 performance wristband, one endorsed by famous athletes and touted to improve athletic performance. In a test people were given the advertised wristband and exposed to some physical performance and balance tests. The before and after results showed some improvement. Then they were given a similar-looking one-dollar replacement band and told it was also special, performance on physical and balance tests improved comparably. Conclusion: it wasn’t the band at all; it was the perception that they were getting some extra, outside help – mind over matter.

Since then I have mentioned the placebo effect in essays warning about vitamins, acupuncture, forest bathing, chiropractic, healing crystals, gluten-free diets, cryotherapy, homeopathy, ear candling, essential oils and a few other subjects. (Wow, that’s a lot of toes to step on in only six and a half years!)

The point is not to make people angry and defensive, but to make them aware of the difference between science and marketing, and how the placebo effect can lead to an erroneous conclusion that a treatment really works.

When a cure is proposed, competent scientists will split a relatively large group in two, randomly assigning one to test the treatment while giving the other a placebo. Both groups usually show some improvement due to the placebo effect. To validate the treatment however, the improvement of the treated group must be significantly better than that of the control group. Otherwise they declare the treatment “no better than a placebo,” that is, no better than no medicine at all.

The placebo effect explains many of the endorsements we hear from celebrities, friends and neighbors. They sincerely (and enthusiastically) believe whatever they are recommending has beneficial effects, but with no scientific evidence it may be “no better than a placebo.” When you buy one of these products, the money spent is money wasted. That’s why the small print in ads, where they explain how the FDA has not approved their magic formula, they often add something like “results will vary.”

That takes us to a health story from England where the BBC reported a pure placebo experiment. With help from University of Oxford, they tried to see if they could “cure real back pain with fake pills.”

One hundred people with severe back pain were asked to participate in a study of a powerful new painkiller. What they didn’t know is that everyone would be given realistic looking pills that were really placebos, “capsules containing nothing but ground rice.”

The blue-and-white-striped pills “came in bottles, carefully labeled, warning of potential side effects and sternly reminding patients to keep out of the hands of children” to further the impression that this was powerful stuff.

Three weeks later researchers found “nearly half of our volunteers reported a medically significant improvement in their back pain” and that those who spent a little more time with a doctor merely discussing the pills were more likely to improve. In one case, a man went off his morphine but continues to take the ground-rice pills.

Placebo effect is not a trick that works only on the gullible. Taking a placebo can cause the body to release endorphins, natural painkillers. And sometimes subjects improve even when they know they are taking a placebo.

But that doesn’t mean the gullible aren’t tricked. In the earlier case of wristbands, even after the people learned that there was no difference and the improvement in both cases was psychological, they still wanted to buy the $30-wristband over the equally effective $1 bands. It’s like when people think the same wine tastes better when the bottle has a higher price tag. 

It does no good to understand science when critical thinking fails to kick in.

Fake News Goes Non-political

Not too long ago, when you heard the expression “fake news” the assumption was that the speaker was talking about politics. That seems not to be the case any more.

This thought struck me as I came across a story on the fastcompany.com website with the headline: “Facebook deletes alternative health pages as the war on fake news escalates.”

The move began in the spring of this year, but few noticed except the advertisers who were suddenly being blocked. It appears that Facebook views several of the promoters offering alternative or holistic medicine as purveyors of pseudoscience, declaring them possibly as big a danger to the public as election tampering. “This includes rather large accounts focused on health, natural remedies, and organic living, such as Just Natural Medicine (1 million followers), Natural Cures Not Medicine (2.3 million followers), and People’s Awakening (3.6 million followers). Small accounts with under 15,000 followers were also hit.” Another affected company was Conscious Life News with 1.1 million followers.

The article goes on to say that these and similar complementary and alternative health pages “have been known to spread misleading or false information about medicinal remedies that are not backed by traditional science, or debate issues like vaccination.”

The subject of vaccinations is of particular interest for two reasons. First, Russian bots have been targeting both pro- and anti-vaccination advocates with on-line posts in an attempt to stir up controversy and conflict. Second, the recent increase in outbreaks of measles, mumps, and pertussis among unvaccinated children has “increased mortality from vaccine preventable diseases.”

