The proximate cause of the wave of pessimism were two reports on the low levels of house sales in July. The National Association of Realtors revealed that existing home sales were down 27% in July from June. And sales of newly constructed houses fell 12.4% to a new all-time low.

The New York Times reported this with the headline Housing Market Plunged in July, Fueling Anxiety. Anxiety may indeed be being fueled, but the housing market, at least the one most of us care about, did not, as far as we know, plunge in July.

As I am getting tired of saying, sales numbers are very important if you are a real estate agent and largely meaningless otherwise. They are analogous to the stock market’s trading volume rather than to a price index like the S&P 500. Alas, I seem to be the only person who can keep this subtle point in his head for very long.

Press reports about the data oozed foreboding of apocalypse. US New Home Sales Plunge to Lowest Levels Since 1963 read the AFP headline.

US new home sales unexpectedly plunged in July to the lowest level in about half a century, government data showed Wednesday, reflecting the sinking housing sector.

…

July sales broke below the 300,000 mark for the first time in the data’s 47 years of history, baffling most economists who had expected sales to rise to 334,000 units.

The sagging sales show that the housing market, which was at the epicenter of the financial crisis that dragged the country into recession, continues to weaken despite attractive prices and record low borrowing costs.

To begin with, new houses are not the housing market. The building of new dwellings may be an important industry that employs many people, but new houses make up only a tiny slice of the housing stock. According to the Census, there are about 130 million existing housing units in the US.

Moreover, although the article (and many others like it) makes the assumption that a drop in sales can only be due to a drying up of demand, it would be at least as reasonable to suspect a reduction in supply. Housing starts are way down, which is not exactly a surprise. If you were a homebuilder, would you have pulled the trigger on constructing a new house six or twelve months ago?

Indeed, things are not as bad for homebuilders these days as you might think. Toll Brothers just turned a quarterly profit. They, and some of their competitors, are using the downturn as an opportunity to buy up land for future use.

The reporting on the somewhat less dire sounding existing home sales data also tended to the same unfounded assumption, that a drop in sales can only mean lower demand. The AP headline read Low Prices and Rates Can’t Slow Fall in Home Sales.

Mortgage rates are indeed very low, but it is not so clear that house prices are. Certainly, they are lower than they were three years ago, but prices are higher than they were one year ago. Read the article carefully, with a jaundiced eye, and you realize that a shortage of willing sellers is just as plausible an explanation as a dearth of willing buyers.

Potential buyers are hesitating because they think home prices still have further to fall. Potential sellers — those with the stomach to put their homes on the market at all, anyway — are reluctant to lower their prices.

And from the Wall Street Journal we hear that

Real-estate agents across the country are describing a rare standoff in housing markets, where buyers and sellers aren’t seeing eye to eye on price.

That article then quotes a Seattle real estate agent saying that “Now you’re going to see the logjam break. The low sales figures are going to force sellers to make the first move.”

Breaking the logjam is, of course, very important for real estate brokers, who make money only if a transaction takes place. Who makes the first move does not matter much. If talking up the grave implications of sales numbers will get the sellers to take the buyers’ offers, then that works fine for the brokers.

Of course, there is at least as much data that tends toward a more optimistic take on the housing market, provided you have the patience to find it. The Case-Shiller 20-City Index went up a quite solid 1% in June. (WSJ headline: Home Prices Rise; Outlook Dims.)

And the very same outfit that brought us the scary July existing home sales number a few days later reported that pending home sales for July, that is, the number of agreements to buy a house that were signed rather than the number of sales that closed, was up 5.2% over June. And just today we hear that the number of mortgage applications to buy houses is now higher than it has been since May.

Of course, both these bits of data only suggest that the level of sales, which I do not think means much of anything, is recovering. But they do tend to undermine the dark omen theory of plunging sales.

More relevant than all this is a report from Barclays Capital (via Kiplinger’s)

that the "shadow inventory" of distressed properties – the number of homes that are in the foreclosure pipeline but have not yet been foreclosed upon – contracted in July. For five consecutive months, the shadow inventory of distressed homes has shrunk as increases in the mortgage delinquency rate have moderated.

Foreclosed houses have been a significant overhang for the housing market. A bank that owns an empty house is a motivated and not particularly subtle seller. It says a lot about the basic resiliency of the housing market that even with all the foreclosures, house prices have been roughly stable for a year and a half now.

My view on house prices continues to be that the prognosticators of a second debacle and those hoping for a return to the levels of a few years ago are both bound for disappointment. House prices will be solidly in the boring middle, within striking distance of inflation. We might see a bit of a run up when the economy recovers and the supply of foreclosures finally dries up, but that might be a few years from now.

In the meantime, look for the housing anxiety to actual events ratio to stay high.

Thus, The Wall Street Journal recently treated us to a spate of pieces on basically the same topic, the wisdom of investing in the stock market.

