More Garbage Words: Social Security, A Minor Fiscal Issue

Paul Krugman calls Social Security a minor fiscal issue, citing this report in which Social Security spending as a percent of GDP levels off at around 6% in 2030. For someone whose blogging modus operandi is pointing out disingenuous arguments made on the right, Dr. Krugman is skating on thin ice here. The Trustees Report that he uses as the basis of his numbers shows GDP rising 66% between 2010 and 2020, which would be on par with the rise between 1990 and 2000. Huh? Is that what the &#8220-invisible bond vigilantes&#8221- are telling us? The Trustees Report assumes GDP growth of 160% between 2010 and 2030. If we are becoming Japan as Krugman says, maybe the more relevant comparison is the 66% GDP growth seen in Japan 1990-2010. Changing this assumption has a large effect on Social Security as % of GDP.

Now, Dr. Krugman could argue at least two points:

First, even if you assume Japanese-style growth, Social Security would still account for less than 10% of GDP. This however leaves aside the state and municipal versions of the pension problem, that might eventually take the form of demands at the federal level, and in any case are relevant to state taxpayers. It looks like he is telling half the story, and then with only half the numbers. Not to mention Medicare, which perhaps is only a different issue in a pedantic sense, if not in terms of urgency.

Second, if further stimulus were applied as Krugman recommends, we might have a chance of achieving those GDP targets. If however income is now structurally impaired by demographics or other factors, as some argue, those numbers are out of reach pending some new technology. Maybe you can double down on a bad balance sheet if your cash flow assumptions are good, but in this case they seem to be a product of naive empiricism. This is the same sort of empiricism that got pension funds that had assumed 8% annual returns in trouble. Those numbers seem to be picked from the same fictional future world as the GDP projections that Krugman endorsed, and as usual there is a willful blind spot to reasons why the past might not reflect the future.

To be clear, although it would be largely in my self interest, I am not some right-winger bent on ending social security. In my view, the minimum age must be raised. Dr. Krugman rightly points out that this would put a disproportionate burden on low-income workers, which is why I counter that any age hike must be coupled with means testing, which I prefer to higher taxes. Those on the left that argue that means testing would undermine the popularity of the program are absurd partisans. What is the metaphor? That would be like wearing the wrong color shirt to the wrong neighborhood, getting shot and then freaking out that your shirt is ruined, but not going to the hospital. Neither the right nor left would be thrilled with with an age hike / means testing deal, but that&#8217-s what makes a good compromise.

Mark Thoma, Superficial Blogger

His post, &#8220-The Myth of the Social Security Shortfall&#8221-, here, but if you don&#8217-t want to defer thinking, read Mish Shedlock on pension underfunding instead. Yes, taxes will have to go up, but it&#8217-s not as though sunsetting the Bush cuts and tacking on a couple percent here or there will stem the entitlement spiral, of which social security is a single piece. Thoma is quoting Michael Hiltzik, whose message, when you strip away the authoritative tone is basically, &#8220-don&#8217-t worry so much, it&#8217-s in the future and stuff.&#8221- That strategy hasn&#8217-t worked out so far.

Deferral, abetted by private and public conflicts of interest, is the essence of the problem and is at the root of both the corporate and sovereign credit crises. Now, it&#8217-s one thing when you have an impaired balance sheet propped up by good cash flow, but there are reasons to believe that prospective growth and public income will also be lacking relative to the 20th century. These reasons of course are swept under the rug by at least one liberal economist. Paul Krugman chides someone for rambling on about demographics one day, and tells us we are turning Japanese the next. Why are we turning Japanese? Krugman sees this, but thinks we must defer that issue to deal with unemployment and deflation. To what extent, however, are unemployment, deflation, and the series of booms and busts over the last 30 years symptoms of demographics? If that&#8217-s the case, if pension rate of return assumptions are off for this or other reasons, things could get late early.

