Carpe Diem

An alternative view of U.S. tariffs on Korean steel, from the most important viewpoint of all – the U.S. consumers of steel

As public choice theory predicts, U.S. trade policy is dominated and controlled by well-organized, special-interest groups of domestic producers, who are able to take advantage of less-organized, dispersed groups of domestic buyers of imported goods that include millions of individual consumers and hundreds of industrial consumers. As a result of that domination of the political and legislative process by domestic producers, U.S. manufacturers are often successful at achieving favorable protectionist legislation for their industries.

One might ask: Protectionism against what and whom? The answer is always: Protection for domestic producers against more efficient, lower-cost foreign rivals. One might also ask: How is that protection achieved for high-cost, inefficient domestic producers? The answer is usually: Get government enablers to impose a “tariff” (i.e., a tax) on imported goods produced by your foreign competitors to artificially achieve what you have failed to do on your own: operate more efficiently and offer lower (or the same) prices than your foreign rivals.

Economic trade theory and mountains of empirical evidence on protectionist trade policy confirm conclusively that there is almost always a net loss of economic efficiency from protectionist trade policies. Reason? Protectionist trade policies generate costs to domestic consumers in the form of higher prices and reduced trading activity that outweigh the benefits to protected domestic industries, often by a factor of 2-to-1. In other words, protectionist trade policies always makes the country imposing them worse off on net, not better off, when considering all of the costs and benefits.

The latest example of successful trade protectionism? The U.S. steel industry successfully engaged in enough (wasteful) rent-seeking that it persuaded the U.S. Department of Commerce this week to impose punitive tariffs/taxes of 10-16% on its foreign, steel-producing rivals in South Korea. Below is how the WSJ reported it today, with the usual media bias of presenting protectionist trade policy completely from the viewpoint of the protected domestic industry. With some editing, the corrected text below reflects the alternative viewpoint of the U.S. consumer and U.S. businesses who buy foreign steel and who are now disadvantaged and burdened with higher prices for steel and all steel-containing products.

“U.S. Slaps Tariffs on U.S. Buyers of Korean Steel Pipe Because of Alleged  Unfair Pricing Economically Inefficient, but Politically Powerful and Well-Organized Domestic Steel Producers Have Successfully Been Granted Government Protection from More Efficient, Lower-Cost Foreign Rivals“:

The U.S. on Friday moved to impose punitive tariffs on American buyers of steel from South Korean steelmakers, saying they sold pipe used in the oil and gas industry at extremely competitive artificially low prices that were below higher-priced domestic steel pipe. The Commerce Department’s final decision on Friday is a win for the U.S. steel industry, especially U.S. Steel Corp., after one of the most politically charged trade battles successful examples of rent-seeking protectionism and crony capitalism in years. It’s also a major loss for the hundreds of U.S. companies that purchase foreign steel pipe, their employees, shareholders and customers. It’s also a major loss for the U.S. economy, which will suffer from a net loss of economic efficiency, a net loss of jobs, and a loss of economic growth from the protectionist trade policy that will artificially raise prices for hundreds of products that contain steel and use steel pipe.

If a special U.S. trade commission finds the alleged dumping hurt American steelmakers, even if those low steel prices helped American steel-using industries significantly more, then the tariffs punitive taxes on American steel buyers will become permanent and likely buoy steelmaker profit margins in the U.S., while increasing the cost energy companies pay to drill today’s complicated wells. On the other hand, those increased costs of steel pipe will erode profit margins of energy companies, and hurt their shareholders, customers and employees. In other words, it’s another case of crony capitalism, where the government is deciding winners (U.S. steel producers) and losers (U.S. companies who use steel and steel pipe as an input). 

Steel executives and a union leader have said unfairly more efficiently produced and lower priced imported steel could cost U.S. jobs, and numerous U.S. lawmakers have called or written the Commerce Department out of concern about the case. Speaking for the other side, energy company executives and a union leader said that low-cost foreign steel from Korea has enhanced their competitiveness and greatly helped their industry expand and grow as the U.S. shale boom has boosted their sales, business opportunities and jobs.  

