Felix Salmon

The ethics of accepting BP’s money

Felix Salmon
Sep 20, 2010 19:46 UTC

There are serious ethical questions surrounding whether or not investors should own stock in BP. But is it also unethical for art galleries and museums to accept money from BP? Time’s Frances Perraudin gives the people who think so a lot of sympathetic space:

The cozy relationship between the arts and major corporations has often proved a controversial issue. But now, thanks to the Gulf of Mexico oil spill, protesters — already angered by oil’s role in climate change and human rights abuses — are focusing their crosshairs on BP…

“It’s so galling to see every single cultural attraction in London that I care about stained with this horrible, horrible sponsorship,” says Liberate Tate member Tom Costello…

Critics accuse BP of using blockbuster exhibitions and arts awards (the highlight of the National Portrait Gallery’s year is the “BP Portrait Award”) to direct attention away from their environmental and ethical crimes. “These sponsorship deals give companies like BP the social license to operate,” says Dan Gretton, co-founder of Platform, an arts and research charity that puts pressure on arts organizations to dump their oil partners. “Having these links with cultural organizations is a way for them to launder their image.”

I’ve always thought of arts sponsorship from the likes of Phillip Morris and BP as the silver lining to their unpleasant activities. Yes, the sponsorship is a form of image laundering — but hey, if image laundering results in millions of dollars being spent on worthy arts organizations, what’s not to like?

I’m sad to see entities like the Tate being vilified for accepting money from BP. The job of the Tate is to present great art to the public, not to adjudicate on questions of corporate worthiness. There’s no inherent conflict between accepting BP’s money and exhibiting art. So if BP wants to assuage its guilty conscience by sponsoring a slew of arts organizations, let it do so. The alternative is to simply let that money flow directly to BP’s shareholders, which I don’t think would be much of an improvement.


I don’t think it’s a problem to take their money with two stipulations:

First, there shouldn’t be any stipulations about what kind of art is presented. I don’t see any reason to think there are.

Second, people who receive or benefit from it don’t use it as an excuse for bad behavior. The curators getting the donations aren’t arguing against heavy consequences for spills ( if they even had power to do so), as far as I’ve seen.

Better to make their donations to non-profits than to politicians.

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Adventures in probability, market forecasting edition

Felix Salmon
Sep 20, 2010 19:27 UTC

Carl Richards has a cute graph:


The basic idea here is right. And in fact Richards understates, in his graph, just how bad things are when it comes to market forecasts: his graph curves the wrong way.

Let’s say there’s a 10% chance of any given forecast being right, and let’s say (for the sake of argument) that all forecasts are independent of each other. Then what’s the chance of at least one forecast being right? Here’s the actual graph:


By the time you get to 20 forecasters, there’s an 88% chance that at least one of them will be right. At 40 forecasters, there’s a 99% chance.

In the real world, forecasters aren’t all independent of each other — but at the same time, there’s a hell of a lot more than 40 of them. (And given the squishiness involved in what counts as “being right”, the chances of being able to say that you were right are probably closer to 50% than 10%.)

If you add together the fund managers and the economists and the TV pundits and everybody else telling you where the economy and the markets are going, you’ll get a number somewhere in the tens of thousands. The question isn’t whether one of them will turn out to be right, it’s just how many of them will turn out to have been right.

In fact, given the thousands of people in the market, it’s a statistical certainty that many of them won’t just be right once, but will be right time and time again. Such people are generally lauded as being fabulously smart and prescient, and lots of money gets thrown at them. As a general rule, it’s a good idea to make sure that money isn’t yours.


Let’s monetize that.
Send out say 20,480 newsletters.
Half predict the market will rise, half say it will fall.
Whichever way it goes, you will be correct to 10,240.
Repeat the process with that 10,240. To half you say “rise,” and to the other half you say “fall.”
Soon enough, there is a core of people for whom you have been right 10 times.
Announce a hedge fund.
Check laws on extradition before absconding.

Posted by RobertArvanitis | Report as abusive

The whining rich

Felix Salmon
Sep 20, 2010 17:45 UTC

Todd Henderson’s whine about how he’s only scraping by on $450,000 a year in his million-dollar Chicago house is causing quite a stir in the blogosphere. (Tyler Cowen says that “this number seems not to be true”, but Henderson isn’t clarifying things, and it’s very hard to come up with a substantially lower number which would result in his family still paying “nearly $100,000 in federal and state taxes”.)