– out of your titles if you aren&#8217-t going to have any real discussion. If everything is quoted, the quotes lose their meaning and everything is implicitly endorsed.

Whats different about Predictalot?

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A predictalot user asked:

What&#8217-s the difference between predict a lot y Bolsa de predicciones? they have the same things or at least very similar. ?Are you the same? They have predictions, groups, events etc. the only difference is the language- BP is in spanish.

This is my answer.

The main difference is that on bolsadepredicciones (and other prediction markets like crowdcast, inklingmarkets, intrade, newsfutures, hubdub RIP, and &#8212- a new site with a nice/fresh look and good social hooks) every prediction is independent (separate) and there are at most a few thousand.

In predictalot, all predictions are interrelated (predicting Spain to win automatically increases Spain&#8217-s odds of reaching the knockout round) and there are millions and millions of predictions possible, far more than other sites.

We also think our interface is easier to use than others, but you be the judge.

Predictions are flowing in about every three minutes. Here are some from the last half hour:

Chile will finish second in their group. Current odds: 33.50%.
Spain will finish first in their group. Current odds: 52.48%.
Spain will play Portugal in the knockout stage. Current odds: 48.77%.
Roger joined the group &#8216-inetco&#8217-
Spain will advance further than Greece. Current odds: 76.93%.
Spain will not advance to the Knockout Stage. Current odds: 23.13%.
Spain will advance to the Knockout Stage. Current odds: 77.86%.
Both United States and Uruguay will advance to Quaterfinals. Current odds: 60.04%.

Finally, here are instructions for playing predictalot on your iPad:

  1. Click Safari
  2. Go to

Playing predictalot on iPad

Odds on hung parliament in UK shorten after TV debate

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So what effect did the UK&#8216-s first ever televised prime ministerial debate featuring Gordon Brown, David Cameron and Nick Clegg have on the political betting market?

Before the debate, the betting market on Betfair regarding who if anybody would secure an overall majority was as follows- Conservative Majority 1.75- No Overall Majority 2.68- Labour Majority 17.0.

After the debate, the market was betting as follows: Conservative Majority 1.83- No Overall Majority 2.54- Labour Majority 17.5.

Consensus opinion held that the Liberal Democrat leader Nick Clegg had performed best, and, there is little doubt that this debate represented a significant turning points as regards the publics perception of him.   If he performs as well in the next two debates, this will have serious implications as regards the probability of a hung parliament.  Accordingly, one would anticipate that the odds on No Overall Majority are likely to shorten further ahead of the actual election.

Online gambling in the UK tightened up

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Online gambling companies that advertise in the UK, or take bets from customers in the UK, are facing the prospect of much greater scrutiny and the requirement to obtain a licence of some description from the UK Gambling Commission.

This is the news, emanating from the DCMS just a few days ago, which I suspect will not be welcome news to the online gambling industry. Credits go to the APCW 2nd April video for bringing this information to my attention.

I&#8217-ve commented also in my own UK online gambling article.

The plans came to light in an announcement by the DCMS of a consultation on the regulatory future of remote gambling in Great Britain. The full details of the proposals can be found as follows:

Main consultation document

Summary document

I have also produced a user-friendly version, with contents links for convenient navigation to the various sections &#8211- see my consultation document copy. If you want to read the full document, this version definitely facilitates the process.

I&#8217-ll summarise the situation as succinctly as possible:

Basically, the DCMS, the governmental department directly responsible for remote (online) gambling in the UK, is concerned about the current imbalance represented by the existence of two types of online gambling operations with access to UK customers:

• Those which are located in the UK and fully covered by UK legislation.
• Those which are located outside the UK.

The latter category represents the vast majority, and this is then divided into two groups:

• EEA member states, plus Gibraltar, Isle of Man, Alderney, Tasmania and Antigua &amp- Barbuda.
• Everyone else.

It is the problems presented by these two non-UK based groups that the proposals seek to address.

The problems under consideration, all outlined in the document, centre on the lack of a guaranteed regulatory framework for non-UK based operators, and the risks this presents to UK customers.

First, the DCMS considered four possible options for EEA member states, which I quote here:

• Do nothing.

• Introduce non-statutory changes to the system and increased regulatory co-operation.

• Introduce the need for such operators to obtain a licence to enable them to advertise in the UK.

• Introduce the need for such operators to obtain a licence to enable them to transact with British consumers and advertise in the UK.

The option planned for adoption is the last, which is the most far-reaching.

Second, for non-EEA member states (plus Gibraltar, Isle of Man, Alderney, Tasmania and Antigua &amp- Barbuda), The DCMS considered three possible options:

• Improve the white listing system for non-EEA jurisdictions.

• Develop a more streamlined white listing process as well as introduce licensing for operators in white listed jurisdictions.

• Abolish the white list and introduce a licensing system for operators in all non-EEA jurisdictions.

The option that the government proposes to adobt here is the second, the more &#8220-streamlined&#8221- whitelist.

To summarise to date: EEA member states (plus Gibraltar, Isle of Man, Alderney, Tasmania and Antigua &amp- Barbuda) would need a to obtain a license to transact with UK customers- non-EEA member states would need to be whitelisted.

The proposals are currently very flexible on matters of compliance. They do suggest the following safeguards, however:

• A mirrored, tamper-proof server containing a full copy of gambling transaction records for inspection by the Commission (in Britain or elsewhere)

• A regulatory representative in Britain

• A UK registered company and certain office functions located in Britain

• More enhanced regulatory returns

• A bond lodged in Britain or payable to the Commission in the event of default.

On the question of actual enforcement: the consultation considers, and rejects, prohibitive and punitive measures (such as extradition applications for offenders, the actual blocking of transactions to non-licensed operators by UK banks, ISP blocking, and so on), preferring to focus on cooperation, rather than than sanctions, as a means of ensuring compliance.

Which is all very &#8220-British&#8221-. :D

They also say as follows with regard to prohibitionist measures:

We have considered whether to make it an offence for a British citizen to gamble with an unlicensed provider.

At this stage we are not minded to consider such a provision further as it seems disproportionate to the harm caused and raises issues of informed adult choice.

We do not intend at this stage to introduce an offence that would criminalise the consumer for gambling with an unlicensed operator.

This suggests that they do not rule out a US-style prohibitive approach at some future point &#8211- though I suspect this is very unlikely.

Issues of raising consumer awareness, such as a dedicated section of the Commission&#8217-s website put aside for facts relevant to the player customers, are also considered as part of the compliance / enforcement considerations. Consumers could thuswise:

• Check the licensed status of operators.

• Learn which operators have had their licences suspended or revoked.

• Learn which operators are trying to access the market without a licence (we envisage this would usually refer to repeat offenders).

• Anonymously or otherwise, inform the Commission of any operators that have been targeting British consumers without a licence.

The actual consultation document is long, but not too long. It&#8217-s definitely worth reading if these matters are of interest to you.

The proposals under consideration will certainly tighten up the online gambling scene as it relates to the UK-based customer. As such, I support them. However, I suspect the industry as a whole will not view this development with any great affection, as it represents more cost and, crucially, closer scrutiny.

Close scrutiny and online gambling are not happy bedfellows.

Online gambling regulation: players two, casinos nil. And about time, too.

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Online gambling regulators are not usually much to write home about as far as player protection goes. For the most part, they do little more than lie down and wait for their collective tummies to be tickled by the operators they claim to &#8220-regulate with impartiality&#8221-, and it can be considered an achievement of global proportions if you can manage to get a reply from any of them in anything less than a year of making a complaint.

The Alderney Gambling Control Commission? A sham of incompetence.

The Malta Lotteries And Gaming Authority? Actions bordering, at times, on criminal.

However, in recent weeks, two regulators have issued judgements which give hope for the future. One close to home in the UK, the other on the far-off shores of the Mohawk Indian reservation in Canada. Both, rather typically, centred around the casinos&#8217- misuse of their bonus programmes to the disadvantage of their customers.

In the first case, sportsbook and casino Bet365 promoted a free bet in a UK television advert, with the promise of further free bets if the first one was successful. Customers claimed the bet, and those who won went on to claim again- another win, and another free bet claim. And so on and so on.

Bet365 didn&#8217-t like this, and, in time-honoured online gambling fashion, refused the bets to some customers with a variety of excuses: customers showed &#8220-unusual patterns&#8221– customers were suspected (not proven, of course) of laying off the bet elsewhere for a guaranteed profit with the bonus, which Bet365 considered &#8220-bad business&#8221-.

Oh dear.

How despicable &#8211- customers looking for ways to win. What in the world were they thinking, trying to win money in a casino?

Anyway, some customers complained to the Advertising Standards Authority, and an Adjudication on Bet365 Group Ltd was promptly issued. Here is a part of the judgement &#8211- read it and weep, online gambling operators worldwide:

We understood that Bet365 excluded a proportion of customers who they deemed to be non-recreational players- however, we considered that without defined criteria, it appeared that Bet365 had excluded customers from the offer when they were winning or were no longer profitable.

We noted the ad did not state that customers who made each-way bets, won frequently on similar bets, or used betting exchanges would be excluded from the offer.

Although we understood that Bet365 believed the viewers were exploiting the offer, in the absence of qualification in the ad to make Bet365s limitations on the offer clear, we concluded the ad was likely to mislead.

The ASA discounted all of Bet365&#8217-s whinging and whining about &#8220-non-recreational players&#8221- who were &#8220-bad for business&#8221-, on the basis that since none of those copouts were stated in the terms of the deal, they could not be arbitrarily applied afterwards as an excuse for non-payment.

Or, if I can summarise the ASA judment in my own words: &#8220-This is what you said- this is what you did- what you did wasn&#8217-t what you said you&#8217-d do&#8230-so please go take a running jump&#8221-.

This was a perfectly thought out and articulated response from the ASA. What a refreshing change to see a regulator of some description actually doing its job and making a fair call.

Players 1 / casinos 0.

The next case was one I was involved with myself. A player contacted me, saying that he&#8217-d had a €10,000 cashout confiscated by a Microgaming casino group, on the basis of infringing the conditions of the bonus he&#8217-d received on his deposit. He had indeed, but the terms were so cleverly hidden by the casino that breaking them was almost a certainly.

To cut a long story short, the player filed a complaint with the Kahnawake Gaming Commission. The KGC has long been something of a running joke on the online gambling scene, allowing its licensees to get away with almost anything. However, I had heard that a new complaints officer had recently been appointed, and that the Commission was generally trying to get its act together and be taken seriously as a genuine regulator. But I wasn&#8217-t holding my breath.

As such, the Kahnawake judgement left me astonished &#8211- see the full complaint against UK Casino Club, of which here is an central extract:

Mr. N&#8217-s dispute centres on the argument that, at the relevant time, some additional terms and conditions that were posted on the Casino&#8217-s site regarding signup bonuses (the &#8220-Terms and Conditions &#8211- Multiple Bonus Promotion&#8221-) did not clearly incorporate the provisions of the Casino&#8217-s T&amp-C.

However, given the fact that Mr. Niemz did accept the T&amp-C and that his pattern of play subsequently breached Clause 13(i) of the T&amp-C, we cannot conclude that it is reasonable to direct the Casino to reimburse Mr. Niemz for 100% of the amount of the disputed amount &#8211- 10,000 Euro.

We do accept that the Casino must bear some responsibility for failing to make it clear that the Terms and Conditions &#8211- Multiple Bonus Promotion incorporated the provisions of the Casino&#8217-s T&amp-C.

In view of the foregoing, we hereby direct that:

1. The Casino must, on or before 8:00 p.m ET on February 18, 2010, deposit 50% of the disputed amount &#8211- i.e. 5,000 Euro &#8211- into Mr. N&#8217-s account and permit him to withdraw this amount, and

2. The Casino must immediately amend its Terms and Conditions &#8211- Multiple Bonus Promotion to clearly indicate that they incorporate the provisions of the T&amp-C.

This was an excellent resolution, as much for its sheer unexpectedness as for the fact that it was fair. Way to go, Kahnawake.

Players 2 / casinos 0.

I&#8217-ve commented on both these cases in more detail in my Kahnawake Gaming Commission and Bet365 posts.

I had assumed that hell would freeze over before any official &#8220-watchdog&#8221- or &#8220-regulator&#8221- would arbitrate a conflict between player and gamnbling operation and find in the player&#8217-s favour. As such, I&#8217-m pleasantly surprised &#8211- or, to be a bit more honest, entirely gob-smacked &#8211- at the outcomes of the cases handled by the UK ASA and the Mohawk KGC.

It&#8217-s not all bad, folks.

Paul Krugman Makes a Boo Boo.

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In Paul Krugman&#8217-s blog entry, Done, at 4:39pm (EDT) on March 21, 2010, he commented: &#8220-OK, nothing is sure in this world. Intrade is still giving Obamacare a 2.2% chance of failing, …&#8221-

He was talking about the InTrade market on Health Care Reform. In theory, the market price in such a derivative market should equal the expectation of the underlying event coming true. However, Paul Krugman (and many others) forgot one of the most basic assumptions of the market model! Transaction costs.

When the market price is over 95, InTrade charges a transaction fee of 3 cents per contract (real money). While market prices are quoted in percentages, the payoff for a winning ticket is $10 (real money). Therefore, the transaction fee is 0.3% of the winning payoff. In addition, InTrade charges 10 cents per contract on expiry (if you &#8220-win&#8221-). That&#8217-s another 1.0%.

So, when the market was quoting 97.8% likelihood of the HCR bill passing before June 2010, this didn&#8217-t really mean that there was a 2.2% chance of the bill not passing. A winning ticket would be subject to 1.3% transaction fees. The real likelihood of failure was 0.9% &#8211- approximating the uncertainty that Obama would be &#8220-hit by a bus&#8221- before signing the bill into law.

No rational investor would wish to purchase a share for more than 98.7, given the transaction costs. In a sense, this is the market&#8217-s &#8220-100%&#8221-. Interestingly, at 1:49pm GMT today (March 23), there are 695 bids at 99.1 and 413 asks at 99.2. Clearly, some traders are not subject to the full transaction fees at InTrade. More about that here.

[Cross-posted from Toronto Prediction Market Blog.]

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A Note on the Impotence of the Efficient Market Hypothesis

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No one who makes a living trading really cares about EMH, but I&#8217-m not sure why failure to predict under EMH is that surprising. Markets do more discounting than predicting. That&#8217-s part of the reason why stocks are volatile &#8212- the last data point tends to be extrapolated into perpetuity. It is true that factors like emotion and momentum additionally move prices, but to me this points to a fundamental challenge in valuation: the idea that there is an &#8220-intrinsic&#8221- value, when in fact all values interact, with prices reflecting structural realities and other prices. The misallocation in the housing bubble was to some extent already a mispricing of money in the form of rates. What was the &#8220-right&#8221- price for housing given the price of money?

The price of money in turn was influenced by the demographic savings glut that previously fueled the tech bubble. At this point, governments failing to predict the past &#8212- the trend of increased longevity &#8212- seems like the biggest problem. The escalated contentiousness in the Senate is, in part, a symptom of this slow motion failure and the &#8220-lower stakes&#8221- for all of us.