But this brings up a couple of interesting questions. Why is it Facebook’s job to police all the false information on their pages? And, shouldn’t people be able to figure out for themselves whether their choice of medicine is effective or not?

Neither has an easy answer. Facebook has passed the point where they can declare themselves a communications medium, not responsible for content. The phone companies aren’t held responsible for what you say to a friend, but they also don’t run advertising during your conversation or otherwise try to influence you. That leaves Facebook in an awkward position.

According to the numbers shown above, millions of people are looking for magic answers in the areas of health and wellness. Many don’t care what science says and don’t make good choices.

Over the past three weeks I have seen numerous reports such as these:

• A doctor placed on probation by the Medical Board of California for four years even though she “received testimonials from celebrity patients…and has promoted [her questionable therapy] on the Oprah Winfrey Network.” Unfortunately celebrity testimonials are not the same as scientific evidence. 
• Crowd funding for patients to receive dubious cancer treatments with much fanfare, although after treatment “many publicized success stories have a tragic ending,” a fact that  is not widely publicized.
• After Federal Trade Commission (FTC) action, an intravenous vitamin cocktail marketer agrees to stop making deceptive health claims.
• The Texas Medical board required a promoter of the multiple chemical sensitivity concept “to revise the form he used to obtain consent to treat patients with injections of environmental substances. The form was required to state that (a) his injections contain only the ‘electromagnetic imprint’ of the agents in question, (b) the therapy is not FDA-approved, and (c) the therapeutic value of the therapy is disputed.”

See several more examples from this RAS post in June 2016.

I have argued in the past against too much consumer protection. Let people make informed choices. But the information above shows that some promoters, even medical doctors, will get away with as much as they can to dupe patients into undergoing unproven treatments until a medical board or the FTC is forced to step in.

Critical thinking should at least make everyone wary enough to shun those who try to avoid legal problems by burying wording in the fine print, “Not approved by the FDA and not intended to diagnose, treat, cure or prevent any disease or any other medical condition.” But even with the help of Facebook, people looking for easy answers and who don't care about science will still be at the mercy of liars and charlatans.

How Much We Take on Faith

The other day I got into a discussion with a colleague about plastic, which led to a comment about the amount of plastic in the ocean and what a problem it is. My response that only about 1% of the ocean plastic comes from the United States was met with stares of disbelief. Instead of arguing the point with someone who firmly believed the opposite, I offered to send references. The next day I emailed an explanation of the situation from a number of reputable sources.

From National Geographic in a story about the large accumulation of waste in the Pacific: "Microplastics make up 94 percent of an estimated 1.8 trillion pieces of plastic in the patch. But that only amounts to eight percent of the total tonnage. As it turns out, of the 79,000 metric tons of plastic in the patch, most of it is abandoned fishing gear—not plastic bottles or packaging drawing headlines today."

My next stop was a Bloomberg article with a sub headline of: “Skipping straws may be hip. But there are much better ways to fight pollution.” They first point out that the original estimate, the one activists and news media cite with confidence, that Americans use 500 million straws per day is based on highly dubious data that came from a small survey by a nine-year-old for a grade school science project. Then it was spread without any attempt to verify it by those who wanted to emphasize the problem. "Similarly, two Australian scientists estimate that there are up to 8.3 billion plastic straws scattered on global coastlines. Yet even if all those straws were suddenly washed into the sea, they'd account for about .03 percent of the 8 million metric tons of plastics estimated to enter the oceans in a given year.” So what we have been told about straws being the problem is a gross exaggeration.

A Science report on marine pollution verifies exactly what I was saying with a table on their site,  Table 1 titled: “Waste estimates for 2010 for the top 20 countries ranked by mass of mismanaged plastic waste (in units of millions of metric tons per year).” The US is listed at the bottom of the table with a contribution of .09% – less than one percent. That same information is repeated in pie charts on other sites.

So all this fuss about banning straws is bogus. It is a feel-good exercise that grows because so few people take the time to do the research. Ocean pollution is a problem, but the advocates and politicians are misinformed and are passing along that poor information to the rest of us – and we are buying it.