To protect the U.S. steel industry from more efficient foreign competition, the Commerce Department assigned tariffs taxes of an extra 15.75% on the tubular steel products from Hyundai Hysco Co. and 9.89% for Nexteel Co.; Other Korean suppliers were subjected to punitive tariffs of 12.82%. As a result of the taxes on foreign steel, U.S. energy companies using steel pipe will face higher input costs and will therefore be less competitive and less profitable, which might likely result in fewer energy jobs for Americans. 

“We are deeply disappointed by the determination, which disrupts the current level playing field” with unfair high tariffs that will ultimately be paid for by American buyers of steel, said an official at the Korean embassy in Washington. “We had expected the U.S. government to lead by example and resist protectionist pressure from well-organized and politically connected U.S. steel producers. This provides one of the best recent examples of exactly the type of distortionary crony capitalism that makes the U.S. less economically efficient and worse off, not better off. We will consider every possible option to challenge this unfair protectionist decision favoring U.S. steel producers over U.S. steel buyers, including at the World Trade Organization.”

After news of the decision, U.S. Steel shares climbed 3.2% in price on Friday to $27.64 by the close, providing empirical evidence that successful rent-seeking, protectionist trade policies, and crony capitalism generate significant financial benefits for the shareholders of domestic industries who use the political process to artificially distort markets in their favor.  Offsetting the gains in the stock prices of American steel producing companies like U.S. Steel were losses on Friday for the stock prices of U.S. energy companies that rely on low-cost steel pipe from Korea as one of their main inputs.  

“We applaud their decision to prevent further gamesmanship of our laws hobble our more efficient rivals in Korea with artificially higher prices that will allow us to gain market share, and to secure our nation’s economy artificially higher, government-enhanced profits for our shareholders,” U.S. Steel Chief Executive Mario Longhi said. “As a result of rising imports of more efficiently produced, lower cost steel, United States Steel has suffered mightily: orders have been reduced, mills have been idled and jobs have been lost. We’re obviously not efficient enough to compete on our own merits, and we need the heavy hand of U.S. government intervention to survive. Our rent-seeking efforts are a great example of how crony capitalism works in America today to protect well-organized special interest groups of domestic producers against more efficient foreign competition.

The U.S. International Trade Commission will next decide whether the alleged dumping low-cost steel imports harmed the U.S. steel industry more than it helped U.S. steel-using industries and, if so, make the tariffs taxes on foreign steel permanent. Economic theory and overwhelming empirical case study evidence suggest that the economic benefits to the U.S. economy from cheap, foreign steel significantly outweigh the costs to the U.S. steel industry. Therefore, a protectionist outcome of permanent steel tariffs would result in a “dead weight loss” to the U.S. economy, and an overall net loss of jobs, profits, and economic benefits. 

It wasn’t immediately clear whether the tariffs would stop Korean firms from selling the product, known as oil-country tubular goods, or OCTG, to willing, loyal buyers in the U.S. market.

A complete shift from low-cost, more efficiently produced Korean steel to higher-priced U.S.-produced steel would raise the cost of developing a new oil well by between 1% and 4%, depending on the quantity and quality of steel tubes needed for it. Those higher production costs could results in higher energy costs for millions of American consumers and businesses, and a significant net loss of economic benefits.  

MP: This would be a good time to invoke the wisdom of French economist Frederic Bastiat:

Treat all economic questions from the viewpoint of the consumer, for the interests of the consumer are the interests of the human race.

If the viewpoint of the consumer, i.e. mankind, were seriously considered in the case of imported steel from Korea, there would be no question about the outcome – no government protection for the U.S. steel industry. And to get the lowest possible steel price for American consumers, we should welcome the Koreans to engage in as much “dumping” as they are willing to…. the lower the price they offer us, the better…. even if it’s below their cost of production… And if that’s really the case and they’re selling steel and steel pipe at a loss, we should gladly accept their generous gift of foreign aid to America, and stop complaining….

Update: Don Boudreaux sent a letter to the WSJ about the steel tariffs, here’s an excerpt:

The ostensible principle behind Uncle Sam’s action is that we Americans are made poorer when non-Americans act especially vigorously to increase our access to foreign-made products.  But this principle is economically insane.  People grow prosperous, not by rejecting, but by embracing enhanced access to goods and services, regardless of the sources of this enhanced access.