Brett Arends kicked off this festival of tea leaf reading mid-week with Why Stocks Still Aren’t Cheap. Then over the weekend we got Is It Time to Scrap the Fusty Old P/E Ratio?, covering some of the same ground as Arends but with a less bearish spin, and Thinking Outside the Stocks, discussing off-beat non-stock investments.

The Arends title caught my eye because I wondered what he could mean by “still.” Did he mean that stocks were not cheap even though the market was then down 12%+ since its late April high? Is a drop of that size over that period supposed to inspire the urge to swoop in and grab bargains?

The market is up nicely from a year ago and up rather spectacularly from March of ‘09. I would have been less surprised to see a bearish article entitled “Why Stocks are No Longer Cheap.”

Turns out, Arends’ angle is that stocks are not cheap even though lots of people are saying that they are expensive. He is employing that rarified tool of market analysis, reverse reverse psychology.

I am not so sure about that second reverse, but the first one seems sound enough. Arends tells us that “Talk has been growing all summer of a crash.” Assuming that is true, and I am willing to take his word for it, then it is indeed a bullish sign. One of the things about crashes is that they only happen when just about everybody dismisses the possibility. A crash is a violent shift from the top of the optimism scale to the bottom, from blissfully confident greed to irrationally paranoid fear.

If the emotional state of the market is in the middle of the scale, as it is now, with cautious optimism mixed with disaster planning and a nagging fear of the sky falling on our heads, then we do not have far enough to fall to make a crash. Of course stocks can go down from here, but expectations are currently so muted that it is hard for me to imagine that much disappointment in the near future.

Arends has more imagination than I do. He does not provide a specific prediction of disaster but argues that stocks are now not as cheap as you might think given all the pessimism you hear. Yes, the price earnings ratio on forecast earnings is now around 12 and the historical average is around 15. Do not let that fool you.

You see, those earnings forecasts are unreliable. And 2011 earnings will be disappointing.

I agree that earnings forecasts are not as accurate as we might like, particularly on a stock-by-stock basis.  But aggregated to the whole market they work pretty well. Sure, there is an optimistic bias in estimates in general, analysts tend to like the companies they follow a little too much, but that is not an issue here. The market is trading at 12 times (too optimistic) earnings forecasts which is lower than the average level of trading at 15 times (too optimistic) earnings forecasts.

Both Arends and Ben Levisohn, the author of the fusty PE piece, tell us that earnings projections for 2011 are more shaky than usual. Neither makes a particularly strong case. Arends tells us that, despite the economic environment, corporate earnings are currently abnormally high and will have to come down. Levisohn just quotes an analyst saying that 2011 estimates are too high.

And both authors offer an alternative to fusty old PE. They suggest a variation on the same theme, the ratio of enterprise value to free cash flow. That is a ratio I have used a lot, alongside PE, and I agree that it works for picking stocks. In fact, the two are nearly interchangeable and in the case of more than a few stocks literally identical.

Interestingly, the authors put different spins on the same data. Bearish Arends tells us that based on EV/CF “share prices are still way above levels seen prior to the last 13 years.” More bullish Levisohn tells us that “The enterprise-value-to-free-cash-flow ratio for the S&P 500 is currently 20, a 10-year low.” (Then again, Levisohn loses credibility when he misspells the name of the largest US stock broker. Surely “Merrill” is in the WSJ spell checker?)

On balance, I think that Arends is too bearish. The fact that stocks are now as cheap as they have been for a decade has to mean something. Granted, stocks are more expensive than they have been in the more distant past. Arends trots out Shiller’s PE10 and Tobin’s q to demonstrate that in the scale of a 100 years the current market is no bargain.

But the inevitable result of that sort of analysis is that, with the possible exception of a few weeks last spring, the stock market has been overpriced for decades. I have a lot of trouble with a schema that says I should have been out of the market for most of my adult life. Moreover, the implicit but unspoken assumption that the long term average is meaningful, that it is some kind of revealed truth about the universe, strikes me as particularly bogus.

Which is not to say that I am an unrestrained stock market enthusiast. I think most people should have a healthy chunk of their savings in stocks, but what I have in mind is something like half the kitty, give or take. That is a lot less than has been typically suggested by investment advisors and gurus, some of whom used to recommend allocations as high as 100%.

For reasons that should be obvious, many people are now backing off their allocations to stocks. And when they do, they often run into a problem. Fewer stocks and more bonds decreases the risk level, but it also decreases the expected return of the portfolio. So you either have to increase your savings rate or adjust downward your retirement ambitions. Yuck.

Or you can find other investments that have expected returns similar to the stock market but are not the stock market. Hence the topic of the third WSJ item, Thinking Outside the Stocks. It discusses several offbeat places to put your money. All turn out to be exotic corners of real estate, from cellular towers to student housing and abandoned rail beds.

