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Archive for the ‘Economics’ Category

Today’s Times details the extensive donations that Michael Bloomberg has made to his alma mater, Johns Hopkins University — over 1 billion dollars! This is totally nutso. Yet, it is relatively common for highly selective universities to get giant donations from rich alums.

This is bad for a variety of reasons:

  1. College is probably not the best place to use your dollars if your goal is societal improvement. By the time you get to college, your life track, income, etc. is pretty much set within a narrow range of outcomes. It’s probably better to spend your money improving early childhood and elementary schools.
  2. If you assume that college is still quite important for other reasons, don’t fund Johns Hopkins (or Harvard or Yale or wherever). Your return-on-investment there is pretty bad, since these institutions coast on reputation. Why not give to community colleges instead — which are always hurting for cash and have lower attrition rates than four-year colleges? Additionally, the students that attend Hopkins or Harvard or Yale already have lots of breaks in their favor? Why not give a break to the students at the margins of success who need it more?
  3. Additionally, the highly selective undergraduate institution relies on cartelization to keep its prestige. Harvard, with its $34B endowment, could reasonably educate a lot more people than it does now. Instead, it limits who can attend with unnecessary precision. Can’t dilute the brand! If that’s the case, why keep giving so much to an institution that will do so little with your money?

So, if this is so bad, why do we do it?

  1. Sentimentality (or availability bias): Michael Bloomberg got a lot out of Hopkins; he wants to show his appreciation. He loves the place and has fond memories. As such, he wants to give money.
  2. Our tax code: By giving the money away, Bloomberg gets a legacy that he doesn’t have to lose upon death (estate tax). Additionally, he gets to deduct those donations from his massive income.
  3. Prestige: Rich people love giving away money when they can slap their name on it. (Not so much when they can’t, see, e.g., Donald Trump.) Additionally, we shower people with attention for their donations.

All these factors lead to a quite inefficient distribution of wealth to higher education. Hopkins has a $3B endowment; it educates 5,000 undergrads and 2,000 grad students a year. The University of Maryland-College Park has a $792M endowment; it educates 26,000 undergrads and 10,000 grad students a year. I can’t find statistics, but I would hazard that the parental income of a Hopkins student is higher than the parental income of a Maryland student. I would also hazard that the percentage difference in income of a student who was waitlisted at the university and got in vs. a student who did not is bigger at Maryland than at Hopkins.

Which is all a long way of saying that donations are vastly inefficient ways to redistribute wealth, and we should just tax people a lot more. I’m not saying that central planning is a better way to distribute wealth; plenty of this money could just be block-granted to states/municipalities with some strings (i.e. required income reporting, tracking students after graduation, etc.).

Philanthropy may sound good, but a system with a lot of big-dollar philanthropy probably isn’t equitably distributing wealth in the first place.

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The term “black swan” refers to an event that has enormous impact and is rare and difficult to predict. The prime example used by Taleb is 9/11 — an event of outsize importance that typical risk analyses would have been unable to predict or identify. There’s a fair amount of focus now on black swans, how to predict and control for them.

Sometimes, though, we are looking for black swans when we should be looking for white ones — events that have enormous impact, but that are neither rare nor particularly difficult to predict. An event like the Newtown murders may feel like a black swan — who could have predicted? But the preconditions for the event make it more of a white swan than a black one. For one, mass gun violence is relatively common in America; about 80 people die every day from gun violence. Although it is tragic that 27 murders and 1 suicide occurred in one place, and that many of the dead are children, it is not extraordinary in a world where gun violence occurs with regularity.

As long as it is easier for a mentally disturbed young man to get a handgun than mental health treatment, President Obama’s exhortations that we will do more to protect children strike me as hollow. Gun control laws have been eviscerated by the Supreme Court, and the gun lobby’s loud voice in the public conversation make movement on that front almost unimaginable. Mental health treatment is only slightly more likely, and my guess is that such laws would be targeted at committing people to quasi-incarceration rather than actually providing therapeutic treatment.