Tyler says that the rich have just as much right to whine as the poor, which is a fair point. But it’s also reasonable to examine this particular law professor’s argument closely. For instance:

If our taxes rise significantly, as they seem likely to, we can cut back on some things. The (legal) immigrant from Mexico who owns the lawn service we employ will suffer, as will the (legal) immigrant from Poland who cleans our house a few times a month. We can cancel our cell phones and some cable channels, as well as take our daughter from her art class at the community art center, but these are only a few hundred dollars per month in total.

Here’s Brad DeLong’s fantastic response:

The big expenses in the Henderson family budget–their $60,000 a year in contributions to tax-favored retirement savings vehicles, their $25,000 a year savings building home equity, their $55,000 for housing, their $60,000 in private school costs, even their $10,000 a year for new cars–are simply out of reach for the overwhelming majority of Americans…

By any standard, they are really rich.

But they don’t feel rich. They have a cash flow problem. When the bills are paid at the end of the month, the money is gone–and they feel that they have to scrimp…

Professor Henderson’s problem is that he thinks that he ought to be able to pay off student loans, contribute to retirement savings vehicles, build equity, drive new cars, live in a big expensive house, send his children to private school, and still have plenty of cash at the end of the month for the $200 restaurant meals, the $1000 a night resort hotel rooms, and the $75,000 automobiles. And even half a million dollars a year cannot buy you all of that.

But if he values the high-end consumption so much, why doesn’t he rearrange his budget? Why not stop the retirement savings contributions, why not rent rather than buy, why not send the kids to public school? Then the disposable cash at the end of the month would flow like water. His problem is that some of these decisions would strike him as imprudent. And all of them would strike him as degradations–doctor-law professor couples ought to send their kids to private schools, and live in big houses, and contribute to their 401(k)s, and also still have lots of cash for splurges. That is the way things should be.

The first thing to note here are Henderson’s priorities: for him, it seems, it’s more important to spend $60,000 a year on retirement savings, and to send his kids to private school, than it is to have a cellphone. That alone marks him out as very unusual among Americans, most of whom will spend money on a cellphone long before they send their kids to private school or put that fifty-thousandth dollar into their retirement savings.

And in reality, I doubt that a four-point increase in the tax that he pays on any income over $250,000 is going to stop him from hiring someone to mow his lawn. And it’s certainly not going to make him give up his cellphone.

But what’s very clear here is that Henderson doesn’t feel rich. As DeLong says, he’s not comparing himself to the hundreds of millions of people who earn less than him: instead he’s comparing himself to the handful of people who earn vastly more than he does. People who don’t seem to worry about money at all. Who have multiple houses. Who charter jets. He looks at those people and thinks that they are rich, and that therefore he, with his monthly budget, isn’t.

There’s no doubt that people earning $250,000 or more are rich. The simple ability to dismiss a whole class of expenses as “only a few hundred dollars per month in total” makes you rich.

But by the same token, many rich people don’t feel rich, and so describing them that way gets their backs up. And in fact it’s good that the rich don’t feel rich: it means they have more incentive to keep on earning and producing and adding value.

So maybe we shouldn’t be so rude about the likes of Todd Henderson: without rich people constantly striving for extra dollars, America would be in an even worse position than it is. But equally, we shouldn’t take their pleas seriously.

For most people, “rich” starts at roughly double whatever their own household income is. It’s the hedonic treadmill: you race towards it, but you never achieve it — even when you’re living in a million-dollar home and pulling down something north of $400,000 a year. Or, I daresay, when you’re living in a $4 million home and making $1 million a year. It’s just that above a certain income, people (Ben Stein, of course, always excepted) tend to have the good sense not to whine in public about how hard their life is.

Update: Henderson has now taken down his post, saying that an “electronic lynch mob” has “caused untold damage to me personally”.


I can’t understand how our taxation is “fair” when supposedly 40 percent or more of US citizens actually pay no income taxes. So why should there be a group that is allowed to reap the benefits that taxes provide, pay nothing and still be allowed to vote for ever more benefits and ever more taxes on the “rich”? Part of our problem is there are a whole lot of folks who don’t have any “skin” in the game, so of course they are happy to let the government increase taxes on those better off than they. Maybe they should raise taxes on the rich, but for each $10,000.00 in income taxes you pay, you get an extra vote?

