Felix Salmon

Jonathan Weil and Jesse Eisinger wrote very similar columns yesterday, about the way in which the latest batch of white-collar-crime prosecutions is seemingly an attempt to occlude the fact that none of the main culprits in the financial crisis have been prosecuted of anything. Meanwhile, Janet Tavakoli has come out with a presentation listing just some of the people who might be liable for prosecution here:

Much as I love the idea that Christopher Cox could be prosecuted as an accessory and accomplice, it’s probably easier to start with the bankers. Or maybe “easier” isn’t exactly the mot juste:

By all outward appearances, it seems the Justice Department either doesn’t want to prosecute systemically important frauds, or doesn’t know how. Or maybe it’s both.

It wasn’t always this way. More than a thousand felony convictions followed the savings-and-loan scandal of the 1980s and early 1990s. Some of the biggest kingpins, such as Charles Keating of Lincoln Savings & Loan, went to jail. With this latest financial crisis, there’s been no such accountability.

That’s Weil. Here’s Eisinger:

The most common explanation from lawyers for this bizarre state of affairs is that it’s hard work. It’s complicated to make criminal cases in corporate fraud. Getting a case that shows the wrong-doer acted with intent — and proving it to a jury — is difficult.

But, of course, Enron was complicated too… WorldCom’s Bernie Ebbers and Tyco’s Dennis Kozlowski are wearing stripes…

The most popular reason offered for the dearth of financial crisis prosecutions is the 100-year flood excuse: The banking system was hit by a systemic and unforeseeable disaster, which means that, as unpleasant as it may be to laymen, it’s unlikely that anyone committed any crimes.

Or, barring that wildly implausible explanation (since, indeed, many people saw the crash coming and warned about it), the argument is that acting stupidly and recklessly is no crime…

Just as it’s clear that not all bankers were guilty of crimes in the lead-up to the crisis, it strains credulity to contend no one was. Corporate crime is usually the act of desperate people who have initially made relatively innocent mistakes and then seek to cover them up. Some banks went down innocently. Surely some housed bad actors who broke laws.

There’s an irony here: the financial crisis was so sudden and so devastating that no one really had the opportunity or incentive to cover up their crimes. Cover-ups are always easier to prove and prosecute than the original crimes, after all. But in this case the crimes all happened more or less in plain sight: Tavakoli, for one, has been shouting “fraud” for years. And the bankers just say “oh no it isn’t” and carry on.

I tend to agree with Eisinger that the doomed prosecution of the two Bear Stearns hedge fund managers does not mean that prosecutions are impossible: it just means that if you’re going to try to prosecute, you’ll need a much more carefully-constructed case than the U.S. attorney’s office managed to cobble together. “You worked in a bank and you went bust” isn’t enough — but with time and subpoena power, it doesn’t have to be.

I suspect that we will see a criminal prosecution of Dick Fuld at some point, although as Eisinger points out it’s certainly taking long enough. A criminal prosecution of Angelo Mozilo is much less likely now that he’s settled his civil suit with the SEC. Stan O’Neal? Chuck Prince? Martin Sullivan? Going after those guys would require a degree of testicular fortitude which simply doesn’t exist anywhere in the Obama administration. There might be a handful of mid-level executives eventually — people higher up the food chain than Fabulous Fab, but well below CEO level. The top cats are sitting comfortably in a cloud of impunity, and they all have very good lawyers.

I’m reminded of a passage from Too Big To Fail:

Several weeks after Merill’s board had named Thain CEO, he was faced with an especially delicate task. Placing a call to his predecessor, Stan O’Neal (who had just negotiated an exit package for himself totaling $161.5 million), Thain asked if they might get together…

Thain knew that if there was one person in the world who could explain what had gone wrong at Merrill Lynch, why it had loaded up on $27.2 billion of subprime and other risky investments — what, in other words, had gone wrong on Wall Street — it was O’Neal.