This and many other trends and movements have become their own religions. They depend on blind faith. The preachers stand up and confidently make ignorant and absurd allegations about chemicals, food safety, pollution, economics and a host of other subjects. The general population takes it on faith, chanting “amen” in all the right places. This leads to poor policies and results in those responsible for poor policies being reelected on the basis of making their followers feel good about themselves, about how pure they are, about how caring they are. It’s much more about ego and self esteem than science or actually saving the planet.

In reality these policies deliver little or no benefit and may have unknown side effects or unforeseen consequences. They are at best a waste of time. Critical thinking is the answer, but who wants to deal with reality?

The Paranormal

Is there any logical reason to believe in the claims of ESP and other paranormal powers? A few reasons come to mind to support skepticism.

First, I ran across this long list on Wikipedia. It shows a number of prizes offered, past and present, for proof of paranormal powers under controlled conditions. Many of the prizes were in the hundreds of thousands of dollars. The last column shows the outcome as “unclaimed” for all but two. The participants disputed those two but still failed to collect the prize.

If people really had psychic powers, you would expect to see a line at some of these tests. It would be easy money and vindication from all the skeptics.

But the catch is that they must show their skills under controlled conditions. That means, among other things, no outside help, no hidden wires or microphones and no hints from testers. The last is particularly frustrating to those who practice cold reading, a technique of throwing out general statements looking for encouragement from credulous customers and letting them lead the reader to a plausible story. Without these aids and distractions, everyone fails.

People also try to assign some magical force to coincidence. Something unusual or unexpected happens and they automatically think the universe is sending them a message. It reminds me of a feature on an Oprah show years ago about a young boy and young girl who were best friends in a Russian orphanage. They were adopted separately but were reunited by accident in a restaurant in Michigan. The audience was amazed, asking themselves “What are the odds?”

Critical thinking tells us that although this particular occurrence was unusual and heartwarming, the odds of the producers of the Oprah Show looking for and finding any such extraordinary situation in a country with a population of over 330 million, each one eager to share stories of notable coincidences, borders on certainty. Social media proves that it is very likely that several unusual coincidences arise somewhere (and get posted) almost constantly. When you dream of a loss and something remotely resembling it happens, it is attributed to ESP. When nothing happens, there is no coincidence, and the dream is forgotten or discounted as just another bad dream. In the case of the “dream-come-true,” it is comforting to be able to feel some sense of control or connection.

Another example is represented by the man in the moon. The shadows on the moon’s surface are interpreted by the brain to resemble something familiar. Other cultures have seen a rabbit, the silhouette of a woman, a frog, a moose, a buffalo, or a dragon, instead of a face. This tendency to reinterpret random shapes as real pictures is called pareidolia. It was responsible a few years ago for the excitement over the face on Mars where a certain rock under certain lighting conditions looked like a human head. The same phenomenon is at work when someone sees Jesus or Elvis burned onto their toast or in a potato chip.

The question always comes up why people with real psychic powers don’t just go to Las Vegas and use their powers to win big at the roulette wheel. The answer provided is that people with those powers are too ethical to use them for such base purposes. They are more interested in using their powers to benefit humanity.

But couldn’t they benefit humanity a lot more by using their roulette winnings to set up charitable organizations? Couldn’t they benefit humanity more by warning of impending disasters? Where were all the psychics when the twin towers were destroyed or when the Mandalay Bay shooter was smuggling guns into the hotel? There must have been at least a small ripple in the ether. Being home to carefully calculated odds, Las Vegas is far more worried about shooters than they are about psychics.

Perspective

From time to time it’s good to reflect on what is important in life. That's the basis for having  perspective. It helps ground us. In separating the trivial from the substantial, it’s often necessary to look below the surface. In the end perspective saves time and energy.

I am reminded of this by many of the advertisements and news stories I run across daily. I recognize how so many people waste their time chasing things they don’t need and get into trouble making decisions based on appearance. 

Remember, economic understanding tells us that companies don’t keep trying to sell items that people don’t buy. They don’t sustain advertising approaches that don’t show results. This also applies to the news media and politicians who are also interested in drawing in viewers or voters. The ads we see, the news we hear and the political messages are good indicators of underlying behavioral patterns.

One indicator of a lack of perspective is the constant supply of tips and tricks to declutter. A quick search on line gives access to 5 ways, 10 creative ways, 9 secrets, 15 great tips and 100 tips to declutter. They reference Zen habits, minimalist philosophy and provide links to professionals who will walk you through it. The message in all these is that many Americans have accumulated more than they need to the point where they don’t know where to start solving the problem.

