Published for www.dmarron.com, January 30, 2012

Last week, I noted that former Stanford professor Sebastian Thrun enrolled 160,000 students in an online computer science class. That inspired him to set up a new company, Udacity, to pursue online education. A new article in Bloomberg BusinessWeek adds some additional color to the story.

Barrett Sheridan and Brendan Greeley answer a question many folks asked about the students: how many actually finished? Answer: 23,000 finished all the assignments.

Second, they note that professor Thrun is also at the forefront of another potentially transformative technology: self-driving cars:

“Last fall, Stanford took the idea further and conducted two CS courses entirely online. These included not just instructional videos but also opportunities to ask questions of the professors, get homework graded, and take midterms—all for free and available to the public.

Sebastian Thrun, a computer science professor and a Google fellow overseeing the search company’s project to build driverless cars, co-taught one of the courses, on artificial intelligence. It wasn’t meant for everyone; students were expected to get up to speed with topics like probability theory and linear algebra. Thrun’s co-teacher, Peter Norvig, estimated that 1,000 people would sign up. “I’m known as a crazy optimist, so I said 10,000 students,” says Thrun. “We had 160,000 sign up, and then we got frightened and closed enrollment. It would have been 250,000 if we had kept it open.” Many dropped out, but 23,000 students finished all 11 weeks’ worth of assignments. Stanford is continuing the project with an expanded list of classes this year. Thrun, however, has given up his tenured position to focus on his work at Google and to build Udacity, a startup that, like Codecademy, will offer free computer science courses on the Web.”

I wish Thrun success in both endeavors. Perhaps one day soon, commuters will settle in for an hour of online learning while their car drives them to work.

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Published for www.csmonitor.com, January 26, 2012

America is deep in debt. But how deep?

That question seems simple, yet analysts and pundits give answers that differ by trillions of dollars. Sometimes tens of trillions. That confusion arises because there are various ways to tote up America’s debts.

Many observers often focus on the publicly held debt – the bonds that the Treasury has sold into financial markets. By that measure, the federal government owed a bit more than $10 trillion at the end of last fiscal year.

That figure is important because it measures how much the federal government has had to rely on outside investors. For that reason, it does not include the special Treasury bonds in the Social Security Trust Fund and similar accounts owned by the federal government itself. From an accounting perspective, those bonds net to zero – a part of the government owes money to another part. But they are important to Social Security legally and politically. Some analysts use a measure that includes the trust funds, bringing the federal debt to more than $14 trillion.

That’s not the only measurement disagreement. Social Security and Medicare reflect a major commitment to seniors in the years ahead, but the government hasn’t identified enough dedicated financing to pay for them. Some analysts believe these unfunded amounts should be viewed as debts as well. Their size depends on technical factors like the future growth rate of health spending and how far you look into the future. Depending on their choices, analysts can get huge measures of indebtedness: $50 trillion or more.

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Published for www.dmarron.com, January 26, 2012

That’s what former Stanford professor Sebastian Thrun aims to do.

Sound impossible? Well, he’s already taught a class of 160,000 students. As Felix Salmon recounts:

“Thrun told the story of his Introduction to Artificial Intelligence class, which ran from October to December last year. It started as a way of putting his Stanford course online — he was going to teach the whole thing, for free, to anybody in the world who wanted it. With quizzes and grades and a final certificate, in parallel with the in-person course he was giving his Stanford undergrad students. He sent out one email to announce the class, and from that one email there was ultimately an enrollment of 160,000 students. Thrun scrambled to put together a website which could scale and support that enrollment, and succeeded spectacularly well.

Just a couple of datapoints from Thrun’s talk: there were more students in his course from Lithuania alone than there are students at Stanford altogether. There were students in Afghanistan, exfiltrating war zones to grab an hour of connectivity to finish the homework assignments. There were single mothers keeping the faith and staying with the course even as their families were being hit by tragedy. And when it finished, thousands of students around the world were educated and inspired. Some 248 of them, in total, got a perfect score: they never got a single question wrong, over the entire course of the class. All 248 took the course online; not one was enrolled at Stanford.
…

And I loved as well his story of the physical class at Stanford, which dwindled from 200 students to 30 students because the online course was more intimate and better at teaching than the real-world course on which it was based.”

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Published for www.dmarron.com, January 24, 2012

The top tax rate on long-term capital gains is currently 15%. That’s why Mitt Romney is spending so much time talking about his tax returns.

That revelation has set off a familiar debate about whether that low rate is appropriate. Often overlooked in these discussions, however, is the fact that the days of the 15% tax rate are numbered. As of this posting, it has only 342 left.

On January 1, 2013, capital gains taxes are scheduled to go up sharply:

First, the 2001 and 2003 tax cuts are scheduled to expire. If that happens, the regular top rate on capital gains will rise to 20%. In addition, an obscure provision of the tax code, the limitation on itemized deductions, will return in full force. That provision, known as Pease, increases effective tax rates on high-income taxpayers by reducing the value of their itemized deductions. On net, it will add another 1.2 percentage points to the effective capital gains tax rate for high-income taxpayers.

And that’s not all. The health reform legislation enacted in 2010 imposed a new tax on the net investment income of high-income taxpayers, including capital gains. That adds another 3.8 percentage points to the tax rate.

Put it all together, and the top tax rate on capital gains is scheduled to increase from 15% today to 25% on January 1. That’s a big jump. If taxpayers really believe this will happen, expect a torrent of asset selling in November and December as wealthy taxpayers take final advantage of the lower rate.

Of course, the tax cuts might get extended for all Americans, including high-income taxpayers. That’s what happened in 2010. In that case, the increase in the capital gains rate will be smaller. Because of the health reform tax, the top capital gains tax rate will increase from 15% to 18.8%. That’s still a notable increase, but would likely set off much less tax-oriented selling this year.

The only way that the top capital gains tax rate remains at 15% will be if the tax cuts are extended for high-income taxpayers and the new health reform tax gets repealed. That’s a key distinction in the election: President Barack Obama opposes those steps, while the GOP presidential candidates favor them (and some candidates would cut the capital gains tax rate even further).

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Published for www.dmarron.com, January 18, 2012

Over at Bloomberg, Julie Johnsson and Mark Chediak document how low natural gas prices are reshaping electricity markets. Wind, nuclear, and coal all look expensive compared to natural gas generation:

“With abundant new supplies of gas making it the cheapest option for new power generation, the largest U.S. wind-energy producer, NextEra Energy Inc. (NEE), has shelved plans for new U.S. wind projects next year and Exelon Corp. (EXC) called off plans to expand two nuclear plants. Michigan utility CMS Energy Corp. (CMS) canceled a $2 billion coal plant after deciding it wasn’t financially viable in a time of “low natural-gas prices linked to expanded shale-gas supplies,” according to a company statement.

Mirroring the gas market, wholesale electricity prices have dropped more than 50 percent on average since 2008, and about 10 percent during the fourth quarter of 2011, according to a Jan. 11 research report by Aneesh Prabhu, a New York-based credit analyst with Standard & Poor’s Financial Services LLC. Prices in the west hub of PJM Interconnection LLC, the largest wholesale market in the U.S., declined to about $39 per megawatt hour by December 2011 from $87 in the first quarter of 2008.

Power producers’ profits are deflated by cheap gas because electricity pricing historically has been linked to the gas market. As profit margins shrink from falling prices, more generators are expected to postpone or abandon coal, nuclear and wind projects, decisions that may slow the shift to cleaner forms of energy and shape the industry for decades to come, Mark Pruitt, a Chicago-based independent industry consultant, said in a telephone interview.”

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Published for www.dmarron.com, January 10, 2012

In 2010, I wrote a series of posts documenting how oil and natural prices had decoupled from each other (see here and here). For many years, oil prices (as measured in $ per barrel) were typically 6 to 12 times natural gas prices (as measured in $ per MMBtu). That ratio blew out to around 20 in 2009 and again in 2010, a severe break with historical trends.

At the time, that seemed like an enormous disparity between the two prices. In retrospect, we hadn’t seem anything yet. As of yesterday, the ratio stood at more than 33:

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Auto companies have made great strides in improving engine efficiency in recent decades. But those improvements haven’t done much to improve the fuel economy of America’s passenger car fleet. Instead, consumers have “spent” most of those efficiency improvements on bigger, faster cars.

MIT economist Christopher Knittel has carefully quantified these tradeoffs in a recent paper in the American Economic Review (pdf; earlier ungated version here). As noted by Peter Dizikes of MIT’s News Office:

[B]etween 1980 and 2006, the average gas mileage of vehicles sold in the United States increased by slightly more than 15 percent — a relatively modest improvement. But during that time, Knittel has found, the average curb weight of those vehicles increased 26 percent, while their horsepower rose 107 percent. All factors being equal, fuel economy actually increased by 60 percent between 1980 and 2006, as Knittel shows in a new research paper, “Automobiles on Steroids,” just published in the American Economic Review.

Thus if Americans today were driving cars of the same size and power that were typical in 1980, the country’s fleet of autos would have jumped from an average of about 23 miles per gallon (mpg) to roughly 37 mpg, well above the current average of around 27 mpg. Instead, Knittel says, “Most of that technological progress has gone into [compensating for] weight and horsepower.”

This is a fine example of a very common phenomenon: consumers often “spend” technological improvements in ways that partially offset the direct effect of the improvement. If you make engines more efficient, consumers purchase heavier cars. If you increase fuel economy, consumers drive more. If you give hikers cell phones, they go to riskier places. If you make low-fat cookies, people eat more. And on and on. People really do respond to incentives.

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Published for www.dmarron.com, January 5, 2012

Over at National Affairs, Tevi Troy reviews the evolution–and, he believes, devaluation–of America’s think tanks. He leads off by noting how many think tanks have shifted toward political combat and rapid response and away from non-partisan research:

One of the most peculiar, and least understood, features of the Washington policy process is the extraordinary dependence of policymakers on the work of think tanks. Most Americans — even most of those who follow politics closely — would probably struggle to name a think tank or to explain precisely what a think tank does [DM: This is true; even close friends and family often wonder what I do.]. Yet over the past half-century, think tanks have come to play a central role in policy development — and even in the surrounding political combat.

Over that period, however, the balance between those two functions — policy development and political combat — has been steadily shifting. And with that shift, the work of Washington think tanks has undergone a transformation. Today, while most think tanks continue to serve as homes for some academic-style scholarship regarding public policy, many have also come to play more active (if informal) roles in politics. Some serve as governments-in-waiting for the party out of power, providing professional perches for former officials who hope to be back in office when their party next takes control of the White House or Congress. Some serve as training grounds for young activists. Some serve as unofficial public-relations and rapid-response teams for one of the political parties — providing instant critiques of the opposition’s ideas and public arguments in defense of favored policies.

Some new think tanks have even been created as direct responses to particular, narrow political exigencies. As each party has drawn lessons from various electoral failures over recent decades, their conclusions have frequently pointed to the need for new think tanks (often modeled on counterparts on the opposite side of the political aisle).

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Published for www.dmarron.com, January 2, 2012

You can’t manage what you don’t measure.

That’s good advice, as far as it goes. But it has a dark underside: managing the measurement rather than actual outcomes.

Over at the New York Times, Al Baker and Joseph Goldstein recount a troubling example. To keep reported crime rates low, New York’s Finest may be under reporting the crimes that actually occur:

Crime victims in New York sometimes struggle to persuade the police to write down what happened on an official report. The reasons are varied. Police officers are often busy, and few relish paperwork. But in interviews, more than half a dozen police officers, detectives and commanders also cited departmental pressure to keep crime statistics low.

While it is difficult to say how often crime complaints are not officially recorded, the Police Department is conscious of the potential problem, trying to ferret out unreported crimes through audits of emergency calls and of any resulting paperwork.

As concerns grew about the integrity of the data, the police commissioner, Raymond W. Kelly, appointed a panel of former federal prosecutors in January to study the crime-reporting system. The move was unusual for Mr. Kelly, who is normally reluctant to invite outside scrutiny.

The panel, which has not yet released its findings, was expected to focus on the downgrading of crimes, in which officers improperly classify felonies as misdemeanors.

But of nearly as much concern to people in law enforcement are crimes that officers simply failed to record, which one high-ranking police commander in Manhattan suggested was “the newest evolution in this numbers game.”

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Published for www.dmarron.com, December 22, 2011

With apologies to Christmas carol purists, my latest Christian Science Monitor column offers up the twelve days of Christmas for our weak economy. I am no Jeff Foxworthy, so please forgive the poetic license and imprecise scanning. Oh, and kudos to my editor for letting me keep in the reference to Festivus.

As the folks in the streets of Oakland and the halls of Congress remind us, we don’t lack for challenges this holiday season.

Despite glimmers of improvement, the US economy remains lackluster and Washington seems unable to get anything passed to help, even a payroll tax extension that all sides want. Things are worse in Europe. Japan still struggles to recover from two decades of weak growth and the shock of this year’s earthquake, tsunami, and nuclear disaster. Even highflying China and Brazil find their economies slowing.

But it is the season of hope. So rather than gather around the Festivus pole to air grievances, let’s visualize a better world. Here are the gifts I would bestow on the world economy for the 12 days of Christmas:

12 AAA nations. At this writing, 12 European nations have a triple-A credit rating from Standard & Poor’s, but those top-notch ratings are in jeopardy. Thanks to the European financial crisis, S&P put 15 eurozone nations on credit watch, with a real risk of downgrades. It would be a remarkable gift if a year from now, all 12 AAA nations remain so.

11 percent Dow gain. A so-called Santa rally would buoy investor spirits globally.

10 more Steve Jobses. In October, America lost its most iconic entrepreneur. We could use many more of him to drive new economic activity.

9 percent BRIC growth. As late as April, forecasters were calling for Brazil and Russia (the first two of the BRIC nations) to grow by about 4 percent through 2014, while India was to speed ahead at slightly over 8 percent and China at 9.5 percent. That forecast now looks optimistic, but these emerging economies have the size and dynamism to reenergize the world economy.

8 percent EU jobless. The unemployment rate is already above 10 percent in the European Union (compared with 8.6 percent in the United States). Europe’s financial crisis and economic contraction threaten to push it higher still. The faster its job growth, the easier its debt problems can be solved.

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