If the principle that motivates Uncle Sam to tax Americans who buy inexpensive imports were valid, then, for example, my household would be made poorer whenever I buy - rather than make myself - my own furniture and clothing.  After all, Ethan Allen and Nordstrom charge prices so low that they not only “hurt,” they destroy, my capacity to make for myself the goods that they offer for sale.  Should I perhaps, in my quest to grow more prosperous, hire my neighbor to threaten to shoot me whenever I seek out merchants willing to sell to me especially low-priced sofas and shirts?


Carpe Diem

Saturday afternoon linkage

1. Forbes’ Rich Karlgaard Says: Paul Krugman Is Dumber Than We Thought, and He Just Makes Stuff Up…..

2. Great Moments in Government Overreach: Aren’t You Glad That the USDA’s “Cherry Industry Administrative Board” Has a Stranglehold on the US Cherry Industry Such That Growers Need a Permission Slip from the Government to Sell Cherries?  Yeah, I Thought So…..

3. Good News: The DEA May Be Losing Political Support for Its Long, Cruel, Expensive, Immoral, and Senseless War or Weeds.

4. Charts and Graphs: a) Political Affiliation by Age in the US and b) Average Song Length, 1944 to 2010.

5. Musical Disintermediation: Country Superstar Garth Brooks Releases His First Album in 13 Years, and Will Skip iTunes and Release Digital Music Himself on His Website. Q: Why don’t more artists do this?  (HT: Morgan Frank)

6. Diminishing Returns to Fuel Economy: The EIA reports that switching from a 10-mpg vehicle to a 15-mpg vehicle saves more fuel than switching from a 25-mpg vehicle to a 75-mpg vehicle. Similarly, the cost savings of improving fuel economy from 12 mpg to 15 mpg are the same as increasing from 30 mpg to 60 mpg.

Carpe Diem

Uber/Lyft vs. taxis: Let the market decide, not taxi cartels and their government enablers — bureaucrats and legislators

taxiHoward Baetjer writes about Uber vs. taxis in his Freeman article “Value Creation vs. Regulation,” here’s an excerpt:

The benefits of free markets and the problems with government intervention are well illustrated by the unfolding story of smart phone-based car services such as Uber and Lyft. If we had free markets for city ride services….the preferred ride services—Uber and imitators—would thrive, and older, clumsier ways of connecting riders with cars would gradually disappear.

But we don’t have free markets for city ride services. Legislators and government bureaucrats have political authority to intervene in these markets. And the taxicab companies, whose profits—and even existence—are being threatened, are trying to use this authority to block or impede the creative destruction that is doing so much to improve the lives of city dwellers.

Note this well: The government’s authority to interfere in the business of city ride services, an authority ostensibly and officially meant to protect the public from inferior ride services, is being used in practice to impede public access to superior ride services. It illustrates the way government intervention is generally used: to benefit some special interest group—in this case the taxicab companies —at the expense of its customers and competitors.

What should be done? The markets for city rides should be set free. It is unfair to taxicab companies for Uber to charge market prices while taxis must charge what regulators decree. But the sensible response to this unfairness is not to burden Uber the way taxis are burdened, but to unburden the taxis and leave all ride services free to compete.

MP: As I’ve noted before, it’s important to remember that Uber and Lyft are already very heavily regulated ride-sharing services, and in some ways they are regulated even more intensely than traditional taxis  by a very ruthless group of regulators – the consumers who use their services. The issue really isn’t regulated versus unregulated ride services; the issue really is who is the primary regulator: a) government bureaucrats and legislators who are often captured by the regulated taxi cartels or b) consumers. And there’s no question that captured regulators almost always put the special interests of the well-organized, concentrated groups of regulated producers like the taxi cartel over the public interest of the dis-organized, dispersed thousands/millions of consumers.

Related: I’ve written before about how it appears that Uber’s presence in New York City is challenging the power of the city’s taxi cartel, and that challenge is being reflected in the fee to join the NYC taxi cartel – the market prices of NYC taxi medallions. The chart above shows the percentage increase since January 2004 in the auction-based value of the taxi medallion that allows an individual to operate a single taxi in the city’s heavily regulated protected market. A NYC taxi medallion that cost $241,000 in January 2004 is now worth more than $1 million ($1,045,000 in June 2014), reflecting a whopping 336% increase and an annual return on investment of almost 15%. In contrast, the S&P 500 increased by only 76% over that period, and has increased annually at a rate of only 5.4%. A $241,000 investment in the S&P 500 in January 2004 would only be worth about $424,000 today, less than half of today’s price for a NYC taxi medallion. As a recent Washington Post article pointed out, “Taxi medallions have been the best investment in America for years.”