It is an amusing holiday weekend story, but the investments mentioned are not really practical for most people. First, because the minimum buy-in for most of the schemes is too large for ordinary folks. Second, many of them are more like starting a part-time business than making an investment. And thirdly, I am not convinced that they are really as unlike the stock market as is claimed.

The returns from real estate are not perfectly correlated with the returns from the S&P 500, but that is true of any industry. Own a basket of airline stocks or drug companies and you will get roughly similar expected returns as the whole market but will not follow it lockstep. Owning self-storage facilities or cell towers is still, after all, investing in a business, just like buying stocks.

The truth is mundane and sobering. The stock market is currently on the cheap side, but not a once-in-a-lifetime opportunity. It is more risky and likely less profitable than many people thought it was just a few years ago. But it is still the best thing going. The grass may seem greener in some alternative investments, but that is largely an optical illusion.

Welcome back to work.

I got this from an interesting paper recently published on common perceptions versus the reality of energy savings. Much to my non-surprise, they found that perception and reality are only roughly related. “The observed correlations between judged and actual energy values, although positive, may be too small to support sound decision making.”

The paper is based on a survey that asked respondents to rank groups of alternatives in terms of relative energy savings. Some, like the beverage containers, had to do with energy used outside a consumer’s view. For example, when asked to rank the energy use of transporting goods by airplane, ship, train, and truck, most people correctly picked air as the most inefficient. However, they ranked the other three as being about the same. (In fact, trucks use about ten times the energy of trains and ships.)

But even when asked about things like household appliances and gas mileage people made meaningful mistakes. The savings from reducing driving speed from 70 to 60 was overestimated, while the savings from tuning up the car was (greatly) underestimated.

Overall, the researchers found a consistent pattern in the under/over estimations of consumer energy use. People tended to favor not doing something over doing it more efficiently.

When asked for the most effective strategy they could implement to conserve energy, most participants mentioned curtailment (e.g., turning off lights, driving less) rather than efficiency improvements (e.g., installing more efficient light bulbs and appliances), in contrast to experts’ recommendations.

This fits nicely into my basic criticism of most frugalism. It is concerned less with saving money than with finding and carrying out conspicuous money saving acts. Driving in the slow lane and line-drying clothes is preferred over tuning the car or getting a more efficient clothes dryer because they are things you can do on a daily basis. In as much as they are a little annoying, they are more easily noticed reminders of virtue.

The survey breaks out the relationship between a person’s accuracy on the questions and certain other traits and behaviors. The usual demographic divisions, gender, age, income, political views, etc., had little or no effect. But measures of greenness, climate change attitude and pro-environment behaviors, did have a significant impact on accuracy. Greens tended to be less accurate.

Surprisingly, participants’ self-reported environmental behaviors scale always had a negative coefficient and was significant in three of the five tests, indicating that participants who reported engaging in a greater number of proenvironmental energy-related behaviors had less accurate perceptions.

It is clear that the authors of the paper are indeed surprised, and confused, by this result. Their basic thesis is that the planet is being destroyed because people are making incorrect decisions about energy use based on ignorance.

Many people’s concerns about energy are simply not strong enough, relative to their other concerns, to warrant learning about energy conservation. Although it may be appropriate to criticize the media for not presenting the case for climate change more strongly and for not presenting the implications of individual behavior more clearly, scientists share at least some of the responsibility for the current state of affairs.

So how can it be that the pro-environment green types, who presumably understand the case for climate change and the implications for individual behavior most clearly, actually understand the facts of energy conservation less well?

To those of us who think that the media has not presented a stronger case for climate change because there is no stronger case to be made, the answer to this conundrum is obvious. The greens have a poor command of the practical facts that surround their central cause because those facts are not important to them.

Particularly as it intersects with frugalism (and the overlap is wide) greenism is more about asceticism than practical concerns about saving money or the planet. Banning incandescent light bulbs is not important because it will have any practical effect. It is important because it qualifies, for reasons I honestly do not quite understand, as the right thing to do.

[Photo – Diligentdog]

On Monday the New York Times ran a piece that, in a better world, would not have been news. Turns out that credit card companies are often willing to settle delinquent accounts for less than what is owed. Golly.

The article did contain an important tip for those in serious credit card trouble. When the card issuer calls you out of the blue and offers to let you settle the whole thing for 80 cents on the dollar, you should, without hesitation or reflection, say no. Then hang up. They’re not calling because they think you’ll pay them eventually. That 80% is what we Wall Street types call a “first offer”.

The Times piece tells the story of a guy who got a call like this, said no thanks, and then when the company called back a few weeks later, offered them 50%.

It’s a deal, the account representative immediately said, not even bothering to check with a supervisor.

