January 31, 2013, 1:35 pm
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Apparently it’s shocking if a US politician doesn’t think changing the weather is something the government can do. The prevailing religion of course being: changing the weather is, indeed, something the government can (and should) do. We are all required to believe this now; disbelief disqualifies you from public office. So sayeth we all.

These thoughts from a ex-financial firm compliance officer are worth reading. Almost makes it sound interesting.

Data is not objective: “Don’t be fooled by the mathematical imprimatur: behind every model and every data set is a political process that chose that data and built that model and defined success for that model.” I couldn’t agree more! (All large calculations are wrong.)

Does elite behavior prevent society from moving away from work? “Because the elites now see work as desirable and self-actualizing rather than a burden, and it’s the elites who control the direction of society, they are not going move society in the direction of moving away from the idea of work.” I would say the cause is different: it’s because elites humans are competitive (i.e. with each other). Yes, you could take it easier as an elite, and (therefore) stop contributing to the social pressure to work more, but then how will you get your child into Super-Special Private School, buy that $50k SUV, the kitchen overhaul with the granite countertops, etc.? But arguing that other people should take it easy – why, that’s a no-brainer; on the off chance they actually do, that makes your climb to the top all the easier.

A Craiglist poster explains what Obamacare did for him. Presumably whoever wrote that is just racist. Again I marvel at the fact that so few people realized (or realize, even today) that ‘it’s some kind of a National Health Care Thing! Being proposed by (D)s!’ wasn’t an accurate metric on which to base their support for Obamacare or accurately gauge the effect, positive or negative, it would have on their lives. It was some sort of a National Health Care Thing, and (D)s proposed it – for the Reality-Based Community™, that’s all they needed to know.

A question Rotten Chestnuts would like to see asked.

I’d spend some time explaining why this story about how JP Morgan had ‘bet against itself’ was silly, but I don’t have to because that’s why there’s Matt Levine. I will highlight, as something new, this: “…the two CIO employees complained about the investment bank’s actions in the spring of 2012, accusing its traders of deliberately trying to move the market against the CIO by leaking information on its position to hedge funds.” When that story broke last year, my first reaction was not ‘ohmygosh how can they have done those trades’, it was ohmygosh how could someone have leaked those trades (and in particular the rival trader commentary – itself, a bit too revealing – that got quoted a lot at the time) to the press in such a transparent effort to squeeze them. I still find it somewhat distasteful. If indeed it was their own dealer desk contributing to it, geez.

The left gets in on the ‘financial innovation’ game
January 30, 2013, 7:33 am
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Via @InfiniteGuest on Twitter, I’m told Matthew Yglesias says the US government should issue perps. As this really is just the logical, distilled extension of my super-coupon bond idea which solved the Debt Crisis a while ago (remember that?), I can only really say Let’s go for it.

Try to poke holes in it and it’s harder than you might think. You would actually rather see (at least, I’d rather see) the USG issue a bunch of perps than to rely more on TIPS, or issue floaters (as they’ve been pushing for). The risk is much more right-way round. You could say – for that reason – ‘who would buy these things right now at anything resembling a low yield?’ but that’s an empirical question, not a reason not to try it at all.

Or you can try a thought experiment as follows: suppose N years have gone by and USG has been relying significantly on perps for its funding. Now there are a huge face amount of outstanding perps and the USG is paying $X billion/year just to service them. Does this start to become a political problem? How will perps look ‘optically’ at that time? Will populist politicians start griping ‘why should we pay these fat cat perp holders forever, for doing nothing? It’s not like we owe them any money because they didn’t loan any!’ Does this lead to pressure to repudiate or ‘restructure’ them? (And therefore, for this reason, do people shy away from them now?) But again, this is a sort of double-hypothetical as a reason for not doing something. This danger could be lessened if the Treasury does their issuance ‘intelligently’, and has an active and intelligently-managed buyback program. (Hmm, can we assume that?)

At the very least, there would always be a background incentive to inflate away their value. Then you remember that part of the reason for issuing TIPS is supposed to be to give USG ‘credibility in fighting inflation’, since inflation hurts a USG that has issued a lot of TIPS. But of course inflation would really, really help a USG that has issued perps. Oops. But that just means the USG will have been doing things at cross purposes. What else is new. And did we really buy that ‘credibility’ in the first place, given that TIPS are just a small part of the debt mix?