But things have changed recently, since Uber and Lyft have started successfully challenging the NYC taxi cartel with price-cutting and intense “cut-throat” consumer-centered competition. As this Bloomberg article describes it, there’s been “an end to the dizzying rise” in the value of NYC taxi medallions, and you can see that in the graph above. In an unprecedented reversal of higher-than-stock market increases in medallion prices, individual NYC taxi medallion prices have been flat at about $1.05 million for the last 13 months starting in June 2013. Over the most recent 12-month period through June, the value of NYC taxi medallions have actually fallen by 0.56% from $1,051,000 to $1,045,000. At the same time, the S&P increased by 16.7%, and out-performed NYC taxi medallions as an investment over any 12-month period for the first time since at least 2004, and maybe for the first time ever?

Bottom Line: Expect more of this “creative destruction” in the ride service industry, and expect further declines in the value of NYC taxi medallions (and Chicago, Philadelphia and elsewhere) as Uber and Lyft challenge the taxi cartels.

HT: Warren Smith


Carpe Diem

Friday afternoon linkage

usoil1. Chart of the Day: The shale oil boom helped push US oil output in June to 8.456 million barrels per day, the highest level of domestic crude oil production in more than 27 years, going back to April 1987 during the Regan administration.

2. GDP forecasting (nowcasting): The Atlanta Fed now has a forecasting model – “GDPNow” – that provides updated, estimates of GDP growth ahead of the three official quarterly GDP releases from the BEA starting a month after the quarter ends. The current “nowcast” of real GDP in Q2 is 2.6%, after being updated yesterday with new wholesale trade data. (HT: Morgan Frank and see Jimmy P’s related post here.)

3. Take a Guess: Who Was Obama’s Biggest Campaign Contributor By Far in 2012 – Almost 50% Ahead of the No. 2 Contributor? You Might Be Very Surprised. Or Maybe Not.

4. Racial Disparity Weed Map: In six states and DC, blacks are more than five times more likely to be arrested for possessing weeds compared to whites, even though weed usage doesn’t vary by race. On average across all states, blacks are 3.7 times more likely than whites to be arrested for weed possession.

5. From Vanguard: Debunking five myths and misconceptions about index investing.

6. America, Here’s Your Drug War: DEA handcuffed a drug suspect and locked him in a cell for 5 days without food or water. Luckily, the guy got a $4.1 million settlement for his “near death” experience.

7. Milton Friedman (featured previously on CD): “The minimum wage law is most properly described as a law saying that employers must discriminate against people who have low skills. The consequences of minimum wage laws have been almost wholly bad. We have increased unemployment and increased poverty.”

8. Not All Police Are Warrior Cops Like in the US: According to Germany’s Der Spiegel, German police shot only 85 bullets in all of 2011 — 49 warning shots and 36 shots on suspects; 15 persons were injured, and 6 were killed. In contrast, US warrior cops have shot and killed more than 20 Americans so far this year, just as part of their drug enforcement operations, and they recently fired 84 shots at just one murder suspect in Harlem and another 90 shots at one fleeing unarmed man in Los Angeles.

9. Mixed-Raced Student Sues University of Connecticut. She Says They Lied to Her About Her “Merit” Scholarship to Secretly Promote Racial Diversity.

10. Inconvenient Chart: Global temperatures have been flat for more than 17 years (see smaller chart at the bottom right) while global CO2 levels have been increasing. Wasn’t there supposed to be a relationship?  co2

Carpe Diem

America, here’s your War on Drugs – St. Paul SWAT team kills two family dogs, finds no drugs, makes no arrests

Militarized police forces around the country now routinely conduct as many as 80,000 no-knock SWAT raids on the homes of Americans (that’s about 150-200 every day), mostly as part of our cruel, expensive, senseless and immoral War on Drugs Otherwise Peaceful Americans Voluntarily Using Plants, Weeds and Intoxicants Arbitrarily Proscribed by the Government. The news report above from KMSP-TV in Minneapolis-St. Paul provides details on one of the latest SWAT raids on the home of Larry Lee Arnman, owner of a St. Paul towing business and a self-admitted, occasional recreational user of weeds. Mr. Arnman, his two children, his 8-months pregnant girlfriend and their two family dogs were all at their home Wednesday morning when St. Paul SWAT team executed a no-knock, early morning raid on the family’s home, searching for drugs. Upon entering, the first thing the SWAT did was unleash a hail of bullets and execute the two family dogs, Mellow and Laylo (pictured below) in front of the family, who were understandably nervous and barking as the SWAT team broke down the door with a battering ram.