“Well, as you know, I’m new, and you were the CEO for five years,” Thain said carefully. “I’d like to get your take, any insight on what happened here. Who everybody is, and all that. It would be very helpful to me and to Merrill.”

O’Neal was silent for a moment, picking at his fruit plate, and then looked up at Thain. “I’m sorry,” he said. “I don’t think I’m the right person to answer that question.”

Was O’Neal afraid that anything he said might be used against him in some kind of lawsuit? I daresay he was. He might have been greedy, but he wasn’t stupid.

Is the market in European sovereign debt rife with speculation? The NYT would have you think so. And indeed the EU was so worried about the possibility of manipulation in the sovereign CDS market that it commissioned a comprehensive report on the subject.

Wonderfully, Martin Visser of Dutch newspaper Het Financieele Dagblad managed to obtain a copy of the report, using the European equivalent of a FOIA request. His article is here; a Google-translated version is here; and the actual report — a 6MB PDF file, I’m afraid — is here. (For all of these links I’m highly indebted to @ldaalder.)

You can see why the EU might have wanted to keep the report secret: it concludes that the sovereign CDS market is a force for good, and that curtailing it in any way is likely to be a bad idea. Here’s part of the executive summary:

First, the results show that there is no evidence of any obvious mis-pricing in the sovereign bond and CDS markets. Second, the CDS spreads for the more troubled countries seem to be low relative to the corresponding bond yield spreads, which implies that CDS spreads can hardly be considered to cause the high bond yields for these countries. Finally, the correlation analysis shows that changes in spreads in the two markets are mainly contemporaneous. The vast majority of countries show now lead or lag behaviour, and when series are not changing contemporaneously, CDS and bond markets are basically equally likely to lead or lag the other. Furthermore, these relationships have been broadly stable over time.

The report goes on to look specifically at the idea of banning “naked shorting” in the CDS market:

Prohibiting naked positions in credit default swaps could dramatically impact the market. If the CDS market is reduced to hedgers only, market liquidity is likely to drop substantially…

Under a permanent naked CDS ban, CDS would possibly become more classical insurance devices, i.e. customised to closely-related exposure. This would reduce the market’s ability to trade credit risk and, make proxy-hedging impossible. As a result, the cost of bond market financing for the broader economy could increase…

Overall, it is not clear how the bond market would be affected by a ban on naked CDS. Moreover, there are substitute strategies to bet on a downturn in sovereign risk: sell a future on the bond, buy a put option, sell a call option, short sell the bond are usual investment techniques…

Using temporary bans could prove to be an efficient way of dealing with short-term emergency situations. On the other hand, if temporary bans become a “normal” practice of supervisors, this could create additional uncertainty in the market. If in more volatile situations a ban can be imposed, market participants might price in this uncertainty and bond yields might therefore increase…

Another drawback of a ban is that it can send a very strong message to the financial markets about the gravity of the situation of the country(ies) for which the ban will be set in place.

It’s only natural for issuers of bonds and stocks to complain about speculators and short-sellers whenever those bonds and stocks decline in value; sovereign countries are no exception to this rule. But precisely because such complaints are so natural, they should, as a rule, be ignored. Even the EU, when it investigated the situation, came to the conclusion that market manipulation is not the problem here: the market is simply doing its job of pricing credit risk. If anything, the market failure took place in the past, when investors (especially European banks) were not properly pricing credit risk.

I don’t blame the NYT for missing a report in a Dutch newspaper, but I’m still stumped as to the source of its assertion that Dominique Strauss-Kahn has been warning about speculation in European sovereign debt. Because the fact is that if you’re looking at the views of big international organizations, the consensus would seem to be that speculation is actually nothing much to worry about at all.

On September 17, 2008, while the rest of us were running around like headless chickens watching the world come to an end, the WSJ‘s Don Clark ran an important story about Nathan Myhrvold’s patent-troll shop Intellectual Ventures:

Unlike most other pure licensing companies, Intellectual Ventures hasn’t filed patent-infringement lawsuits to help force settlements. But the group lobbying on behalf of tech companies in Washington, the Coalition for Patent Fairness — which includes several companies that have been approached for licensing deals by Intellectual Ventures — says it is only a matter of time…

In an interview at his Bellevue, Wash., headquarters, Mr. Myhrvold acknowledged facing resistance from companies he targets for licenses. But his patent inventory gives him leverage to extract settlements without litigation. “I say, ‘I can’t afford to sue you on all of these, and you can’t afford to defend on all these,’” Mr. Myhrvold said.

Now, two years later, Clark drops the inevitable update: Myhrvold hired a chief litigation counsel in May, and has now started suing:

On Wednesday, Mr. Myhrvold’s firm, unable to secure payments from nine companies, announced three patent-infringement suits. One suit names the best-known players in security software—Symantec Corp., McAfee Inc., Trend Micro Inc. and Check Point Software Technologies Ltd.

Some links would have been nice here: Intellectual Ventures is good about posting links to all the patents and complaints, even if it does make you download various PDF files to find them.

The complaints (here’s the security-software one) include some startling facts about the sheer scope of Myhrvold’s operation:

To date, Intellectual Ventures has purchased more than 30,000 patents and patent applications and, in the process, has paid hundreds of millions of dollars to individual inventors for their inventions. Intellectual Ventures, in turn, has earned nearly $2 billion by licensing these patents.

This is all predictably depressing, and poses, as I said two years ago, the single biggest risk to America’s continued leadership in technology and innovation. Intellectual Ventures might do a bit of R, but it doesn’t do any D. Instead, it just sits there, extracting rents (that’s the polite way of saying “blackmailing”) technology companies who actually want to make things.

The long term repercussions of this will be a competitive advantage for companies based in places like China or Brazil which have much weaker intellectual property laws. It’s sad, because patents, as originally envisaged, were designed to encourage innovation, rather than to stifle it.

“A source close the company tells us Groupon added 4 million email subscribers in the last week” — TBI (The CEO tells the NYT it’s 3 million)

Why does the LA Film School hate locavores? — LA Weekly

Participate in a proper scientific economics experiment by watching cute baby animals — NPR

For a guy who claims to hate bloggers, Aaron Sorkin is a really good blogger — HuffPo

Only 28,000 people are specifically paying to access the Times online — Press Gazette

Only the Daily Show managed to pick up on Bernanke blatantly contradicting himself — Daily Show

Why does OAuth default to letting third parties read my DMs? Is this fixable? — Guardian

What links December 15, February 14, and October 13, in that order? — Auto Insurance Blog

What’s even less probable than the government breaking even on its AIG bailout? How about Bernie Madoff’s investors getting all their money back? That’s what Stephen Gandel reckons might happen:

In the past few weeks, Irving Picard, the bankruptcy trustee in the financial fraud case has issued a flurry of lawsuits and settlements. The trustee netted $500 million on Monday alone in a settlement with Swiss bank Union Bancaire Privee. Picard’s moves are raising the possibility that Madoff investors could get all of their money back and then some. In fact, if Picard is successful in all of his cases, investors in the what has been called the largest financial fraud in history could walk away with a 65% profit.

I doubt, somehow, that Picard will get anything like the sums he’s asking for, which include $9 billion from HSBC alone. But at this point it might well make sense for Madoff’s investors to start investigating how much their claims might be worth. Gandel estimates the total investment losses to be just under $20 billion, with a lower bound of $5.8 billion. That’s more than enough money for hedge funds to sit up and take note: if they reckon that Picard has teeth, I’m sure there are one or two of them willing to buy up claims at a discount. For investors who placed eight-figure sums with Madoff, that could translate to a seven-figure payout. Which would make a very nice present, this holiday season.

Did you know there’s a fight to the death going on in Europe? The NYT covers it today, under the headline “Central Bank and Financiers Fight Over Fate of the Euro.” Let’s see if we can spot a theme here:

On one side is the European Central Bank, which is spending billions to prop up Europe’s weak-kneed bond markets…

On the other side are hedge funds and big financial institutions that are betting against those same bonds…

The war keeps escalating as traders position themselves for what some believe is inevitable: a default by Greece, Ireland or perhaps even Portugal…

The head of the International Monetary Fund, meantime, urged Europe to take broader action to fend off speculators…

The speculators keep coming back…

No single hedge fund, after all, can hope to outgun the central bank…

By emphasizing that the central bank is “permanently alert,” Jean-Claude Trichet, its president, has raised the risk for speculators who might try to profit by selling short Greek, Portuguese or Irish bonds…

Speculators have been maintaining large positions in credit-default swaps on Spanish bonds and on the debt of Spanish banks.

OK, that seems pretty clear. On the one side there’s the ECB, nobly trying to defend a young and embattled currency; on the other side there’s hedge funds and traders and big financial institutions—collectively, “speculators”—looking to destroy the euro and collect a big payday, in a manner reminiscent of when George Soros broke the pound.

But who are these speculators? The NYT never specifies. It talks about Pimco selling euro-periphery bonds last year; about JP Morgan clients also being eager to sell their sovereign holdings; and about one hedge fund which made money in the CDS market over the summer and which has now closed its position. The first two can’t really be considered speculators, because speculators are people making a directional bet, rather than simply selling bonds they own and which they fear might fall in value. The hedge fund does count as a speculator, but it’s anonymous, and the size of the trade is not divulged, and it’s far from clear that such funds have any ability at all to move the market.

The NYT also fails to link to any story about the head of the IMF warning about speculators, which is sad, because I’d like to see exactly what he said. Was it this? I can’t see anything about speculators there.

It seems to me that blaming speculators for anything going on in Europe is lazy and unproven. There’s obviously credit risk in various European sovereign bond markets, and those markets are naturally going to trade at levels commensurate with that risk whether they’re full of speculators or not. So long as the ECB remains essentially the only buyer in the market, there will be tension about where the price should be. Real-money investors will tend to consider bonds overvalued and want to sell them at the ECB’s levels: that’s not speculation, that’s just the way that markets work. Yes, such sales put downward pressure on bond prices—as do purchases of protection by investors worried about what might happen in an event of default.

But the fact is that a European sovereign default would almost certainly cause a huge amount of financial harm across the continent—much more than any marginal benefit accruing to short-sellers and speculators. The markets don’t want a default; they’re just trying to determine the probability of a default, and to price assets accordingly.

And by Occam’s Razor, if everything going on in European bond markets can be explained without recourse to evil speculators, then there’s no reason to talk about them at such great length or to demonize them—unless you’re some kind of politician. Journalists should beware “speculator” terminology unless and until they have concrete evidence that what’s going on really is speculation rather than perfectly normal price discovery. So far, I don’t think that evidence exists.

At the bottom of the NYT‘s long and fascinating account of the feud between Andrew Cuomo and Steve Rattner, there’s a startling kicker:

After earning millions from managing Mr. Bloomberg’s fortune, Mr. Rattner now advises the billionaire mayor without pay, as the terms of his S.E.C. settlement require, reducing a onetime Wall Street titan to a volunteer.

This is news, I think, and fascinating, to boot. In its press release, the SEC said only that Rattner had “consented to the entry of a Commission order that will bar him from associating with any investment adviser or broker-dealer with the right to reapply after two years”; when Dan Primack called Bloomberg for comment, he was told that “Mr Rattner is a friend whose advice the Mayor has and will continue to rely on.”