Where I come from, the account rep would be considered very rude. Proper etiquette would have been to put the customer on hold for thirty seconds while pretending to beg a supervisor to okay the deal. At the very least, the rep could have heaved a big sigh and mentioned something about how will probably be fired for this.

Things are grim in credit card land. A few years ago card companies could sell delinquent accounts to collection agencies for 15 cents on the dollar. That may sound like a pittance, but things being what they are today, they can’t even get that anymore. According to the article, 5 cents on the dollar is now the going rate for bad accounts. And the number of those accounts is growing.

So, obviously, there is a groundswell of sympathy credit card companies and a feeling that they need the sort of help that the government gave AIG, GM and Chrysler, lest this key part of our economy be further damaged. Yeah, right. Credit card companies are like lawyers and used car salesmen. No matter the circumstance, popular perception has a black hat permanently affixed to their heads. Washington even used the current state of things to triumphantly enact a new set of restrictions on what the card companies could do.

Today’s Wall Street Journal has another article on credit cards, this one about the widespread rage that consumers have against them. Apparently, YouTube is filling with videos of folks destroying their cards in spectacular ways, inspired, at least in part, by our old friend Dave Ramsey.

So, in keeping with Ramsey’s views, are these angry consumers up in arms about the ease with which you can get credit and run up debt? Well, not exactly. They have some complaints about interest rates on existing debt going up. But the big outrage, for which the article provided four separate examples, is card companies reducing credit lines.

In other words, the movement isn’t consumers reducing their use of cards out of outrage against card companies. It is consumers’ outrage that the companies have forced them to reduce their use of cards.

And of course the companies have been reducing credit lines. What with one thing and another, credit cards have become radically less profitable for their issuers than they were just a little while ago and it doesn’t look like things will get better any time soon.

But consumers, who take daily use of cards for granted while complaining bitterly about how awful they are, can’t imagine why the companies could possibly be less interested in lending them more money all of a sudden.  They’re like drunks angry the bartender has cut them off. And that he charged so much for a shot of whiskey when he was serving. And what happened to the free peanuts? I better call my congressman.

[Photo: Andres Rueda]

That advice comes from several sources. There are publications and broadcasts of various kinds. Aside from often lacking much wisdom or insight, these sources of information suffer from the fact that they are aimed at a broad and anonymous audience. By their nature, they are one-size-fits-all, leaving individuals to work out for themselves any customizations that might be required. On the other hand, this advice is free or nearly so.

More near-free advice can be had from friends and relatives. Some of this is probably good, but given the general state of PF knowledge out there the chances of hitting on a gifted amateur with sound ideas is low.

At the top of the advice food chain are professionals who give advice to particular individuals, presumably based those individuals’ situations, in exchange for money in the form of fees and/or commissions. In principle, that ought to work best and I have no doubt that there are many paid advisors out there who do a great job. But I am also pretty sure that many others, maybe even most others, are not up to snuff.

I was reminded of this by two recent items from the publication end of the personal finance advice spectrum.

The first is from Kiplinger’s. Social Security Payback Option May Disappear serves as a good update to a post I ran a few weeks back on a clever Social Security maneuver. In a nutshell, the idea is that instead of choosing between a lower payment at 62 and a higher one at 70, a person can have it both ways. Start at 62 and then, if you are still healthy at 70, repay what you got without interest and start over at 70.

Combining a free option with an interest-free loan from the government is pretty compelling. Frankly, I was embarrassed that I had, a year ago, written about when to take Social Security without knowing of this facet. But I never pretended to be a particular expert on this corner of personal finance and I certainly do not charge anybody money for advice on it.

Alas, the Kiplinger’s article tells us that the government is on to this trick and may soon close it down. That’s not exactly a shock. What did raise my eyebrows was some background data buried deep in the piece.

In 2007, only about 500 people — out of more than 37 million retirees and their dependents receiving benefits — took advantage of the payback option. By 2009, the number had nearly doubled as more retirees learned how they could repay their benefits, interest- and penalty-free, and restart them at a new, higher level.

Fewer than 1000 retirees took the payback and restart option last year? Out of 37 million people getting checks? That is 0.0027%. More people played Major League Baseball in 2009 than took advantage of this peculiarity in the SS rules. It almost makes me wonder why the bureaucrats are bothering to even discuss plugging such a tiny hole.

I am not sure what percentage of old folks would ideally be paying back and re-filing. But it is important to keep in mind that the basic strategy of starting at 62 and then calling a do-over at 70 is something that would make sense for almost all SS recipients. In the ideal world, most 70-year-olds would be re-filing for higher benefits. I do not know what portion of the 37 million are 70 years old. Would it be unreasonable to take a rough guess that the profit-maximizing ideal proportion re-filing is something like 2.7% of recipients? That would mean that the actual number is a thousand times lower than what it should be.