dogs2According to this report:

Officers proceeded to tear the house apart for hours. Besides the two dead dogs, the extensive damages included multiple broken doors, broken door frames, and walls with the insulation and vents ripped out.  All damages were left to the homeowner to cover.

And what did the SWAT team find after ripping the house apart? A huge drug stash, weapons, cash? Nope, they were only able to find a glass bong and some suspected marijuana remnants in a metal grinder. Were there any arrests on drug charges? Nope, in the wake of the SWAT team’s devastation and murder of the two family dogs, police could only come up with enough evidence to issue a $200 ticket.

Read other news reports about this Drug War tragedy here and here.

Related: In a recent SWAT raid in Tampa Bay over some small-time sales of weeds, Jason Wescott’s experience was much worse than Larry Lee Arman’s loss of his two family dogs, a damaged home and terrorized children and pregnant girlfriend. Mr. Wescott was shot and killed by the Tampa Bay SWAT team that executed a no-knock search warrant on the 29-year old’s home. Despite police assertions that Westcott was a weed dealer, the SWAT team found only 0.2 grams — approximately $2 worth — of weeds in the house. Further, the weed purchases that preceded the raid were made by an informant (not undercover police), who had purchased less than $200 of weeds during previous visits to Westcott’s house over four months. Unfortunately, Jason Wescott has the distinction of becoming the 25th American to die in US domestic drug law enforcement operations so far this year.

MP: In a supposedly free, civilized society can we really justify 80,000 SWAT raids every year, often resulting in Americans and their dogs getting gunned down in their homes, so frequently in the futile search for small amounts of weeds? As I’ve said before, I’m confident that in a future, more enlightened, advanced, open-minded and tolerant America, we’ll look back on America’s Drug War and deadly SWAT raids like the two featured above that often result in death for Americans and their family pets, with shame, contempt and embarrassment for such cruel, intolerant and inhumane treatment of our fellow-man.

Related: Here’s a report with a great question: “Why are police shooting so many family dogs?” For example, a Salt Lake City police officer recently entered a man’s fenced backyard looking for a neighborhood boy who they mistakenly thought was missing (he was actually asleep in his own home).  shot and killed Geist — the man’s 110-pound Weimaraner dog — on his private property! Hundreds of pet owners and animal lovers in Salt Lake City have been protesting this cruel shooting of a family pet in his own backyard!

Carpe Diem

Beer milestone: US now has more than 3,000 breweries; welcome to the ‘Golden Age of Beer’

breweries The Brewers Association reported yesterday that:

The American brewing industry reached another milestone at the end of June, with more than 3,000 breweries operating for all or part of the month (3,040 to be precise). Although precise numbers from the 19th century are difficult to confirm, this is likely the first time the United States has crossed the 3,000 brewery barrier since the 1870s. The Internal Revenue Department counted 2,830 “ale and lager breweries in operation” in 1880, down from a high point of 4,131 in 1873.

What does 3,000 breweries mean? For one, it represents a return to the localization of beer production, with almost 99% of the 3,040 breweries being small and independent. The majority of Americans live within 10 miles of a local brewery, and with almost 2,000 planning breweries in the BA database, that percentage is only going to climb in the coming years.

Secondly, it means that competition continues to increase, and that brewers will need to further differentiate and focus on quality if they are going to succeed in a crowded marketplace. While a national brewery number is fairly irrelevant without understanding local marketplaces, 3,040 breweries could not happen without increased competition in many localities.

MP: In addition to the animated graphic above, there’s an interactive chart of the annual brewery count from 1873 to 2014 here. Note that in every year from 1977 to 1984 there were fewer than 100 breweries in the US, and the low point was 1978, when there were only 89 breweries. By 2007, there were about 1,500 breweries, and that number had doubled to more than 3,000 in less than 7 years! There’s never been a better time to be a serious beer drinker than today, given the awesome selection of craft beers from every part of the country. Welcome to the Golden Age of Beer - there’s no stagnation for this part of the economy!