And speaking of things you probably don’t need…

How about an automated floss dispenser that acts as an alarm clock to remind up to two people that it’s time to floss and makes a red frowny face when you miss the deadline? You can buy it for about $40 and hang it on the wall and then shell out another $8 every time it needs a refill, about 3.5 times the cost of traditional floss – or you could just remember. 

OK, I get it. Remembering isn’t so easy these days. But has it gotten to the point that people need to be reminded that your child is sitting in the back seat? – Apparently so.

Remembering to floss is not as important as forgetting a child, but I saw another example of another aspect of perspective a little over a month ago.  The New York Post ran an article giving advice on how women in the big city can be more successful in business based on findings from a number of studies.

Unlike men who need only a suit and decent haircut (and can possibly skip shaving), “women are expected to adhere to a stringent regime of primping and preening to get promoted.” But don't take it too far.

A University of Chicago study discovered typical stereotypes of beautiful women portray them as less capable of taking on managerial and leadership responsibilities. In addition, another series of studies discovered that men find “brunette women as better leaders than fairer haired peers.” Likewise a dress-for-success prejudice prevails, and a “Harvard University study found cosmetics can change people’s perceptions of a woman’s likability, her competence and (provided she does not overdo it) her trustworthiness.” 

Although, men don’t typically face the same kind of appearance-related pressure, there are equally faulty and unjust prejudices about height, voice, handshake grip and old school ties, many of which can’t be changed as easily as makeup, hair color or clothing. It’s a shame that acceptance and promotion so often depend on these outward appearances instead of any attempt at an objective measure of ability, but perhaps that explains some of the real incompetence we so often are subject to as customers and employees.

It all gets back to perspective.

Is Social Security Really "My Money"?

It’s a common argument among retirees, encouraged by organizations like AARP, that Social Security is my money and the government cannot be tinkering with it. It’s strange how this argument never came up years ago when the government decided to add an annual cost of living increase. Tinkering in the positive direction is fine. 

But advocates take advantage of retirees lack of perspective, critical thinking and economic understanding by pushing all kinds of myths and untruths to get them riled up enough to vote in a particular way.

Lack of perspective is evident when the announcement of the year’s cost of living adjustment is routinely met with complaints  that it is not really enough to keep up with inflation. They don’t understand that it was never in the original plan and any increase should be greeted with gratitude.

Lacking critical thinking, most don’t even make the effort to do a little simple research to find out how Social Security works. It’s clear that it’s not your money simply by the fact that when someone dies before retirement age, the SSA does not treat it like an inheritance to be divided among next of kin. No, the money was paid into Social Security and will be used for Social Security purposes.

There is also the lack of understanding about the government having “robbed” the Social Security trust fund and spent all the money on other projects. Consider this. Social Security since its beginning and up until this year has been collecting more money than it was paying out. The surplus had to be invested somewhere.

They can’t put it into a commercial bank or credit union. That would be an unfair windfall for that bank relative to its competition and would likely involve political favoritism. Investing in the stock market could not be justified, seen as “gambling with my retirement,” and equally problematic from the favoritism standpoint. Likewise corporate bonds are out of consideration.

What’s left? Government bonds. And what are government bonds used for? They are used to borrow money for the government to spend! The government has not been robbing from the “trust fund.” They have been borrowing the money with an obligation to pay it back, just as they must eventually pay back other bonds they sell to raise money when they spend more than they have. (They face that obligation now, as contributions are no longer sufficient to cover promised benefits.)

Finally, Social Security does not favor the rich. It is skewed in the opposite direction. Taking a look at the generic benefit calculator on the SSA website shows the difference. In one case, a person born in 1958, earning $50,000 per year, and planning to retire at 66 years old will receive $1460 per month (estimated). Leaving all assumptions the same and only changing the earnings to $100,000 gives an estimated monthly payment of $2276. Double the earnings and the benefit increases by only 56%.

 This is not my first tirade about Social Security (see here, here and here) and will probably not be my last. I just get very frustrated when people continue to fall for all those lies without doing a lick of work to investigate.