What is wrong with the other 99.9%? The great majority of them, we presume, are simply the victims of poor one-size-fits-all advice from the mass PF media. Or perhaps they just listen to their friends. But some non-trivial portion, way more than 0.1%, paid an expert to give them advice. In fact, folks nearing retirement and in their early 60s are probably the best served demographic by financial advisors. Some of those advisors even hold themselves out as experts on such things as Social Security. And yet….

My other example of poor advice given one-on-one to the nearly retired is from CNBC. When Is Paying Off Your Mortgage the Right Move? is a typical exercise in making the relatively simple confusingly obscure. As I have written here repeatedly, the core issue on to pay off your mortgage or not is whether or not you can expect to get a better (after-tax) return on your money by investing it.

The CNBC story tells us of a soon to be retired couple in New Jersey who are advised by a certified financial planner to pay the mortgage down. (The article names the advisor and contains a link to his firm’s website in case you want to sign up.) He advised them that “they would need to make between 6 percent and 8 percent on their money to make it worth holding on to the mortgage.”

Setting aside the fact that 6% to 8% is actually not hugely ambitious as a projected return, I have to wonder how the CFP got that hurdle rate. The CNBC piece doesn’t say. (Why waste space on such trivialities? We need to know that the husband of the couple once owned an auto repair business but now sells real estate.)

But the article does say that the couple paid down a 30 year at 5.25%. Is it possible that the advisor took 5.25% and bumped it up a little to take into account the risk of investing? Did he forget the tax effects? Or is mortgage interest not deductible for this couple, which seems very unlikely given what we are told about them?

More to the point, the advisor, who undoubtedly assured the couple he was an expert on these things, is apparently ignorant of a little trick that might have helped his fee-paying clients. They could have refinanced the mortgage, reducing the interest rate by at least a full point. On an after-tax basis, I am guessing the cost would be close to 3%. That’s an investment hurdle rate that most people would expect to comfortably beat.

Last week, Silicon Valley Blogger at The Digerati Life gave us a long and methodical discussion, complete with charts, Should You Invest In An Ivy League College Education? The post tees up the major issues, but stops short of presenting a definitive answer to its own question.

In contrast, Zac Bissonnette’s post at The Consumerist, 5 Reasons Why Every Single College Ranking Is a Pile of Crap, makes it clear where he stands. “A student’s success or failure in college and in life will ultimately be determined by who they are, not which college they attend.”

It is hard for me to avoid thinking that this question is overly, you will excuse the expression, academic. All parents should be so fortunate as to wonder if shelling out $200K to send the kid to Yale for four years is really worth it.

When we talk about the elite schools we are talking about maybe two dozen schools out of the 4,100 colleges and universities in America. This is not a personal finance question like “Should you buy a car new or used?” It is a hypothetical exercise along the lines of “Is a house on Nantucket a better value than one on Martha’s Vineyard?”

But just for fun, I am going to pretend it is on the list of personal finance problems that all consumers need to be able to tackle. Cuz ya’ never know.

To begin with, let me define the question more precisely. We are not talking about going to Elite University or not going to college at all. The choice is really between Elite U. and the University of Your Home State or similar. Put another way, you can go to an expensive top 20 school or a much cheaper place that merely ranks in the top 100.

Further, for the purposes of our analysis, we assume that money is your only concern. The only downside to going to Elite U. is that it is more expensive, and the only upside is an increased income later in life. We ignore, for example, the non-trivial advantages Elite would give you in the dating and marriage market.

We will further assume that Elite will set you back $200K. That’s a nice round number cited in the Digerati post, but it is something of a worst-case scenario. Although places like Harvard and Yale charge around $35K/year for tuition, with room, board, and other expenses not included, that’s more of an asking price than a firm quote. The majority of students receive financial aid of some kind.

And let us arbitrarily peg the cost of the lesser alternative to Elite at $80K, that is, $20K/year, a big slice of which is living expenses. Thus the net cost of Elite is $120K.

How much more income would you have to get over your working life to justify paying $120K now? Not that much. Even assuming an unrealistically high 10% discount rate, you would only have to increase your annual pay by more than $12,271 a year for 40 years to make Elite worth it.

A website called PayScale runs an annual survey of the salaries earned by the alumni of American colleges. Their top 20 have median “mid-career” incomes that range from $126K down to $109K. I have a lot of problems with their methodology, chief among those being that they exclude alumni who later got graduate degrees and use what can only be small and skewed sample sizes for some schools. But I think they hit the side of the barn, more or less. Let us assume that Elite grads pull in an average of $118K a year in mid-career.

As a representative lesser and cheaper school, I will use The University of Virginia, fondly known to its friends as UVA. (Actually, it’s only cheaper if you are a Virginian, and even then won’t quite squeeze into $20K/year.) PayScale does not number its list, but I have counted out UVA as having the 81st highest alumni pay at $93,900. The gap between Elite and UVA is then $24,100 a year, roughly twice the difference that would be needed to justify the additional expense of Elite.