Carpe Diem

Who’d a-thunk it? Universities support leftist campus groups while denying funds to conservative and libertarian clubs?

From the Ann Arbor Journal:

The University of Michigan has settled a lawsuit brought by a student libertarian club after the university spent thousands supporting leftist campus groups while denying funding to campus conservative and libertarian clubs.

The university agreed to pay the U-M Young Americans for Liberty (YAL) a sum of $5,000 plus attorney fees for denying the student group funding toward an event hosted by anti-affirmative action activist Jennifer Gratz. Gratz spoke about the importance of intellectual diversity at the University last October. The student government denied YAL’s request for financial support of Gratz’s visit, citing a policy of not funding “political” events.

YAL filed suit when they discovered the student government had approved funding for a radical pro-affirmative action group’s bus trip to Washington D.C. to protest at the U.S. Supreme Court in favor of affirmative action. The university funded multiple other “political” events in support of immigrant rights, Islamic groups, etc.

“Too few students have the courage to stand up for diversity of opinion and thought when bullied, intimidated and silenced by zealous university officials intent on imposing their views,” Gratz stated in reaction to the settlement. “The YAL students at the University of Michigan refused to accept discrimination and stood up for their right to equal treatment. The university recognized they would lose in court and quietly settled the matter. The U-M YAL students truly are the ‘victors valiant’ for standing up for the rights of all students.”

Here’s a copy of the settlement.

Carpe Diem

Markets in everything: A cooler for the 21st century, and an excellent example of 21st century capitalism

This is a great example of 21st century capitalism at its finest – a young entrepreneurial designer has a great idea for a new product – The Coolest, a cooler for the 21st century – and he needs $50,000 in funding to launch the product and bring it to the market. He promotes The Coolest on the crowd-sourcing website Kickstarter (which has helped raise more than $1.2 billion now for more than 65,000 successfully funded projects), and has already raised more than $1 million, and there are still 50 days to go before the August 29 deadline.

What exactly is the “The Coolest“? As you can see in the video above, it’s an amazing 60 quart cooler with the following features: a rechargeable blender, a built-in bottle opener, lighting, a USB charger for your smart phone, a removable waterproof Bluetooth speaker, a bungee tie-down strap to help transport your gear, a cutting board, a built-in storage compartment for plates, heavy duty wheels, etc.

In just the time it took me to write this post, the Kickstarter project has generated more than $10,000 in new funding from more than 150 new investors! For pledging $180 towards the project, you’ll get one of The Coolest coolers as soon as they’re available.

HT: Morgan Frank

Carpe Diem

It’s easy to ‘beat the market,’ even with index funds

Vanguard Index Funds 10-year Return Expense Ratio $10,000 Investment In 2004
FTSE Social Index 6.31% 0.28% $18,439
S&P 500 Index 7.70% 0.05% $21,134
Value Index 7.86% 0.09% $21,311
Large-Cap Index 8.18% 0.09% $21,952
Total Stock Market Index 8.42% 0.05% $22,444
Growth Index 8.43% 0.09% $22,464
REIT Index 9.81% 0.10% $25,493
Small-Cap Index 10.21% 0.09% $26,437
Mid-Cap Index 10.32% 0.09% $26,702
Extended Market Index 10.33% 0.10% $26,726

A series of recent CD posts (here, here, here, here and here and here) focused on the general inability of actively managed stock portfolios to out-perform or “beat the market” over long periods of time, after adjusting for risk, expenses and taxes. For example, according to this document from Index Fund Advisors, “In two 30-year studies, the S&P 500 outperformed 97% and 94% of managers.” That quote illustrates that “the market” is most frequently measured by the S&P 500 index, which is the best single measure of large capitalization US equities, and captures about 80% of the total available stock market capitalization.

As I pointed out in this post:

An S&P 500 Index fund will have average risk, i.e. “market risk” or the risk of holding a diversified portfolio of large cap equities. Some managed equity funds that “beat the market” over certain holding periods might do so by investing in portfolios that have higher than average risk. But that’s to be expected and not necessarily evidence that managed funds are superior to index investing. A complete comparison would have to control for fees, taxes and risk, and on a risk-adjusted basis, after taxes and fees, most managed funds won’t out-perform index funds over long holding periods.