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Momentum sans hindsight

Felix Salmon
Sep 20, 2010 15:53 UTC

Here’s a great way of making money in the market. At the end of every month, look to see whether stocks went up or whether they went down. If they went up, then buy stocks at the average price for the month. And if they went down, then sell stocks at the average price for the month. Follow that strategy for 130 years, and you can turn $1 into $50,000!

Of course, it’s impossible to go back in time, armed with your 20-20 hindsight, and buy stocks in retrospect. So the strategy is not exactly a very useful one. But it turns out that it’s exactly the strategy that Andrew Haldane used in his value vs momentum chart.

Michael Stokes has run the numbers, and shows what Haldane’s momentum strategy would look like if you buy and sell at month-end prices, rather than retrospectively at the average price for the month:


Given that the momentum strategy wasn’t very good at outperforming a simple buy-and-hold strategy in the first place, this latest insight I think does a great job of burying it completely.


I think this is how Steve Jobs asks for his options allocation.

Unfortunately, not a strategy particularly available to the man on the street.

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Ben Stein’s fiscal policy

Felix Salmon
Sep 20, 2010 15:28 UTC

Here’s Ben Stein in August 2008, when we were at the depths of the longest recession in postwar history:

The unhappy fact is that it’s necessary to raise my taxes and the taxes of all upper-income Americans…

If we don’t raise taxes, if we keep doing what we’re doing, the immense deficits and debt will not go away — and will probably grow.

The question is simply this: Do we want to step up to the plate like responsible people — I hate to say this, but the last responsible people who actually did this were named Bill and Bob (Clinton and Rubin) — and shoulder our responsibilities? Or do we just kick the can down the road a bit and leave the mess for our children and their children?

And if we do raise taxes, should people who are barely getting by pay them or should people who are getting by very nicely pay them?

I don’t like taxing rich people or anyone I like. But our government — run by the people we elected — needs the revenue. Do we pay it or do we make our children pay it? Dwight D. Eisenhower — and Bill Clinton — knew the answer: You behave responsibly and balance the budget except in rare circumstances.

And here’s Ben Stein in September 2010, 15 months after the recession ended:

In the midst of a severe recession, I am to have my taxes raised dramatically.

I am not quite sure what my sin is…

What I don’t get is this: There is no known economic theory under which raising my taxes in the midst of a severe recession will help the economy recover. It isn’t part of any well known monetarist or Keynesian theory. So if it does no good to raise our taxes, I assume we are being punished.

But for what? I don’t own slaves.

Good point, Ben. Let’s just raise taxes on slaveowners. That’ll do the trick.


When Ben Stein (and aren’t his initials a happy coincidence?) pays taxes, he feels he is being punished, even though he is only paying his share toward keeping his country going. When he shops for groceries and goes through the checkout line, does he feel he is being punished for needing to eat? Why doesn’t he demand free food? Why shouldn’t everything we need–or desire–be free? Jeez, Ben Stein is nothing but a dirty little commie, isn’t he? On top of being a lackwit.

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Do we need an inflation target?

Felix Salmon
Sep 20, 2010 14:40 UTC

Tyler Cowen thinks that the Fed should adopt a 3% inflation target; Jim Surowiecki is inclined to agree. What’s more, they also agree that it’s not going to happen. Tyler has an interesting theory, on this front:

Maybe we are in a new political economy equilibrium where each government agency is given “one shot” at a problem. Treasury had its one shot with the stimulus plan. The Fed had its exotic monetary policy operations and deal-making during the crisis. Maybe in bad times voters aren’t happy no matter what, and no one is allowed to try twice. We have not yet thought through the political economy of this scenario.

In general, both of them talk a lot about the politics of inflation: Tyler points out that conservatives are in denial about the inflation which accompanied the Reagan boom, while Surowiecki talks about the way in which voters hate inflation, even more than unemployment.

Which leads me to the conclusion that a lot of what we’re seeing is a lack of genuine independence at the Fed, which became indistinguishable from Treasury during the crisis, and which has yet to break free from Treasury’s grasp.

I think it’s pretty clear that some kind of rise in the price level would be a great thing for the economy. Steady 3% inflation is one way of achieving that; I also very much like Daniel Davies’s idea:

What is needed is a step-change shift in the price level. These are two distinct concepts – we want a change in P with constant dP/dT, not a change in dP/dT. This has the effect of a one-off windfall redistribution from nominal creditors to nominal debtors, a one-off increase in the ratio of collateral to credit. If anticipated, it would encourage an investment boom, as owners of nominal assets attempted to exchange them for real assets…

Several of the world’s most important central banks have it written into their constitutions that they need to control inflation or target price stability. I think a good lawyer could make a case that a decision to target stability, but stability at a higher level would be consistent with the letter if not the spirit of these laws.

The problem, of course, is how do we get there from here: as the Bank of Japan knows only too well, creating inflation can be very hard indeed. And if you say that you’re going to create inflation and you fail, then you lose precious credibility.

Bond investors like Marshall Auerback will scream loudly every time this subject comes up, saying that “we should be targeting policies needed to generate full employment” (yes) and that such policies by their nature have to be fiscal rather than monetary (no). But I do think that the Fed’s full-employment mandate is all that it needs to pursue inflationary policies: it doesn’t really need an inflation target on top of that.

My feeling about an inflation target is that its mere existence is not going to convince anybody that inflation is on the way. So unless and until the Fed can credibly explain how it’s going to create 3% inflation, it shouldn’t even think about unveiling a target. And if it can credibly explain how it’s going to create 3% inflation, then it doesn’t need the target at all.

So. Inflation? Yes please. Inflation target? I’m not so sure.


Re: “So. Inflation? Yes please”

If, as you wrote in another posting on Monday, “There are serious ethical questions surrounding whether or not investors should own stock in BP,” are there not even more serious ethical questions surrounding confiscating savings?

Posted by 10024 | Report as abusive

Women desert Wall Street

Felix Salmon
Sep 20, 2010 13:44 UTC

Chart of the day comes from Kyle Stock:


This is very bad indeed: women are leaving the financial-services industry even as men are joining it; and the trend is most pronounced among the youngest cohorts of the population, who will be running the industry in the future.

The losses are steepest for the youngest women, including those just out of college. The number of women entering finance-industry jobs at age 20 to 24 fell 21.8% over the past decade. For jobs across all industries, the overall number of women in the work force was unchanged over the same period.

This is not — or not only — a crisis phenomenon: the number of women on Wall Street was falling even from 2001 to 2006.

So what’s going on? Stock wheels out a couple of theories:

Across the economy, computers have replaced junior, back-office workers, jobs that were largely filled by women…

Given recent volatile markets and much scrutiny on compensation, there are fewer incentives to stay in the business for those women who have already chosen finance-industry careers, said Grace Tsiang, an economics professor at the University of Chicago.

Ms. Tsiang theorized that these women are having and raising children rather than staying on the job.

“Women have this higher alternative value of how to spend their time,” Ms. Tsiang said. “They’re always perched on this edge, and if the value of staying in a high-pressure job goes down just a bit, then that might make a big difference in the number that jump.”

I don’t find either of these theories particularly convincing. For one thing, have Wall Street back offices really thinned out since 2000? And were they particularly female-dominated back then?

And as for the idea that women would rather quit to have babies rather than cope with volatility, frankly it’s downright offensive. And doesn’t square with those job losses between 2001 and 2006, when volatility was declining and compensation was rising.

I’m also unimpressed at the part of Stock’s article which veers into anecdote. He manages to find two women who left Wall Street; one of them started a firm called ChickRx, and the other founded a company “which makes protective covers for high-heel shoes.”

The most depressing part of Stock’s story, however, is probably the reaction of the Wall Street boy’s club:

Wall Street isn’t keen to talk about these gender shifts. A number of firms, including J.P. Morgan Chase and Lazard Ltd., declined to answer questions for this article, and some of those that responded declined to detail the male-to-female ratios of their staffs.

Unless you’re open about your gender-balance problems, you’re never going to fix them. And we’ll end up further away than ever from a world where more than one in five executives in the financial-services industry is a woman.


I’ve got a much simpler explanation of the numbers in the chart. The numbers in the chart are wrong.

If I am reading the chart correctly it suggests that male employment in financial services has grown and that female employment in financial services has shrunk over 10years.

I would bet all that I own that female financial sector employment is greater today than 10 years ago.

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Felix Salmon
Sep 20, 2010 05:23 UTC

“If you pledge to not drive on campus, Stanford will actually pay you! $250!” — Paddy Hirsch

NYT photog captures a bike salmon in his natural habitat, for a post on The Cyclist-Pedestrian Wars — Spokes

Why exercise won’t make you thin — Guardian

Park Slope Food Coop grosses $6,500/sqft/year: “so much money that it deposits its cash every 2 hrs for security reasons” — Fortune

In which Paul Jackson moves one step closer to Total World Domination: HousingWire to Acquire REO Insider — PR Newswire

Divilians vs Tradebots — Reformed Broker

I’m late to this chart, but it’s fantastic — Economix


@WCW –

If I had my way, it would all be Pigouvian taxes for revenue. Basically hit the things that take away from the commons.

* Gradually I would ratched up to big oil taxes (not gas taxes but upstream even of agriculture and chemical etc).
* Land taxes (a variant of real estate taxes, focusing on the scarce portion of real estate)
* Water taxes where water is scarce
* Tax on imports from currency manipulating nations

There is something here for everyone to hate, Repubs and Dems alike.

I suppose a consumption tax would fall into this category as well.

Every economic purist should be for Pigouvian taxes because they are fair and they maximize overall wellbeing and minimize the negative externalities we impose on each other.

Posted by DanHess | Report as abusive

The economics of One World Trade Center

Felix Salmon
Sep 19, 2010 17:59 UTC

Many thanks to Joe Nocera for raising the issue of One World Trade Center’s finances. It’s by far the tallest and most expensive building that New York has ever seen, and it’s no thing of beauty, either. Plus, there’s not nearly enough demand for new top-grade office space to justify building so much of it at this location and at this time. So what exactly is the Port Authority thinking?

All that said, the issue is much more complicated than Nocera makes out. For one thing, the 1,776-foot tower is really the last vestige of the once-lauded Daniel Libeskind master plan for the World Trade Center site; for another, the deal that gave it to the Port Authority was a highly complex one, done with developer Larry Silverstein, and so it’s a little bit simplistic to try to view One World Trade in a vacuum, as Nocera does.

Plus, Nocera’s very vague about sourcing his numbers: he says only that “my real estate sources say they believe that the Port Authority will need to charge $130 a square foot to break even on the building”, and then adds a pro-forma Port Authority denial.

It would be very useful to learn where that number comes from. Looking at the figures in the piece, the cost of the building is $3.3 billion, with $1 billion of that coming from insurance proceeds. I’m not sure exactly what Nocera means by “break even”, but he does talk earlier on in the piece about “any shortfall between the building’s annual rental income and its carrying costs”, so let’s think about it that way.

The building will end up with 2.6 million square feet; if the breakeven rate is $130 a square foot, then that implies its carrying costs will be $338 million a year. But it doesn’t cost anything like that for the Port Authority to borrow $2.3 billion. After all, the last time the Port Authority issued bonds, it paid an average interest rate of less than 4.5%. And 4.5% of $2.3 billion is barely more than $100 million a year — less than a third of the number implied by Nocera.

Or think about it in terms of a standard residential mortgage. Let’s say you wanted to take out a 30-year fixed-rate loan on a $3.3 billion home, putting $1 billion down. Right now, mortgage rates are 4.5%, which implies a monthly repayment of $11.65 million per month, or $140 million a year. OK, you’re not going to be able to borrow that kind of money from your local credit union, and I’m pretty sure that the note would be non-conforming in the eyes of Fannie and Freddie. But still, if you want to get $140 million a year from renting out a 2.6 million square foot building, then you only need to charge $54 a square foot: a far cry from Nocera’s $130 figure.

Yes, there will be high maintenance costs, especially given all the extra security. But at the same time, the Port Authority owns the land underneath the building outright, so there are no costs associated with that. And in the early years of the project, when the building isn’t fully rented out, the Port Authority will have to carry some of the costs of the empty space.

On the other hand, there are less quantifiable costs to having empty space in that part of the New York skyline which used to be home to the Twin Towers. One World Trade Center might never be as iconic as they were, but it will still be an instant landmark, and a vast improvement on the gaping hole that we’ve been living with these past nine years. If Nocera wants to make the case that its costs will end up being borne by commuters crossing the George Washington Bridge, he’s going to have to be a lot more specific about exactly how he’s calculating them.


24 minutes ago Freedom tower is much better than twin towers,because there are four towers

,also Freedom tower is taller than twin towers.People should be excited.


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