There is also the juicy question of whether it would count as ‘debt’ for the purpose of the debt ceiling, since perpetuities/annuities ‘feel’ debt-like but need never be called and are actually treated as equity-like for some purposes. My ignorant knowledge of the debt-ceiling laws (which is open to correction), based on reading blogs, suggests: perhaps not debt at all!, in which case this really would be the loophole to end all loopholes, as Treasury could issue these without limit. So the possibilities are endless and delicious.

Makes you wonder why ‘financial innovation’ got such a bad name!

Always fighting the last election
January 29, 2013, 7:26 am
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After the traumatizing 2000 election, lefties started floating the idea of having states allocate their electors proportionally instead of winner-take-all. There was even a whole movement to get states to sign pledges – which many have, all still in effect to my knowledge – to achieve a similar outcome, to give their votes to the popular-vote winner in certain cases.

This movement was aligned broadly, albeit not completely, with the left. You see, at that time they apparently believed all future elections would have dynamics exactly like 2000. Thus, proportional-electors was a pro-left measure!, they figured.

Flash forward to 2012 and the proposal is considered to be “rigging the electoral system” by that same left. The fact that Rethugs would even propose such a thing just proves how bereft of ideas they are!

I’ll collect my 2 Consistency Points at this time by pointing out that I was opposed to proportional electors in 2000 and still am today. The (R)s proposing this are being just as silly and short-sighted as those who floated this twelve years ago. I look forward to redeeming those Consistency Points, once I’ve saved up 10, at my local Chuck E. Cheese in exchange for a plastic ring with a plastic spider on top that is too small for my pinky. In the meantime though, let us just marvel at the whiplash some on the left are capable of: the filibuster is crucial to the Republic! No wait, it’s an anti democratic abomination! Winner-take-all states are anti-populist! No, wait, they are necessary for black enfranchisement!

It’s as if they think we don’t remember things from more than a year and a half ago. Either that or they’re all, like, eleven years old, so they don’t remember. Maybe the latter in this case.

The seen, the unseen, and the oblivious
January 28, 2013, 10:37 pm
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Alan Blinder wonders why people hate TARP and ‘stimulus’. The whole interview is full of WTF, but this breathtaking sequence (bold emphases mine) takes the cake:

The second example of that is the stimulus bill, which has been vilified by Republicans. It’s said it didn’t create any jobs, which if you think about it for 30 seconds, it’d be impossible to spend that much money without creating any jobs.

DM: How much of this do you think has to do with people’s difficulty with reasoning counterfactually? So you see the economy, which isn’t that great, and conclude “Well TARP and the stimulus must not have worked.”

AB: I think that’s a very major part of it. In his book, Thinking, Fast and Slow, my colleague Daniel Kahneman has this concept he called WYSIATI – “what you see is all there is.” If you believe the only thing there is is what you see, what you see is …

…that ‘it’d be impossible to spend that much money without creating any jobs’, perhaps?

For crying out loud. Stuff like this is self-ridiculing. How many economists out there don’t give economics a bad name? Sometimes the percentage seems vanishingly small.

Dark Knight Rises
January 28, 2013, 8:01 pm
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I finally got around to seeing this and have some scattered thoughts in place of a review.

  • The Hans Zimmer score is obnoxious (making me realize I got the same feeling from Inception). No scene is free of the drumming tension-building strings. You are given no time/freedom to think.
  • Overall it was my favorite of the three. I did not like the other two that much, nor was I all that bowled over by Heath Ledger’s Joker like everyone else was.
  • In fact, I really liked the “Bane” villain. So strange and specific. I guess it helped that I watched the DVD with subtitles on.
  • The absence of the Katie Holmes/Donnie Darko’s sister (can never remember her name) girlfriend character was a huge, huge plus. Each of the two female leads was far more charismatic than those two put together.
  • Taken as a whole, the story is almost like a wacked-out and surreal Die Hard storyline. Seen in this light it’s fine. The maker of Memento made a Die Hard movie – makes total sense.
  • None of these three films gave me any sort of ‘Batman’ vibe though. The back of my mind did not believe any of this was ‘Batman’, or a comic-book or superhero of any kind. I know, I guess that was the idea. Which I wasn’t crazy about. What is the purpose of this endeavor anyway?
  • Most reviewers saw the parallels to ‘Occupy Wall Street’. More interesting were the French Revolution parallels. Either way, Hollywood so rarely portrays such things (in a negative light…) that one is grateful for it where one finds it.