For investors who want greater risk than the large cap S&P 500 Index (which had an annual return of 7.8% over the last ten years), they can easily switch to (or add) the Vanguard Small Cap Index Fund (10.21% annual return over the last ten years), the Vanguard Mid Cap Index (10.32% return over the last ten years). For investors who want less risk, they can switch to (or add) the Vanguard Total Stock Market Index (8.37% per year for the last decade). For investors who want international exposure they can invest in the Vanguard Total International Stock Index, the Vanguard Developed Markets Index, and the Vanguard Emerging Markets Index.

So even though the S&P 500 Index is the most popular stock index, there are many other index alternatives to achieve less/more risk and to gain international exposure. There are also sector alternatives like the Vanguard REIT Index to get exposure to US real estate. Just like active managers can’t consistently beat the S&P 500 Index for large cap stocks, it’s unlikely that they can beat the index funds for small caps, mid-caps, the entire stock market, or the international indexes, after adjusting for expenses, taxes and risk.

The table above helps to illustrate how it’s possible to “beat the market” using Vanguard index funds, if we measure “the market” by the return on the S&P 500 Index. Actually, Vanguard, the industry leader in index mutual funds, offers 28 different stock index funds besides the most popular S&P 500 index fund, including the funds featured in the table above.

The table displays all of the domestic Vanguard stock index funds that have a ten-year history (updated), and all of the index funds except the FTSE Social Index Fund (and index of stocks that have been screened for certain social, human rights, and environmental criteria) generated higher average annual returns than the S&P 500 index fund over the last decade. Investors who are willing to take on more risk could have easily “beat the market” over the last decade by more than 2.5% per year by investing in the Vanguard Small-Cap Index (10.21% return vs. 7.7% S&P 500 return), the Vanguard Mid-Cap Index (10.32% vs. 7.7%) or the Extended Market Index (10.33% vs. 7.7%). Those three, higher-risk index funds would have grown to more than $26,000 from an initial investment of $10,000 in 2004, and would have generated more than $5,000 in additional funds compared to a $10,000 investment in the S&P 500.

Perhaps it’s possible that when some active funds managers (including university endowment managers) claim to “beat the market” they are really only earning a higher return than the S&P 500, and not necessarily beating the other stock market index measures like the Small-Cap and Mid-Cap Indexes. It’s also the case that any investor can easily “beat the market” (i.e. beat the S&P500) by simply investing in other passive index funds that track small and mid-size companies. In either case, whether it’s professional fund managers, or individual investors, you can easily “beat the market” by taking on more risk than the stocks in the S&P 500.

Bottom Line: The investment choice isn’t between investing in the S&P 500 index vs. investing in actively managed stock funds. Rather, it’s a choice between using index funds with a variety of risk, global and sector exposure (e.g. real estate) vs. using actively managed funds. As I mentioned before, the fact that 70% of US investors hold NO index funds suggests to me that: a) many/most investors remain uninformed about the significant cost and tax advantages of index funds over actively managed funds and/or b) many professional investment advisers have not yet sufficiently promoted the significant advantages of index investing to their clients.

Update: The table and post have been updated in response to a comment by “Waytoocrispy” that the original post was “very misleading” because the table “conveniently left out other Vanguard index funds that underperformed the S&P 500.” Well, except for the Social Index Fund, which as a niche, specialty fund might be expected to under-perform the S&P 500, there are no domestic Vanguard stock index funds with a 10-year history that have generated returns lower than the S&P 500. And that confirms my main point – for investors who want to “beat the market” (i.e. get a higher return than the S&P 500), they can easily accomplish that goal with any domestic stock index fund besides the S&P 500 index.

Carpe Diem

Recent national test data (NAEP, SAT) refute the claim that “there just aren’t gender differences in math performance”

2013 Naep Test for 12th Graders Male Female M-F Difference Prob.
Math Composite 155 152 3 0.0014
Math – Algebra 155 155 0 0.7392
Math – Statistics and Probability 155 151 4 0.0001
Math – Geometry 156 151 5 0.0000
Math – Number Properties 151 147 4 0.0000
Reading Composite 284 293 -9 0.0000
Reading – Literacy Experience 274 287 -13 0.0000
Reading – Gain and Use Information 288 296 -8 0.0000

Claims are often made by gender activists like UW-Madison psychology professor Janet Hyde that “There just aren’t gender differences anymore in math performance. So parents and teachers need to revise their thoughts about this. Stereotypes are very, very resistant to change, but as a scientist I have to challenge them with data.”