So, assuming the “mid-career” difference in salary is a good estimate of the average difference throughout a working life, there really is no question. Elite is a buy.

Bissonnette makes the argument that comparing median salaries is misleading because it assumes that the only difference between the median grads of the schools is that they went to different schools. What we really want to know is the salary difference for an individual person should they attend one college or another. It seems reasonable that a given student might expect to make less than the Harvard median if he went there and higher than the UVA median if he went to that school.

I am sympathetic to that argument, in fact I’ve made it myself. But I won’t go so far as to say that which college you go to has no economic impact at all. And although the difference in tuition may seem staggering when you are about to write a check, spread out over a lifetime of working it is comparatively small.

Again, the Ivy-or-not question is not likely to be a practical issue for most people. Many more people are, or will be, confronted with the state school vs. Ivyish school conundrum. And then the results can be quite different. Imagine a resident of Virginia choosing between UVA and comparatively swanky Middlebury college, which weighs in at a hefty $52,120 a year for tuition, room, and board. It also ranks one slot lower than UVA on the PayScale survey at $93,600 for mid-career salary.

She had been saving money for a car, but then a better idea came to her. Why not make a daytrip to Dollywood with her little brother and a friend, aged 13 and 11, respectively. I think we’d all agree that she’d be better off with the car. And it would have been a good idea to discuss it with her parents first. She didn’t.

Bridget grabbed her cash, called a cab, and headed for the airport with boys in tow. Once there she bought three round-trip tickets to Nashville. They went through security without ID, which is allowed if you are under 18.

Once in Nashville, the trio was confronted with the minor detail that Dollywood was still 200 miles away. (Flying to Knoxville would have been a better choice.) Without an obvious way to get there, they panicked and called home. Not that clever, but hey, she’s 15.

Up to this point the story strikes me as an amusing tale of a fairly harmless teenage escapade. The sort of story that will be told over and over again by family members for decades. I don’t have a 15-year-old myself, but we plan to in three years and I like to imagine that if my kid called from an airport under these circumstances I’d just tell them to come home. Then I’d tell the wife this came from her side of the family.

Once again, I am out of step with normal America, or maybe just just out of date. The parents of these travelers may indeed someday tell the story as an amusing anecdote, but for now they are outraged and confused. And apparently, this is the reaction I am supposed to have too. The story at ABC News, linked to above, is entitled “Kids Fly Solo to Nashville, Parents Want Answers” and subtitled “Trio of Kids, Oldest 15, Fly to Nashville Alone, Never Stopped By Airline or TSA.”

I gather the idea is that the adults at the airport should have turned away these children from their dangerous trip. Because, you know, anything could have happened.

I am not completely alone in my head scratching. The airline involved responded to the controversy thusly:

Southwest Airlines unaccompanied minor policy covers children from ages five through 11 traveling alone. In this case, the 11-year-old Customer was accompanied by two older companions. A 12-year-old passenger can travel alone without a parent. Many airlines have similar policies on minors traveling alone.

In other words, nothing went wrong here, this is the way the system works, it is the way it has always worked, and what is wrong with you people anyway?

For me, the only hard to believe part of the story is that they paid cash. I was under the impression that if you showed up at a ticket counter without ID and tried to pay cash for a ticket you would be on your way to Guantanamo within the hour. Do airport ticket counters even take cash? More to the point, don’t most 15-year-old girls have credit cards? Is it just possible that Bridget actually used plastic but that her parents, not wishing to suffer blame for giving such a dangerous item to a mere child, fudged that part of the tale?

And I am glad that the fact that anybody can get through TSA security without ID if they can plausibly claim to be under 18 is now in print. I didn’t want to be the first one to point out this particular flaw in airport security theater. Thankfully, terrorists are always middle-aged.

But the reason I am bringing this up at all is that it is yet another example of what I have today decided to call the imbecilization of America. We increasingly treat adults as if they were kids, so naturally we now must treat everybody under 18 as if they were toddlers.

When I was 15, way back in the 20th Century, I travelled alone between cities routinely. Subway in Brooklyn to Penn Station, Amtrak to Boston’s South Station, T to uncle’s house in Cambridge. Sure, trains are not airplanes, but I am certain that if I had had the money I could have flown just as easily. And the New York City Subway in those days was way more dangerous than anything Bridget and the boys faced on their jaunt. Trust me.

The time was when a girl Bridget’s age could have gotten married in some states. (Strictly speaking, she still can, but it requires parental consent and/or court permission.) 16-year-olds are still allowed to drive cars, in most parts of the country, at least for now. So in a few months Bridget will be able to drive to Nashville, something that is even more dangerous than the Subway was.

