Monday, November 28, 2011

One subsidy I can get behind: Public Defenders

Interpreted at the most literal (or cynical) level, public defenders can seen as a subsidy for criminals because society pays for their legal fees. Of course, not everyone who is arrested is guilty of a crime, but if police are doing their job correctly, most people who are arrested will be guilty of something.

To quote a former police officer: "I don't want to put anyone that's innocent in jail. But, I try not to bring anyone into the interview room that's innocent."

Free legal counsel reduces the cost of being arrested, increasing the net "payoff" to a life of crime. In an anarcho-capitalist system (which some of my classmates at GMU think would be just swell) there'd be no public defenders, the accused would pay the cost of legal representation, and in theory this would provide an additional deterrent to criminal activity.

That's all very well and good, as far as it goes. Ideally, the criminal justice system should take criminals off the streets, and also deter potential criminals with the threat of punishment.

But, there's also a very serious negative externality to the justice system when it puts innocent people in jail. This takes several forms: harm to the person imprisoned and their family and friends, but also society as a whole. People in jail become burdens on the taxpayer and produce nothing (except maybe license plates). The justice system loses credibility when it convicts the innocent. Finally, for each person wrongfully imprisoned there is a criminal walking the streets with impunity, out committing more crimes.

Economists are often skeptical of externality justifications for government subsidies. But, I'd submit that the harm of imprisoning innocent people is so great, that money spent on public defenders is well worth it. Even if career criminals benefit slightly as well, that's a tradeoff worth making (80% of people in jail confess anyway, according to the police officer quoted above, so the harm of that cross-subsidy is pretty minimal in my view).

A last tidbit for thought: being convicted in a criminal trial requires evidence "beyond a reasonable doubt" which amounts to 98% or 99% certainty from a jury. There are a little over 2 million people incarcerated in the U.S. currently. If 99% certainty means being wrong 1% of the time, that's 20,000 people sitting in jail for crimes they didn't commit, at the minimum. Combined with the over-confidence effect (people are lousy at estimating confidence intervals around what they are certain of) it's likely to be much more. A tragic situation, and one which might be made even worse without access to public defenders.

Thursday, November 17, 2011

Statistical Fallacy #176: Ignoring Selection Effects

I stumbled on a post at a credit-related blog. It starts off with the bombastic first line
"The average consumer is saddled with $29,985 in student loan debt..."
 Wow! That's a lot of debt! It's true that the U.S. population has a giant amount of student loan debt -- even more so than the amount of credit card debt. Last year, I wrote about the subject. But, the figure above is pretty high. That statistic is drawn from "262,887 user scores." Sounds pretty robust. But, some simple math reveals there's more to the story.

  • Total student loan debt in the U.S. is about $1 trillion (~$1,000,000,000,000).
  • The U.S. population is 308,745,538. Of that, 24% are under 18, leaving 234,646,609 adult consumers.

Do some division, and you'll find that the average adult consumer has $4261.73 in credit card debt. That's about $25,000 less than the Credit Karma estimate!

What went wrong? My guess: selection effects. Members of a site specializing in credit advice are not a random sample of the population. People who join are probably concerned about their credit... and people who are concerned about their credit probably have a lot of debt.

Nothing personal against the writers for that site, as it would be an easy mistake to make (and they were very nice, even in response to my snarky comment pointing this out). But still, they should have been more careful. A quick test, by multiplying their estimate of average debt by the number of consumers, finds that the U.S. has a total of $7,035,878,570,865 in student loans outstanding, about seven times the real figure. If it were true, that would be about 11% of the entire world GDP owed by American students!

The lesson: look out for non-random sampling due to self-selection, or your numbers will be nonsense.

Sunday, November 6, 2011

Fun Facts about Microsoft Co.

Why would anyone bother reading shareholder reports? They're dry, long-winded, and functionally outdated by the time of arrival, so there's no way to profit from the information. Reasons for reading would have to include boredom, duress, or idle curiosity. It was the latter which led me to the Microsoft Annual Report for 2011. A few interesting facts pulled from that document:
  • Microsoft is divided into five segments. The Windows & Windows Live Division gets 75% of its revenue from selling Windows to computer manufacturers, to be pre-installed for end users. The remaining 25% comes from sale of miscellaneous hardware products and online advertising on Windows Live. 
  • In the Windows Division, most growth over the last year was business sales (+11%) while consumer purchases went down (-1%). A substantial part of the drop in consumer PC sales was from netbooks (-32%).
  • Employee severance expenses were $59 million in 2010 and $330 million in 2009. Why the huge change? Microsoft: "In January 2009, we announced and implemented a resource management program to reduce discretionary operating expenses, employee headcount, and capital expenditures."
  • Research and Development costs took up 15% of Microsoft's revenue, or $9.0 billion, in 2011. That investment is well-protected -- by 26,000 U.S. and international patents, and another 36,000 pending.
  • Kinect for Xbox 360 is the fastest-selling consumer electronics device; confirmed by Guinness World Records
  • If you'd bought $100 of Microsoft stock in June 2006, six years later it would be worth $122.71 (compare to $115.61 for the S&P Index, or $157.48 for the Nasdaq Computer Index). 

What, if anything, does this say about the corporation and its future? Microsoft's product focus is split between entertainment/gaming and business services, while the company's prior breadwinner - bundling software with new PCs - is taking a back seat. As stated in a note from their CEO, Steven Ballmer: "increasingly, we will view ourselves as a devices and services company." It sounds closer to Mattel than the Evil Empire. Regardless, Microsoft's diverse selection of both patents and products provides a foothold to compete against intimidating rivals like Google, Apple, and