We cannot predict mass murder with precision, of course, but we can say with some probability that murders with guns will occur regularly through the day, week, month, year, etc. Without concerted efforts to either reduce the availability of firearms or increase the availability and reduce the stigma of mental health services, mass murder will continue to be a white swan rather than a black one.

(On the gun control topic for a second, I get all the 2nd Amendment stuff — we need to have firearms in case we need to overthrow the government. Sure. But a state monopoly on violence goes a long way to reducing violence among the populace. If this is an explicit trade-off being made, then fine, but I don’t think we have properly costed in the price of lost lives and mental/physical trauma.)

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With each financial scam/hoax/fraud, we hear people decry capitalists not acting as they once did — with honor and so forth. David Rhode has a new short piece for the Atlantic about this topic regarding the Libor scandal. In summary, bankers are behaving unethically and their lack of ethics hurts all of us. And I basically agree with that.

I do take issue, however, with the idea that somehow the past was better. Remember that time when Jay Gould tried to corner the gold market? Remember that time when rampant speculation and poorly regulated credit markets led to the Great Depression? (Oh yeah, did I mention that a bunch of financial wizards tried to overthrow the government?) The amorality of the S&L is on par with the amorality of today.

Capitalists have always pursued profit above all. That’s the point. It would be folly to expect them to do otherwise. That’s exactly why blunt, dumb regulations, rather than public scoldings, are needed to hold the line.

 

David Rohde

David Rohde – David Rohde is a columnist for Reuters, two-time winner of the Pulitzer Prize, and a former reporter for The New York Times. His forthcoming book, Beyond War: Technology, Economic Growth and American Influence in the New Middle East will be published in March 2013. More

The Libor Scandal and Capitalism’s Moral Decay

By David Rohde

Jul 13 2012, 2:45 PM ET 181

The scandal engulfing the financial industry is yet another sign that our business leaders no longer respect the rule of law. 

615_Scales_of_Justice.jpg

Reuters

Maybe the acronym at the heart of the scandal is too confusing. Or Americans are simply tired of hearing about greedy bankers. By any measure, though, the Libor bank scandal is an extraordinary example of the 1 percent stealing from the 99 percent – and our crumbling ethics.

If an organized crime group was accused of breaking into the Nassau County Treasurer’s Office on New York’s Long Island and stealing $13 million, outrage would be widespread. And if the same group was accused of stealing millions from the City of Baltimore and other struggling municipalities, they would emerge as an issue in the presidential campaign.

Instead, the Libor scandal is emerging in dribs and drabs and drawing little public attention. The middle class is being victimized, and there is little protest.

Last month, the British bank Barclays agreed to pay $453 million to American and British authorities to settle allegations that it manipulated key interest rates for profit between 2005 and 2009, specifically the London Interbank Offered Rate, or Libor. American and British investigators are now examining whether traders at a dozen other banks — including the “too-big-to-fail” U.S. banks JPMorgan, Citibank and Bank of America — also manipulated rates.

It is hard to overstate the impact of the Libor benchmark, which is used to value some $360 trillion in loans and financial contracts worldwide. It affects lending to governments, businesses and consumers, and even student loan and credit card rates.

So Barclays’ victims weren’t just other banks and traders. They included taxpayers in dozens of communities who are believed to have paid millions more in interest than they should have at the height of the financial crisis. Teachers and other public servants may have been laid off because of bankers’ pursuit of ever-higher profits.

Lawsuits filed by the City of Baltimore and dozens of other parties against Barclays, JP Morgan, Bank of America, Citibank and Deutsche Bank have been consolidated into a single case in a New York federal court. Banks are denying any wrongdoing, and the true scope of the losses — and the role of American banks — is expected to emerge in the complex legal battles ahead.

I do not believe all bankers are evil. I admire business owners who innovate, create jobs and strengthen communities. But theft — whether the perpetrator is clad in a business suit or blue jeans — is theft.

And let’s not kid ourselves. Our ethical decay stretches beyond Wall Street. It spans industries, political parties and groups. In April, systematic bribery by executives of the U.S.’s second-largest company – Walmart – was reported across Mexico. In June, American sports officials accused cyclist Lance Armstrong of engaging in a massive doping conspiracy. And Jesse Jackson Jr. appears to be the fifth member of Congress to be embroiled in an ethics scandal in two years.

Around the world, a globalized economy is creating planetary-sized profits — and relentless pressure. A May survey by Ernst & Young of 400 chief financial officers around the world found that a growing number of them were willing to pay bribes and falsify their firm’s financial performance to survive the financial downturn.

The number of chief financial officers who said they would engage in bribery to stay in business grew from 9 percent in 2011 to 15 percent in 2012. And the number who said they would misstate their company’s financial health to get though a downturn rose from 3 percent in 2011 to 5 percent in 2012.

“One of the most troubling findings of the survey is the widespread acceptance of unethical business practices,” Ernst & Young said in a statement. “It is particularly alarming that respondents are increasingly willing to make cash payments.”

Corporate boards and other overseers, meanwhile, appear to be looking the other way. Eighty-one percent of those surveyed worldwide by Ernst & Young said anti-bribery and anti-corruption codes of conduct were in place in their companies. But nearly half said they did not believe employees had been punished for violating those polices.

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Politifact reminds me of Michael Scott when he’s trying to roast; they are so eager to roast and find “lies” that they don’t do any deeper introspection on the substance of the statements they are evaluating.

Consider, for instance, their recent 4-Pinocchio rating for the old chestnut that “women make 77 cents for the same job as men.” Take this, exaggerating Obama:

The Obama campaign took a legitimate statistic and described it in a way that makes it sound much more dramatic than it actually is. The 77-cent figure is real, but it does not factor in occupations held, hours worked or length of tenure.

BOOM! ROASTED!

Well, except look at those caveats–(1) occupations held; (2) hours worked; or (3) length of tenure. If we look at BLS occupation figures, (warning: PDF!) we see that women are still pulling down less than men in a variety of categories, so how might those three factors play into this equation?

  • Occupations held: Well, this is a problem, except even in the most specific BLS figures the disparity exists. Female chief executives make 69% what male chief executives make. Unless there is some massive difference in the types of “first-line supervisors of retail sales workers,” women are still making 79% of what their male counterparts make. That’s a pretty specific job type, and yet, the disparity still exists. Now, there’s no way of knowing exactly which job they hold; (PDF) research suggests that within the same establishment, wage gaps are smaller, but the overall pattern still holds that women are paid less than men for similar occupations regardless of establishment. So is Politifact right that the 77-cent figure for “the same work” is false? I mean, maybe, but the real figure might be something like 80-cents. How much better is that?
  • Hours worked: Well, it’s hard to say for hours worked; those pesky women are always taking so much more time off! Or not. BLS figures show that there’s a small difference in aggregate hours worked, but the difference between 8.2 hours and 7.8 hours, even considering overtime, doesn’t make up for the 23-cent gap, and as part-time employees, women actually work more than men. Plus, in “white-collar” occupations where hourly wages don’t matter (managers, supervisors, chief executives, elementary school teachers, accountants, social workers), women still earn less than men. Maybe they’re also working fewer hours there, which is why their companies reward them less. Or maybe something else. But they definitely earn less for similar work, if not the same.
  • Length of tenure: This one pisses me off the most. Maybe those lower-paid women have not worked there as long. True! But is that “not the same job”? A seventh-year teacher and a third-year teacher/cashier/clerk/nurse are doing the “same work.” They do, however, have different levels of seniority. And it turns out that men get promoted at a much higher rate than women (10.6% of men get promoted, as opposed to 7.6% of women), even though their wage growth at each level of promotion is similar. Again, this could be because men are just much better, hard-working, committed, etc. to their jobs than women. Or, perhaps, it could be that there continue to be discriminatory hiring, firing, and promotion practices at these establishments.

The point of this whole exercise is to illustrate that Politifact’s urge to get Obama in a hits-generating BOOM! ROASTED! moment has actually obscured the truth behind the statement. Just because it is difficult to get an exact comparison of apples-to-apples, doesn’t mean that women aren’t working for less pay doing essentially the same job. The bottom line is: women are promoted less often than men, earn less money than men in similar occupations (or “the same work”), and are subject to discriminatory hiring, promotion, and pay. Even if the 77-cent figure did take into account those three missing factors, it would still hit pretty close to the mark.

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A look at the latest market cap numbers for Facebook’s IPO suggest that Facebook’s total shares are worth >$100 million–more than Amazon, Visa, and McDonald’s. This seems fucking crazy.

Consider Facebook’s price-to-earnings ratio. At $100 billion/($205 million*4 quarters), that’s a P/E ratio of 100. (Yes, I know P/E ratio is not a great indicator of true stock value, but it is a great comparison of how a company is doing compared to how stock speculators think the stock is doing.) Which means that everyone thinks Facebook’s profits are going to skyrocket:

Sundaram says judging from this price these investors seem to believe that the company’s profits will double, and then double again, and then double again — all within the next few years.

For that to happen, Facebook will need to attract 10 percent of all advertising dollars spent on the planet “across all media – print, billboards, radio, television, Internet,” Sundaram says. While this is theoretically possible, Sundaram says it’s “an extremely low probability.”

Last year, Facebook had just over $3 billion in global ad sales. TV ad sales in the U.S. alone last year were $68 billion.

Facebook has convinced investors that its 1 billion users and deep data mining on its users will make it an advertising gold mine. Unfortunately for Facebook, it’s not a fledgling start-up with lots of room to grow. Instead, Facebook is plateauing, without a clear vision of how advertising will expand at a dramatic rate.

I’m not saying that buying Facebook stock is a bad bet. It may well be a good bet, as everyone else seems to be betting the same thing, thus raising stock prices. Irrational exuberance is all part of the game. But I am wondering why people consider Facebook such a “sure thing.” As far as I can tell, Facebook doesn’t actually make that much money, which doesn’t seem to be a recipe for long-term success.

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Do they need our charity?

President Obama has released his tax returns–that ever-strange feature of American politics. Yet, the tax return gives us an interesting view into one bit of our tax law that needs substantial reform: the charitable donation. As you’ll note from my shoddy circling, President Obama donated $5,000 to Sidwell Friends School. If that name sounds familiar, it’s because the President’s daughters attend that school.

Now, Sidwell Friends School is a private school with high tuition ($31,960 a year). Do they really need additional funding? Or perhaps, put differently, do they deserve tax-deductible charitable giving?

Furthermore, to what extent can this really be considered charitable giving? Presumably, this is much closer to a quid pro quo relationship — the school, I imagine, strongly encourages parents to donate additional money to the school. Might those parents donate expecting special or different teacher? Might the school have incentives for treating the students of donors differently than those who merely pay tuition?

I’m not impugning the President’s motives here, but his public tax returns give us an opportunity to take a magnifying glass to someone’s tax returns other than our own. Consider that the President and First Lady gave as much money to Sidwell Friends as to any other charity, save the Fisher House Foundation (an excellent organization that runs comfort homes for military and VA hospitals). Does an elite private school really deserve an extra $5,000? Does an Ivy League university? And more importantly, should the American taxpayer be partially financing these types of donations?

We have a system that encourages charitable giving, but does not interrogate closely the reasons or purposes of the charities themselves. As a result, non-profit organizations and charities can easily serve as tax shelters to fund trips, meals, and other expenses for their operators.

The charitable deduction is not necessarily a way of funding charities; it is definitely a way to subsidize (mostly) the rich to make decisions about investments they wish to make. After all, only the rich benefit substantially from the itemized deduction; those of us taking the standard deduction (about 70% of taxpayers) don’t deduct much for our charitable donations. Should we really allow people to deduct for donating to, say, the opera (an organization that overwhelmingly benefits the rich)? The Center for American Progress or the Federalist Society (essentially political advocacy organizations)? Churches and other religious organizations? A private dinner club?

Again, I’m not saying that giving to charity is bad; I myself donate to charities. But, we do need to think more about why we subsidize charities and the outcomes that those subsidies create. Are we OK with subsidizing the ability of the rich to give money to organizations they like? Are the bad outcomes (such as non-profit bloat, fraudulent organizations, tax shelters, and charities that benefit the rich and privileged, etc.) worth the good ones (such as civic participation, communitarian values, market-driven donations, and charities that benefit the poor and underprivileged)? Like I said, I don’t know the answer to these questions, but it’s important that we ask them rather than act as if the charitable deduction must be a universal positive.

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Why can’t everyone have beautiful things?

Unlike other areas of popular arts — film, music, etc. — where the barriers to entry have gotten lower and the price point has allowed for mass enjoyment, high art remains an area locked away in the homes of the rich and tucked into the sterility of the museum.

I can’t get a Rembrandt or a Rauschenberg to hang in my house, or if I did, it would cost a prohibitive sum. Sure, I could get a poster, but it wouldn’t have the depth or interest of the real thing, or even of a decent copy.

Thomas Kinkade was a philanderer, a hypocrite, and a sanctimonious jackass, but certainly if adultery, hypocrisy, and sanctimoniousness disqualify you for being a great artist, we wouldn’t have many to go around. His art, admittedly, was not the finest of anything — mostly the kind of cozy village scene or sun-dappled coastline that all middle Americans wished their communities looked like: equal parts Dickens, Grovers’ Corner, Hudson Valley School, and pastels (good Lord). It’s a particularly retrograde blend of lens flare and over-luminosity that feels to me like watching a JJ Abrams movie … with glaucoma and a pastel palette.

Yet, the art snobs who look at Kinkade with disdain ignore that Kinkade dedicated himself to a market that they had largely ignored — what the 99 percent actually want. Now, to be fair, Kinkade’s pricing system of tiered “limited editions” definitely created the same kinds of pricing and financing schemes that the housing bubble did, where “investors” believed (and still believe) that their paintings’ value will inevitably rise. But like predatory lenders and developers, he was addressing a demand unaddressed by the broader market — Americans wanted beautiful things that they could show off to people who entered their houses, and they wanted to look at beautiful things on a daily basis.

The art world refused to provide that, focusing on the Venetian Bienniale and “big art,” on skyrocketing prices for Damien Hirst and Jeff Koons and their titillating ilk. Much of the great art since the Renaissance was founded on a clientele of the small businessman and the petit bourgeois, from the local merchants who commissioned Dutch masters to paint their portraits to the tiny collectors dotted across Provence who picked up Cezannes and Van Goghs. Today, the art world has returned to the Renaissance-era patron, the super-client rather than the myriad horde.

Matt Yglesias has a schtick about lower-quality goods in higher-quantity, which raise overall utility and satisfaction. I don’t know if I always buy that argument, but in Kinkade’s case, he was producing an inferior good that was able to reach many more people, the store-brand art that you could enjoy in your home on a regular basis.

Kinkade was no saint, but he highlighted a problem with the way that visual arts in particular conceive of their purpose and their audience. Rembrandt and Warhol had no problem churning out work from a factory to give more product to a yearning populace. Instead, the art world of today is largely frozen in private collections and snooty museums, only occasionally glimpsed by the rest of us. Kinkade gave us art in the shopping mall, art through the mail, art a click away. Warhol, Rauschenberg, and Liechtenstein thought they were making mass art, but it was Kinkade who truly brought it to the masses. For that, he deserves our recognition, even if not our gratitude.

P.S. If you haven’t read the Susan Orlean piece on Kinkade, it’s worth the (long) read.

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