So, overall I liked it. I still feel like sitting through these Nolan Batmans was almost some kind of chore however, and I deserve some sort of reward for doing so. Donations, presumably.

January 28, 2013, 11:19 am
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Matthew Yglesias says firms scaling down their in-house recruitment, in favor of internal referrals, is a sign of ‘hysteresis’ in the employment market, since it will make it harder for unemployed people without connections to get jobs. Could be. Or, couldn’t it just be that they’re starting to figure out that in-house recruiters are a waste as they don’t actually add very much value as most successfully filled roles ultimately trace to internal referrals anyway and so cutting out the pointless middleman is a relatively painless cost-saving measure?

Bryan Caplan scoffs at the idea that given the safety-net, at some margin there are people who might prefer to be unemployed than to be employed. In other words he (oddly, since I can confirm it from personal experience) rejects the idea that people have a reserve wage and/or that people might actually respond rationally to the utility curve which, given our current tax & benefits rulse, is notoriously-flat and even in some cases sloping downward for people making salaries up to $50-60k or so. How does he reject this possibility of rationality on the part of others, you ask? “Introspection.” Something about how he would hypothetically feel, if he weren’t a tenured university professor, at getting a wage cut vs. being laid off. Ok then. He also adds, by way of support, that the employment market ‘doesn’t clear’. Not that it clears more slowly or less efficiently, it just ‘doesn’t clear’. I see now why I could never be an economist, since I have this natural aversion to treating ‘how much’ questions as ‘yes/no’ questions, and from what I can tell it seems to be a requirement of the genre.

You guys read James Bowman right? If not why not?

But there is another explanation. It is that “austerity” is not really a strategy but the name we give to reality in order to avoid calling it — or thinking about it as — reality. When reality appears to us a long way off in the form of mere “austerity,” it still looks like a strategy, still looks optional. Uh oh! This strategy doesn’t seem to be working. Let’s try another! And so we turn to intellectuals like Professors Krugman and Tilford who are the perpetual motion men of our era, people who have a system figured out to turn reality into an infinite number of strategies, or maybe just one killer strategy guaranteed to turn the hard reality easy again. Count on them if you need someone to persuade you, or re-persuade you, that reality is optional.


Why does every museum need to have propaganda?
January 27, 2013, 3:08 pm
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If it’s a natural history museum, it will have a section on how we’re destroying the earth. If it’s an aquarium, it will have a section on how we’re destroying the oceans. If it’s a historical museum, it will have a section devoted to the atrocities we’ve committed against whatever peoples. Etc.

You sort of learn to ignore these things, as obligatory tics of whatever sect it is that runs museums. But really, why are they necessary? Have we forgotten how to make museums that are just museums?

Also, the museumers seem not to realize that these things are just too ‘topical’ for what they’re supposed to be doing. Suppose (for example) that 1000 years elapse and the oceans still don’t get destroyed. Surely future aquariums in the year 3113 won’t still at that time include the whiny lectures on plastic bags, the exhibit of the soda bottle covered with seaweed, etc. There is a tension between the (supposedly) timeless nature of a museum and getting them all caught up in the cause du jour that I don’t think is being fully priced in here.

As it stands, it renders the experience somewhat akin to passing around the offering plate at Sunday service: something obligatory, part of the ritual, that you don’t particularly enjoy but you know is coming and is part of the price you pay.

January 27, 2013, 9:40 am
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People who predicted bad things to result from Obamacare, i.e. the National Health Care Thing that all Smart People obsessively craved (without knowing diddly-squat about it) are seeing their predictions come true. But come on, What Difference Does It Make?

Arnold Kling with some counter-conventional-wisdom mortgage links. Do these matter? The debate is over.

SWP on Obama the intellectual lightweight. He’s a skinny sort-of-black guy who looks good in a suit though, he must be a genius.

Can libertarians support a sovereign wealth fund? Perhaps a more relevant question is, don’t we already have a sovereign wealth fund? (For example I hear our investment in AIG turned a profit.) I guess we may as well formalize it and hire better PMs.

Has solar power turned the corner into relevance without righty grumpy gusses noticing? I don’t know and don’t pretend to.

This piece (HT Dealbreaker):

By definition, anyone who is selling financial assets has the option of not selling them (assuming he is not desperate for cash). … No one has any business running money if they do not understand that this is how the game works.


Is Slate^H^H^H^H^H Salon trying to tell me something?
January 26, 2013, 10:28 am
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BTW when searching for Hillary Clinton’s actual quote on Benghazi, I got to this (surprisingly reasonable) Slate piece. At the bottom is a ‘More Related Stories’ section. The first item they recommend:


Um…Okay, thanks! I’ll try that.


UPDATE: Just noticed it’s from ‘Salon’ not ‘Slate’. Hilariously, no noticed. Because yeah, really, what’s the difference?

It makes none // But now you have gone // And you must be looking very old tonight
January 26, 2013, 8:38 am
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For my part I totally understood Hillary Clinton’s statement “What difference does it make?” when it comes to Benghazi. What difference indeed does what actually happened there make to furthering this Smart Person’s Important and Historic Career Aspirations? (Which is all that counts here.)

This is a useful incident because I think it exemplifies and distills the difference between left and right in a single, short statement. The right will never, ever convince the left that it ‘makes a difference’, and the left will never convince the right that it doesn’t. There’s almost no point in talking about it. Which makes it fascinating to think about.

RWCG’s Five-Year Anniversary
January 26, 2013, 3:05 am
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And in those five years, I haven’t managed to rhyme with a single car and/or girl yet.

Why doesn’t Congress want power?
January 25, 2013, 7:57 pm
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One of the interesting evolutions we’ve observed in our government the past 50-100 years or so is that our Congress does not want to have power. They want to give power to the other branches. They have devolved most actual tangible law-making to regulators and bureaucrats. They’ll pass a law (e.g. campaign finance reform) that many of them believe unconstitutional but hope the Supreme Court strikes it down. They don’t want to declare war or not-declare war, they want the President to just let ‘em know when he decides to use ‘war powers’. Etc.

Almost everywhere you look you see the Legislative Branch doing its darndest to make sure it gives power away to one of the other branches.

Today the Supreme Court (UPDATE: Nope, a lower court; the SC will presumably rule on this later) decided that the President had unconstitutionally ‘appointed’ some folks in defiance of an explicitly Constitutionally-specified power of Congress. If we had a true 6th-grade-civics ‘checks and balances’ type of government in which the Legislative Branch were coequal with and jockeying for power against the other two, they would have done something about this long ago. In light of this Supreme Court decision, a Legislative Branch that cared about its powers would presumably begin impeachment charges against the President for overstepping his authority and usurping power that is rightfully theirs. There is zero chance of that happening. Many reading this idea probably are confused by it, so outlandish it sounds. But think about it.

Now, of course there’s the fact that (due to the Clinton precedent) ‘impeachment’ as such will never be used again, against any President, for any reason, of course. But actually, that’s just another case in point.

So why doesn’t the US Congress want to have power? I guess, bless ‘em, it’s working for them – my impression is that Congressmen can get wealthier than ever. And (perhaps relatedly) the one power they do jealously guard is the power to spend money. But aside from that, they seem content to wither on the vine, and hand off power to the others. It’s weird.

Asking the right question on mortgage products
January 25, 2013, 10:30 am
Filed under: Uncategorized

On this issue of the Morgan Stanley ‘s**tbag’ emails proving the shocking and heretofore-unimaginable fact that banks (gasp!) Intentionally Tried To Sell Things To People For More Than They Personally Thought They Were Worth So As To Make A Profit, I had flagged this Dealbreaker post to respond to at some point.

But Kid Dynamite beat me to it so just go read him.

WTF were the BUYERS of these crappy products thinking? … See, once you can answer Levine’s hypothetical question about the internal emails of the buyers of  toxic debt, you can actually figure out what the root causes were and fix them (if they need to be fixed at all…  as I noted in a recent post, making bad loans isn’t – and shouldn’t be – against the law.   This discussion seems to lead inevitably to a debate about the ratings agencies…

Well, exactly. But as the preceding link suggests, I’d go one further: it leads to a debate about government/regulatory policy because that’s the only thing that makes what rating agencies say so important in the first place. Of course, oh I forgot, that debate is ‘over’, government policy has absolutely no measurable effect on the mortgage market. Barry Ritholtz, Paul Krugman and other Smart People told me so.

Ancient alien theorists
January 24, 2013, 10:57 pm
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I’ve been watching** Ancient Aliens and to my delight each episode is somehow able to present a different coherent set of fascinating ideas and theories that ‘ancient alien theorists believe’. If you watch this show as much as I have (i.e., more than 0) then you will have heard this phrase, ‘ancient alien theorists’, many times.

I know what I want to be when I grow up now. Is there somewhere I can apprentice?

**it’s on in the background

On Egan-Jones
January 23, 2013, 10:55 pm
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Notice that the easy-to-make-fun-of action of the SEC against the rating agency Egan-Jones wouldn’t have been possible to begin with, if: Egan-Jones hadn’t had to ‘register’ with the SEC in the first place, because Egan-Jones weren’t an NRSRO, because there were no such things as ‘NRSROs’, because the government didn’t ‘recognize’ statistical rating agencies to begin with, because that’s as stupid as having the government ‘recognize’ movie critics and use their reviews for official things.

Why people buy lottery tickets
January 23, 2013, 10:39 pm
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Falkenstein on ‘skewness‘:

There are several papers asserting that investors like positive skew to their returns. This is because empirically investors tend to be highly undiversified, and have a bias towards highly volatile stocks, and so they seem to want big lottery-type payoffs (incidentally, this is the exact opposite to what Nassim Taleb states is common, that people prefer payoffs that have high modes and low means–negative skew).

I don’t have a fancy model but I do have two cents. This preference for ‘skewness’ (positive convexity) is perhaps perfectly explainable as a hedge. Not a hedge to the rest of a financial portfolio (by assumption/observation, it clearly isn’t), but to life. The natural state  of life is to be negatively-convex (in a lot of things).

You have a job. It pays you $X/year. Sure, maybe down the road you’ll be at 1.15X. But will you ever be at 100X? Clearly not. On the down-side though – you could simply lose your job altogether. Your upside is pretty modest – your downside is huge. That’s negative-‘skewness’ and you experience it in your main/only source of income by default.

Or take something like Social Security. You’re paying into Social Security. I guess down the road you’ll get a check. It might be a little bigger than you expected (who knows). It might be just about what you might expect. Or there might be a big overhaul, it might get raided, and/or huge inflation, and you get effectively $0. Again: minimal upside, huge potential downside.

You have a girlfriend. Maybe you’ll get married (yay? sort of). Or maybe she’ll just dump you and leave you a drunken wreck.

You have kids. Presumably they’ll end up ok (computer programmers). Maybe something a little more impressive. Or maybe they turn out to be meth addicts…

You’re a doctor. Doctoring is good. But your friends are in Tech. Maybe your friends were right. If you overexposed yourself to doctorness, that’s huge trouble for you. If Tech explodes big-time, you’ve missed out…

Add in the use of leverage (usually going hand in hand with societal improvement/technology/progress) – buying a house with a mortgage, a bunch of complicated child-care to allow the spouse to get a second job, moving to a higher-echelon of school district so your kids can go to a Good School – and the sense of being ‘negatively-convex’, or having sold vol, or being short protection, or having sold a bunch of insurance, or however you want to think of it – must only multiply.

You may, while all this is going on,  always suspect/fear that you ‘sold vol too cheaply’. Was it really worth it to pony up for the extra-fancy-school-district house? You’re not sure – you’re uncertain. Uncertainty in one direction doesn’t help you much. But uncertainty in the other direction hurts you a lot…

That’s the way of it. So what do you need to balance all that out, the negative-convexity and the uncertainty about whether the exposure made sense (your ‘ model’, for life)? You need insurance. Often, of course, literally (e.g. homeowner’s insurance). But perhaps just in the metaphorical sense of needing positive-convexity, from anywhere: you need lottery tickets. You need positive convexity to balance out the negative convexity you walk around saddled with all the time.

So you ‘overpay’ (compared to what models suggest) for optionality, for anything with a ‘lottery-ticket-like-payoff’. But the models didn’t take into account your natural negatively-convex existence, did they? (Or do they?)

Taleb, meanwhile, is analyzing banks. (Or thinks he is.) I guess. (Again: I’ve never read Taleb.) Banks, as a business, are typically in the natural position of having sold vol, being negatively-convex, and all that. So to Taleb, analyzing bank trading and their VaR and such, he gets, I guess, the impression that they ‘want to be negatively-skewed’. But it’s really that they have to be negatively-skewed, they just try to do it as smart as they possibly can. (Which of course is a recipe for sometimes getting it spectacularly wrong.)

But that is not the motivation of individuals. Individuals are naturally negatively-skewed – they’re already ‘bank-like’, and don’t necessarily want to be if they can help it. So, they buy lottery tickets. The financial markets offer many of them.

RWCG’s famous Complete-the-Sentence(TM) challenge
January 23, 2013, 9:19 pm
Filed under: Uncategorized

And now it’s time for RWCG’s famous, fun and exciting Complete-the-Sentence™ challenge, where (as always) the challenge is to complete the sentence in an acceptable way.

The sentence:

“Just because you’re gay, doesn’t mean ___________ !”

Have fun!

’80s sci-fi just didn’t get any better
January 23, 2013, 9:14 pm
Filed under: Uncategorized

If I know you, you’re probably wondering what song stuck in my head at the moment. Why it’s the Out of This World theme song of course.

Oh, Maureen Flaniga.

Why two jobs?
January 23, 2013, 8:58 pm
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On the ‘manosphere’ question of women working. No it does not generally make sense, biologically or financially. Biologically, duh.

Financially? Perhaps there was once a meaningful bump to be gained by having a second income, when few others did. But over time all of our laws and taxes have adjusted to the new expected reality in which both parents work. Hey, you’re both working, great, you can be squeezed more!

Now throw in the situation with child care. This is where the whole equation really breaks down. Mathematically, the whole second-job really only makes sense if one can pay for a full-time nanny (a whole ‘nother person’s salary!) completely out of the after-tax, after-commute-cost, etc. portion of only the lower-earning spouse’s income, and still have some money left over. How much money? Well, how much ‘extra money for the family’ is worth being away for your kids 9 hours per day versus not. Would you make that trade for an extra $2k a year? Huh? No. It would have to be an amount sufficient to give you a meaningful bump in lifestyle, at least 10x that for example (and even then…).

Basically, reverse out that math and it seems to me that unless the second spouse is making at least $100k or so, there’s really no point at all. Depending on where you live (New York) the might-make-sense breakeven for spouse #2 is probably higher – say $150k. And that’s if you can hire a nanny for $20-25k (out of pocket) or so – which you’re not supposed to be able to do of course, given minimum-wage laws and the fact that they’re supposed to be a citizen, and you’re of course paying all taxes, health care, and so on. (Ahem.) Now – wait. What sort of citizen will take 50+ hour/week a job as your nanny for like $16k a year after-tax?

It just doesn’t work.

There is one argument for the second spouse to have a job however, and I think deep down it’s probably often the one that’s really operative: Divorce Insurance. If you get divorced somewhere down the road, and the second spouse hadn’t worked for 10+ years, they’ll be largely unemployable at anything reasonable. Oops. Let’s say it’s the wife; this is bad for her. But it’s ALSO bad for the husband who will end up paying a bunch of alimony.

So basically, all those two-earner families keeping two jobs might be rational, if they’re all doing it on the off chance they get divorced. There’s your happy thought for the day, and you’re welcome.

Davos Blogging
January 23, 2013, 6:17 pm
Filed under: Uncategorized

As you know, I’m at Davos. I’m blogging this from Davos. My speech at Davos will go very well I think. Lots of interesting stuff here at Davos. If you’re at Davos too and you happen to see my speech come up after and say hi and share results. We’ll talk. About Davos.

I’m totally at Davos.


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