Well, I’d like to challenge Professor Hyde by looking at some recent data that suggest exactly the opposite – boys consistently outperform girls on standardized math tests. Oh, and by the way, girls outperform boys on standardized reading tests.

The table above presents the most recent results from the National Assessment of Educational Progress (NAEP) for mathematics and reading tests administered in 2013. According to the US Department of Education:

The schools and students participating in NAEP assessments are selected to be representative of all schools nationally and of public schools at the state level. In 2013, more than 92,000 twelfth-graders were assessed in either reading or mathematics. The national sample of schools and students is drawn from across the country. The results from the assessed students are combined to provide accurate estimates of the overall performance of students in the nation and in the 13 states that volunteered to participate in the twelfth-grade state pilot program.

The table above displays test results for the 2013 mathematics and reading tests administered to a representative group of 92,000 12th graders, and show male high school students outperformed girls on the mathematics composite test, while high school girls outperformed boys on the composite reading test. Both of those gender differences were significant at the 0.01 level of statistical significance, meaning that there is less than a 1% chance that we would find these results purely by chance; or we could say that we can be more than 99% confident that these gender differences in test scores are due to real gender differences in academic aptitude and not due to chance.  Interestingly, test scores on the algebra section of the mathematics test did not show any significant gender differences, but scores on the other three sections (statistics and probability, geometry, and number properties) did show highly significant gender differences in mathematical ability. For the NAEP reading assessment, girls outperformed boys on the composite test and the two sub-section categories, and those differences were highly statistically significant.

One of the biggest challenges to the “persistent gender differences in math performance deniers” like Janet Hyde is how to explain the statistically significant gender differences for scores on the math SAT test, which have persisted for generations, see chart below.

satFor the last 42 years, male high school seniors have outperformed high school girls on the math SAT test by a statistically significant average of almost 35 points. How do the “gender differences in math performance deniers” explain the historically persistent gender difference in math SAT scores? Here’s how Professor Hyde tries to explain the very inconvenient truth that male high school students consistently outperform their female counterparts on the math SAT test:

The fact that boys score better on the math SAT than girls has been widely publicized, contributing to the public’s notion that boys truly are better at math. But Hyde and her co-authors think there’s another explanation: sampling artifact.

For one thing, because it’s administered only to college-bound seniors, the SAT is hardly a random sample of all students. What’s more, greater numbers of girls take the test now than boys, because more girls are going to college.

“So you’re dipping farther down into the distribution of female talent, which brings down the average score,” says Hyde. “That may be the explanation for (the results), rather than girls aren’t as good as math.”

But there’s a serious and fatal flaw with the bogus “sampling artifact” explanation of boys consistently outperforming girls on the math SAT — if it was true that an increasing number of girls taking the SAT test over time was increasingly “dipping further down into the distribution of female talent,” that would suggest that female scores on the math SAT test should be going down. But as can be seen on the graph above, average female test scores have been rising over time, not falling. So the “sampling artifact” explanation really isn’t consistent with the female math SAT test score data over time.

Further, even if the “sampling artifact” could explain why average female SAT math test scores were lower than average male test scores, I would have to challenge Janet Hyde with the data in the graph below showing that boys outperform girls for perfect, or near-perfect, math SAT test scores by a ratio of about 2:1. That is, even if an increasing number of female test-takers was lowering average female test scores “dipping farther down into the distribution of female talent,” the “sampling artifact” explanation can NOT explain the gender math differences favoring males at very high levels of mathematical aptitude.

satratio To paraphrase Janet Hyde, I would say that psychology professors, parents and teachers need to revise their thoughts about this and accept the fact that male math aptitude could be significantly greater than female math aptitude, especially for very high levels of mathematical performance, i.e. several standard deviations above average ability. Stereotypes about no gender differences in mathematical and verbal abilities are very, very resistant to change, but as a scientist I have to challenge them with data. And the data suggest that males have greater mathematical abilities than females on average, and especially in the upper tails of mathematical abilities, and females have greater verbal abilities than males.

Related: Watch my video classic below “Boys vs. Girls on the 2010 Math SAT”: