Here’s one recommendation related to discrimination:
Expand Technical Expertise to Stop Discrimination. The detailed personal profiles held about many consumers, combined with automated, algorithm-driven decision-making, could lead—intentionally or inadvertently—to discriminatory outcomes, or what some are already calling “digital redlining.” The federal government’s lead civil rights and consumer protection agencies should expand their technical expertise to be able to identify practices and outcomes facilitated by big data analytics that have a discriminatory impact on protected classes, and develop a plan for investigating and resolving violations of law.
First, I’m very glad this has been acknowledged as an issue; it’s a big step forward from the big data congressional subcommittee meeting I attended last year for example, where the private-data-for-services fallacy was leaned on heavily.
So yes, a great first step. However, the above recommendation is clearly insufficient to the task at hand.
It’s one thing to expand one’s expertise – and I’d be more than happy to be a consultant for any of the above civil rights and consumer protection agencies, by the way – but it’s quite another to expect those groups to be able to effectively measure discrimination, never mind combat it.
Why? It’s just too easy to hide discrimination: the models are proprietary, and some of them are not even apparent; we often don’t even know we’re being modeled. And although the report brings up discriminatory pricing practices, it ignores redlining and reverse-redlining issues, which are even harder to track. How do you know if you haven’t been made an offer?
Once they have the required expertise, we will need laws that allow institutions like the CFPB to deeply investigate these secret models, which means forcing companies like Larry Summer’s Lending Club to give access to them, where the definition of “access” is tricky. That’s not going to happen just because the CFPB asks nicely.
A fascinating and timely study just came out about the “Stand Your Ground” laws. It was written by Cheng Cheng and Mark Hoekstra, and is available as a pdf here, although I found out about in a Reuters column written by Hoekstra. Here’s a longish but crucial excerpt from that column:
It is fitting that much of this debate has centered on Florida, which enacted its law in October of 2005. Florida provides a case study for this more general pattern. Homicide rates in Florida increased by 8 percent from the period prior to passing the law (2000-04) to the period after the law (2006-10).By comparison, national homicide rates fell by 6 percent over the same time period. This is a crude example, but it illustrates the more general pattern that exists in the homicide data published by the FBI.
The critical question for our research is whether this relative increase in homicide rates was caused by these laws. Several factors lead us to believe that laws are in fact responsible. First, the relative increase in homicide rates occurred in adopting states only after the laws were passed, not before. Moreover, there is no history of homicide rates in adopting states (like Florida) increasing relative to other states. In fact, the post-law increase in homicide rates in states like Florida was larger than any relative increase observed in the last 40 years. Put differently, there is no evidence that states like Florida just generally experience increases in homicide rates relative to other states, even when they don’t pass these laws.
We also find no evidence that the increase is due to other factors we observe, such as demographics, policing, economic conditions, and welfare spending. Our results remain the same when we control for these factors. Along similar lines, if some other factor were driving the increase in homicides, we’d expect to see similar increases in other crimes like larceny, motor vehicle theft and burglary. We do not. We find that the magnitude of the increase in homicide rates is sufficiently large that it is unlikely to be explained by chance.
In fact, there is substantial empirical evidence that these laws led to more deadly confrontations. Making it easier to kill people does result in more people getting killed.
If you take a look at page 33 of the paper, you’ll see some graphs of the data. Here’s a rather bad picture of them but it might give you the idea:
That red line is the same in each plot and refers to the log homicide rate in states without the Stand Your Ground law. The blue lines are showing how the log homicide rates looked for states that enacted such a law in a given year. So there’s a graph for each year.
In 2009 there’s only one “treatment” state, namely Montana, which has a population of 1 million, less than one third of one percent of the country. For that reason you see much less stable data. The authors did different analyses, sometimes weighted by population, which is good.
I have to admit, looking at these plots, the main thing I see in the data is that, besides Montana, we’re talking about states that have a higher homicide rate than usual, which could potentially indicate a confounding condition, and to address that (and other concerns) they conducted “falsification tests,” which is to say they studied whether crimes unrelated to Stand Your Ground type laws – larceny and motor vehicle theft – went up at the same time. They found that the answer is no.
The next point is that, although there seem to be bumps for 2005, 2006, and 2008 for the two years after the enactment of the law, there doesn’t for 2007 and 2009. And then even those states go down eventually, but the point is they don’t go down as much as the rest of the states without the laws.
It’s hard to do this analysis perfectly, with so few years of data. The problem is that, as soon as you suspect there’s a real effect, you’d want to act on it, since it directly translates into human deaths. So your natural reaction as a researcher is to “collect more data” but your natural reaction as a citizen is to abandon these laws as ineffective and harmful.