I think it inevitable that in the near future airport rules will be changed to prevent this sort of horror occurring again. Perhaps those under 18 will not be permitted to fly without parental permission. And although a driver’s license at 16 is an American institution, it is one under attack. Advocates for raising the age to 18 point out that traffic fatalities for young people are lower in states where they are not allowed to drive. That is true, but hardly insightful. I am sure that raising the driving age to 30 would reduce fatalities amongst people in their 20s.

I suppose that if I tried I could come up with an argument I thought was compelling in the form of “we allow 15-year-olds to do X and Y, so why not allow them to fly to Nashville?” But I am quite sure that the response I would get would be that they shouldn’t be able to do X and Y either. Similarly, an argument that 21-year-olds can do just about anything but run for president so why can’t somebody just six years younger do something as mild as travel on their own won’t cut it. Too many Americans are not so sure we should be letting 21-year-olds do all that dangerous stuff.

One of my philosophies of parenting is that kids may or may not act less responsibly than you expect them to, but they will under no circumstances act more with more responsibility than is expected of them. Treat them like they can’t be trusted to do anything, and you get what you deserve. Same goes for adults. Treat them like you don’t expect them to understand credit card agreements, or what co-signing a loan means, and we get what we deserve.

Yesterday’s [6/24/09] New York Times had an article about the simmering controversy over target funds headlined Target-Date Mutual Funds May Miss Their Mark. (Get it? It’s a pun.)

Target date funds have been around for a long time. They are a sub-species of asset allocation funds, mutual funds that, in effect, own other mutual funds in order to create a diversified one-stop-shop for the investor either too busy or too intimidated to pick his own. I’m not a big fan. I think you can do better making your own asset allocations, but that has little to do with the current round of hand wringing in Washington.

To understand what has caused the present consternation, you have to go back a few years.

There has always been the problem that too many workers fail to take advantage of the spiffy 401k plans offered to them. One approach to this problem is to understand it as a symptom of a larger tragedy that needs addressing, the fact that so many of us are in dire need of a better understanding of personal finance.

Another approach would be to ignore the big picture and harness the laziness and intimidation induced inertia of the American worker to get the outcome you want. Just make participating in the 401k plan the default, i.e. new employees have to fill out a form not to participate. Guess which path our government chose.

And for a while this looked like a great success for what might be called Nanny State Lite, the idea that the government can help you help yourself in a subtle way that you will hardly notice and that will maintain the pretense that we think you are an adult.

Ah, but just setting aside a part of your paycheck in a 401k isn’t enough. That money has to be invested. Traditionally, the default investment for 401ks was a money market fund, a.k.a. cash. And that made good sense. Everything else is risky and could lose money. Who wants to answer to a worker who lost some of his savings on something you picked for him, even if you meant well?

But if you are invested in cash, you can’t participate in the fabulous returns available from the stock market. So Nanny, who knows what’s best for you, changed the rules in 2006 to allow employers to set a target date fund as the default for 401ks.

You can guess the rest of the story. Everything went swimmingly until 2008, when those target date funds went down rather a lot and the kids started to resent Nanny’s help. Then Nanny, to paraphrase Casablanca, became simply shocked to discover that gambling was taking place in the target date funds.

From the Times:

Mary L. Schapiro, the chairman of the S.E.C., is now questioning whether fund companies misled investors about the risks associated with target-date funds, a concern the mutual fund industry says is unjustified.

The mutual fund industry is right. The composition of a target date fund and the risks involved is far from secret. It’s in the fund literature, on the website, and everywhere else a person who wanted to know such things might think to look. The problem being that the investors the SEC is concerned about are those lazy kids on 401k autopilot who would never look and probably wouldn’t have understood what they found if they did.

In hindsight, Nanny didn’t think this one all the way through.

Data collected by the S.E.C. shows that target-date funds vary widely in terms of their investment risks, even when they use similar target years or names. Even though federal officials put a stamp of approval on target-date funds, there are no clear standards about how they should work.

And, of course, this has always been the case. Two funds with "2025" in their names may have only their names in common, just as two "growth stock" funds may not own a single stock in common. The relatively obvious implication of this being that allowing target date funds to be designated as the default investment in a 401k is nearly an open-ended invitation to the fund manager and employer to take as much risk as they see fit. In giving a free pass to target date funds, Congress essentially made a specific exception for something that was itself undefined. Even by Congressional standards that’s inexplicable.

Nanny, needless to say, is in no hurry to take responsibility for this mess. The SEC is considering banning the use of dates in fund names. Senator Herb Kohl, Democrat of Wisconsin, has suggested standardizing the asset composition of the funds. And there is the usual hot air about fees and disclosure.

The core truth is simple. Nanny decided that taking some risk made more sense for her charges than investing in cash. And as risks taken sometimes do, it turned out badly. The final irony is that Nanny was broadly right. Details  of implementation aside, investing for retirement higher up on the risk-return curve than a money market fund was the right move and still is.

But it begs the question of whether Nanny should be making these decisions at all. Rigging the system to get the outcome we want is nice, but it is no substitute for addressing the problem that caused the undesirable outcome to begin with.

[Photo Remi Jouan]

A post last Friday, written by the Consumerist’s managing editor, ~600,000 Chinese Die Making Our Shiny Toys caught my eye. To save you a click, here is pretty much all of it, links included.

Let’s expand our foreign language vocabulary! Can you say, "guolaosi"? It’s a Mandarin word meaning "death from overwork!" The word describes the phenomenon of Chinese workers falling dead on the spot as they toil in sub-Dickensian conditions so you can save a dollar on your next laptop!

China Daily, an English-language state-run publication, says an estimated 600,000 Chinese workers die each year in this fashion, sometimes falling "off their stools bleeding from the ears, nose and anus," as left-leaning mag The Nation reported in 2007.

A reasonable reader might assume that the first link was to a China Daily item explaining how guolaosi does in 600,000 hapless workers a year. I clicked on it to find, instead, an opinion piece from the UK newspaper The Independent.

That item, by one Johann Hari, is essentially a longer version of the Consumerist post, telling us that “We’ll never know the names of all the people who paid with their limbs, their lungs, or their lives for the goodies in my home and yours.” And, indeed, it tells us that “China Daily estimates that 600,000 people are killed this way every year, mostly making goods for us.”

But that is where the trail goes cold. There are no links in The Independent’s version of the story, nor was there a link in the version on Hari’s own website. I went to China Daily’s website and could not find anything about 600,000 annual deaths. In fact, a search for the term guolaosi returns no hits at all. Google was no help. I sent Hari an email asking for a citation two days ago. He has not yet replied.

I am not saying that Hari made up the 600,000 number, but it is pretty clear to me that somebody did. Because it is yet another example, and a pernicious one, of what I like to call numerical fiction.

To be clear, I do not know how many Chinese workers actually die from guolaosi each year. I doubt anybody does. Nevertheless, any thoughtful and appropriately jaded observer ought to be able to work out that 600,000 is at least several orders of magnitude too high.

I did manage to find another, even higher, estimate of the annual guolaosi toll. On the site of what appears to be far-left Indian organization (it also contains a large collection of 9/11 conspiracy theory reports) there is an article that tells us that “at least one million people in China currently die from overwork each year.”

But that same article lists six specific cases of death from overwork culled from Chinese media reports over three years. If it was a phenomenon so common, why would it be necessary to cite anecdotes going back several years? More to the point, if it was so common, why would the Chinese media consider a single case to be news?

Of course, there is, as far as I know, no such medical diagnosis as death from overwork. But in Japan it is recognized as a legal concept, that is, a person’s heart attack or stroke can be attributed to overwork, which entitles his survivors to compensation. Karoshi, as it is called, is considered a social problem that gets significant Japanese media attention. Yet the scale of the problem is four orders of magnitude lower than what is claimed for China. In 2007 147 Japanese deaths were attributed to karoshi. China is bigger than Japan, but not 4,000 times bigger.

As longtime readers of this blog will recall, Curmudgeon’s Law of Numerical Fiction says that in order for a non-factual number to be accepted as truth it must have three properties. 1) The number must reinforce previously held beliefs. 2) It must be remarkable, i.e. newsworthy, but not so extreme as to be utterly unbelievable. 3) There cannot be an organized body that would have the interest and wherewithal to correct it.

600,000 annual guolaosi deaths qualifies on all three counts. But it is the first one, that it feeds into what we already believe and assume, that is most damning.

Outside of East Asia, death from overwork seems to be utterly non-existent. Americans and Europeans never say that one of their own died that way. I think it is fairly clear that this is merely cultural difference in the way certain deaths are attributed. Some non-Asian young people kill themselves over work or school related stress and some non-Asian middle-aged professionals die of heart attacks on the job. But we do not call these cases of death from overwork.

Yet when we read stories of goulaosi or karoshi we do not say to ourselves that if it happened here we would not call it overwork. We accept the implication that this is something that could only happen to an Asian. Because only they are capable of the robotic dedication necessary to work themselves to death. 600,000 Chinese working until they drop every year? Sounds about right.

Which feeds into the inchoate ideology of the anti-globalist. Asking Americans to compete with Chinese workers is inherently unfair because the Chinese, for whatever reason, are willing to put up with sub-Dickensian conditions. It is not that we are losing a fair fight, they are winning because of unfair advantages.

Of course, the picture that gets painted is of Chinese factory workers as the victims of our own greed for shiny toys. If only we could bring ourselves to go without so many Chinese made things these poor people could stop working so hard in factories. Then they could return to the countryside and the idyllic peasant life they once knew. Because nobody ever heard of a Chinese peasant dying from overwork.

[Photo – Robert Scoble]