Scott Hodge just came out with a column in the Wall Street Journal arguing that reducing income inequality is way too hard to consider. The title of his piece is Scott Hodge: Here’s What ‘Income Equality’ Would Look Like, and his basic argument is as follows.
First of all, the middle quintile already gets too much from the government as it stands. Second of all, we’d have to raise taxes to 74% for the top quintile to even stuff out. Clearly impossible, QED.
As to the first point, his argument, and his supporting data, is intentionally misleading, as I will explain below. As to his second point, he fails to mention that the top tax bracket has historically been much higher than 74%, even as recently as 1969, and the world didn’t end.
Hodge argues with data he took from a report from the CBO called The Distribution of Federal Spending and Taxes in 2006. This report distinguishes between transfers and spending. Here’s a chart to explain what that looks, before taxes are considered and by quintile, for non-elderly households (page 5 of the report):
The stuff on the left corresponds to stuff like food stamps. The stuff in the middle is stuff like Medicaid. The stuff on the right is stuff like wars.
Here are a few things to take from the above:
- There’s way more general spending going on than transfers.
- Transfers are very skewed towards the lowest quintile, as would be expected.
- If you look carefully at the right-most graph, the light green version gives you a way of visualizing of how much more money the top quintile has versus the rest.
Now let’s break this down a bit further to include taxes. This is a key chart that Hodge referred to from this report (page 6 of the report):
OK, so note that in the middle chart, for the middle quintile, people pay more in taxes than they receive in transfers. On the right chart, for the middle quintile, which includes all spending, the middle quintile is about even, depending on how you measure it.
Now let’s go to what Hodge says in his column (emphasis mine):
Looking at prerecession data for non-elderly households in 2006 in “The Distribution of Federal Spending and Taxes in 2006,” the CBO found that those in the bottom fifth, or quintile, of the income scale received $9.62 in federal spending for every $1 they paid in federal taxes of all kinds. This isn’t surprising, since people with low incomes pay little in taxes but receive a lot of transfers.
Nor is it surprising that households in the top fifth received 17 cents in federal spending for every $1 they paid in all federal taxes. High-income households hand over a disproportionate amount in taxes relative to what they get back in spending.
What is surprising is that the middle quintile—the middle class—also got more back from government than they paid in taxes. These households received $1.19 in government spending for every $1 they paid in federal taxes.
In the first paragraph Hodge intentionally conflates the concept of “transfers” and “spending”. He continues to do this for the next two paragraphs, and in the last sentence, it is easy to imagine a middle-quintile family paying $100 in taxes and receiving $119 in food stamps. This is of course not true at all.
What’s nuts about this is that it’s mathematically equivalent to complaining that half the population is below median intelligence. Duh.
Since we have a skewed distribution of incomes, and therefore a skewed distribution of tax receipts as well as transfers, then in the context of a completely balanced budget, we would expect the middle quintile – which has a below-mean average income – to pay slightly less than the government spends on them. It’s a mathematical fact as long as our federal tax system isn’t regressive, which it’s not.
In other words, this guy is just framing stuff in a “middle class is lazy and selfish, what could rich people possibly be expected do about that?” kind of way. Who is this guy anyway?
Turns out that Hodge is the President of the Tax Foundation, which touts itself as “nonpartisan” but which has gotten funding from Big Oil and the Koch brothers. I guess it’s fair to say he has an agenda.
I’ve been super impressed by Matt Stoller’s recent foray into “tumbling”, which is kind of like blogging except it’s called tumbling. Even the spam emails from tumblr are worth following him, because sometimes they contain his newest posts.
His title is Observations on Credit and Surveillance but in fact the content is all over the map, reading original source documents to describe the connections between communism and U.S. slavery or Gerald Ford and Watergate, not to mention the 1894 Post Office Bank proposal.
Go take a look, he’s been on fire. I hope he keeps it going.
It featured four distinguished panelists:
- Jill Abramson Executive Editor, The New York Times
- Janine Gibson Editor-in-Chief, Guardian U.S.
- David Schulz Outside Counsel to The Guardian and Partner, Levine, Sullivan Koch & Schulz LLP
- Cass Sunstein Member, President Obama’s Review Group on Intelligence and Communications Technologies and Robert Walmsley University Professor, Harvard University
First Janine talked about receiving the documents from Snowden, or “the source” as he was called, and spending a bunch of time with her team in verifying the documents as well as focusing on exactly two questions:
- Is this story true?
- Is this story in the public’s interest?
She and her team decided it passed both those tests and they published it. Then Jill Abramson chimed in to talk about how the New York Times got in on the story as well.
David Schulz, and also Lee Bollinger who started out the evening, framed the legal issues around newspapers publishing things in the context of national security here in the U.S., and although much of it was over my head I came away with the distinct impression that in this country, journalisms have historically had a protected space.
However, there have been exceptions recently, and very recently Director of National Intelligence James Clapper insinuated that dozens of journalists reporting on documents leaked by NSA whistleblower Edward Snowden were “accomplices” to a crime.
Those recent events, and Obama’s general campaign against whistleblowers, which are in direct contradiction to his campaign promises, have had a chilling effect on reporting and on reporters who work on national security issues, according to NY Times Executive Editor Jill Abramson.
There was some discussion about how difficult it was to have secure communication between Snowden and journalists, given the situation, and how crucial it is to be able to do so for journalists in order to protect their sources. The question came up of whether it even makes sense for a journalist to suggest to a source that they’d be protected, given how much surveillance now exists.
My favorite line of the night came when David Schulz pointed out that we normal citizens might not think we care about having secure communications, since we don’t intend to do top secret messaging, but even so the lack of secure messaging systems for other people effects what we learn about the world.
Finally, there was a poll taken by the moderator Emily Bell: are we better off because of Snowden? Not all of the panelists agreed, or rather Jill, Janine, and David seemed to think it was obvious but Cass demurred, which I guess was consistent with his being on a Review Group for Obama.
Personally, I don’t think it’s super cut and dry, but I do think we need to have people like Snowden, and whistleblowers more generally, and that in any case journalists absolutely need legal protection to do their jobs.
One last personal comment: I find it absolutely amazing that an entire profession like journalism would actually consider the public good as a major question they put before them before they choose what to work on. I’m coming from inside the tech industry and finance, where the only question that is ever asked is whether an idea is profitable and, secondarily, legal. It’s a refreshing perspective, although I’m guessing somewhat misleading.
I’m incredibly excited to announce that I am writing a book called Weapons of Math Destruction for Random House books, with my editor Amanda Cook. There will also be a subtitle which we haven’t decided on yet.
Here’s how this whole thing went down. First I met my amazing book agent Jay Mandel from William Morris though my buddy Jordan Ellenberg. As many of you know, Jordan is also writing a book but it’s much farther along in the process and has already passed the editing phase. Jordan’s book is called How Not To Be Wrong and it’s already available for pre-order on Amazon.
Anyhoo, Jay spent a few months with me telling me how to write a book proposal, and it was a pretty substantial undertaking actually and required more than just an outline. It was like a short treatment of all the chapters but then two chapters pretty filled in, including the first, and as you know the first is kind of like an advertisement for the whole rest of the book.
Then, once that proposal was ready, Jay started what he hoped would be a bidding war for the proposal among publishers. He had a whole list of people he talked to from all over the place in the publishing world.
What actually happened though was Amanda Cook from Crown Publishing, which is part of Random House, was the first person who was interested enough to talk to me about it, and then we hit it off really well, and she made a pre-emptive offer for the book so the full on bidding war didn’t end up needing to happen. And then just last week she announced the deal in what’s called the Publisher’s Marketplace, which is for people inside publishing to keep abreast of the deals and news. The actual link is here, but it’s behind a pay wall, so Amanda got me a screen shot:
If that font is too small, it says something like this:
Harvard math Ph.D., former Wall Street quant, and advisor to the Occupy movement Cathy O’Neil’s WEAPONS OF MATH DESTRUCTION, arguing that mathematical modeling has become a pervasive and destructive force in society—in finance, education, medicine, politics, and the workplace—and showing how current models exacerbate inequality and endanger democracy and how we might rein them in, to Amanda Cook at Crown in a pre-empt by Jay Mandel at William Morris Endeavor (NA).
So as you can tell I’m incredibly excited about the book, and I have tons of ideas about it, but of course I’d love my readers to weigh in on crucial examples of models and industries that you think might get overlooked.
Please, post a comment or send me an email (located on my About page) with your favorite example of a family of models (Value Added Model for teachers is already in!) or a specific model (Value-at-Risk model in finance in already!) that is illustrative of feedback loops, or perverted incentives, or creepy modeling, or some such concept that you imagine I’ll be writing about (or should be!). Thanks so much for your input!
One last thing. I’m aiming to finish the writing part by next Spring, and then the book is actually released about 9 months later. It takes a while. I’m super glad I have had the experience of writing a technical book with O’Reilly as well as the homemade brew Occupy Finance with my Occupy group so I know at least some of the ropes, but even so this is a bit more involved.
United States District Judge Jed S. Rakoff is already kind of a hero to me, given that he’s the guy who rejected a “do not admit wrongdoing” settlement between Citigroup and the SEC over mortgage-backed securities fraud because, according to Rakoff, the proposed settlement was “neither fair, nor reasonable, nor adequate, nor in the public interest.”
More recently Rakoff has written a fine essay in the New York Review of Books entitled The Financial Crisis: Why Have No High-Level Executives Been Prosecuted? which I will summarize below but is well worth your time to read.
First Rakoff made the point that if there was no intentional fraud we should not scapegoat people and put them to jail. But on the other hand, if there was intentional fraud, then it’s a reflection on a dysfunctional justice system that nobody has gone to jail.
Then he examined that first possibility and found it unlikely, given that “… the Financial Crisis Inquiry Commission, in its final report, uses variants of the word “fraud” no fewer than 157 times in describing what led to the crisis…” In fact, fraud permeated at every level.
The Department of Justice (DOJ) has focused on explaining why nobody has gone to jail in spite of the existence of fraud. They have three reasons.
First, the DOJ claims it’s hard to prove intent for high-level management. But Rakoff demurs on this point, explaining that in cases of accounting fraud, “willful blindness” or “conscious disregard” is a well-established basis on which federal prosecutors have asked juries to infer intent.
Second, since many counterparties were “sophisticated,” it’s difficult to prove “reliance“. Again Rakoff demurs, pointing out that “In actuality, in a criminal fraud case the government is never required to prove—ever—that one party to a transaction relied on the word of another.”
Third, because of the “Too Big To Jail” problem, namely that prosecuting fraud would kill the economy. To this, Rakoff points out what that means in terms of class: that poor people can be prosecuted but the rich are protected.
Next, Rakoff says what he thinks is actually happening. First he discounts the revolving door: he thinks lawyers are thoroughly incentivized to make a name for themselves. Then what? He’s got three reasons.
Well, first, people were distracted. The FBI was distracted by terrorists, and the SEC was focused on Ponzi schemes and insider trading. The DOJ was inexperienced and the Southern District US Attorney’s Office was also focused on insider trading. And given the complexity and incentives, it’s hard for a given lawyer to decide to go with an MBS case instead of insider trading.
Second, the government had direct conflict in the fraud, given that the Fed and the regulators had deregulated everything in sight and then kept interest rates low to keep the mortgage machine going. They also meddled a lot during the crisis, deciding which failing bank should be taken over by whom. It made it hard for them to admit shit went wrong.
Finally, it’s because it’s now in vogue to prosecute corporations instead of people, but that really doesn’t work. Here’s Rakoff on this prosecutorial method:
Although it is supposedly justified because it prevents future crimes, I suggest that the future deterrent value of successfully prosecuting individuals far outweighs the prophylactic benefits of imposing internal compliance measures that are often little more than window-dressing. Just going after the company is also both technically and morally suspect. It is technically suspect because, under the law, you should not indict or threaten to indict a company unless you can prove beyond a reasonable doubt that some managerial agent of the company committed the alleged crime; and if you can prove that, why not indict the manager? And from a moral standpoint, punishing a company and its many innocent employees and shareholders for the crimes committed by some unprosecuted individuals seems contrary to elementary notions of moral responsibility.
And then his final conclusion:
So you don’t go after the companies, at least not criminally, because they are too big to jail; and you don’t go after the individuals, because that would involve the kind of years-long investigations that you no longer have the experience or the resources to pursue.
First, I am super grateful for Judge Rakoff’s essay, because as an experienced lawyer he has way more ammunition than I do to explain this stuff from the perspective of what is actually done in law. The “willful blindness” issue is particularly ridiculous. I’m glad to hear that courts have a way to deal with that problem, even if they aren’t using their tools against Jamie Dimon.
I am also grateful to hear him make the point that widespread fraud, unprosecuted, is not simply a theoretical issue. It exposes the dysfunctionality of our justice system and it exposes basic unfairness in society, where depending on how rich you are and how complicated your crime is, you can avoid going to jail. Personally, in the past few months I’ve gone from being angry at the bankers to being angry at the prosecutors.
Finally, I disagree with Rakoff on one point. Namely, his argument against the negative effect of the revolving door. His argument, I stipulate, only works for lawyers in a US Attorney’s office. I don’t think the average SEC lawyer or economist, or for that matter an employee at any captured regulator, has that much incentive to take on a big MBS case and be hard-assed. I think we would have seen more cases if that were true.