Why is Rattner working without pay for Bloomberg? A few possibilities present themselves:

• Bloomberg is somehow paying Rattner under the table, or in kind, or with some kind of nod-and-a-wink understanding that Rattner will somehow be able to invoice for services rendered at some point in the future, a bit like Mike Milken managing to charge $50 million in M&A advisory fees even after he was barred from the securities industry for life.
• Rattner is hopeful that he’ll be able to charge for his investment-advisory services once he’s able to reapply in two years; obviously it’s worth staying in charge of Bloomberg’s multi-billion-dollar portfolio for a couple of years unpaid if you get to start charging for managing it in the foreseeable future.
• Rattner loves the idea that he’s found a loophole in the SEC agreement he made, and can continue to manage Bloomberg’s money for him even though it would seem that the SEC agreement prevented him from doing that.

I suspect that the real reason, though, is hinted at a bit earlier in the NYT story, when it says that Bloomberg is Rattner’s “most coveted and prestigious client,” and that Rattner’s relationship with the mayor “has conferred credibility and stature on Mr. Rattner despite the legal pall that hangs over him.” Rattner needs a rabbi to protect him, and Bloomberg is the best possible rabbi he could have, with the possible exception of Barack Obama himself.

Earlier in the piece, there’s this:

The attorney general was known to be especially galled that in February 2009, in the midst of the investigation, Mr. Rattner had accepted the high-level post in the White House, overseeing a task force reorganizing the American automobile industry, and later announced he would write a book about the experience.

Cuomo clearly thinks that Rattner was hoping to protect himself with Obama’s coattails, and generally bolster his reputation as much as possible through public service. When that didn’t work, Rattner turned from Obama to Bloomberg for protection. I wonder how much that’s worth to him—how much Rattner would be prepared to pay in order to retain his connection to Bloomberg.

Michael Linden and Michael Ettlinger have a good overview of the cost in dollars of the tax-cut compromise, and its benefit when it comes to employment numbers:

David Leonhardt then boils their numbers down even further:

Of its estimated $900 billion-plus cost over two years, roughly $120 billion covers the high-end tax cuts and the estate tax cut, $450 billion covers Mr. Obama’s wish list and $360 billion covers the tax cut extensions both parties favored.

Both in terms of dollars and in terms of jobs, then, this deal is heavily weighted towards progressive options. Yes, the tax cuts for the rich are expensive, at $60 billion a year. But the payroll cut as proposed will cost $120 billion a year, and it does look as though the Obama administration has found its second stimulus.

As Catherine Rampell reports, cutting taxes is almost never the first-best form of stimulus. But it’s the only form of stimulus which is politically feasible—and what’s more, there are diminishing marginal returns to extra spending-related stimulus, in terms of jobs created, since the first stimulus more than covered the low-hanging fruit.

Incidentally, Leonhardt disagrees with my take on payroll-tax cuts. I reckon it makes perfect sense to give them to employees rather than employers, but he says no:

The ideal package would have been larger than the current one, and it would have been better tailored. The $120 billion cut in the payroll tax, for example, will apply to the portion paid by workers, not companies. The Congressional Budget Office and other analysts have said that cutting the workers’ portion provides less bang for the buck because individuals are likely to save some portion of the money. Cutting the employers’ portion subsidizes hiring.

But politics prevented the best kind of payroll tax cut. Republicans did not want one larger than the $120 billion, one-year cut in the package. Administration officials wanted the political benefit of having that whole sum apply to individual workers. The resulting compromise will help the economy, but not as much as it could have.

John Carney made a similar point yesterday:

Temporary tax relief tends not to increase consumer spending by very much. What’s more, tax relief that comes in the form of a temporary payroll tax cut is even less likely to stimulate spending.

Carney has a certain amount of academic literature on his side, especially a recent paper based on a poll of consumers, asking them how much of any tax cut they would save rather than spend.

Here’s the more detailed testimony of CBO director Douglas Elmendorf. He calculates that reducing employers’ payroll taxes would increase GDP by between 40 cents and $1.20 for every dollar spent, while reducing employees’ payroll taxes would boost GDP by somewhere between 30 cents and 90 cents. On the jobs front, every million dollars spent on the employer side would create between 5 and 13 jobs in the first year; if the cuts were applied to employees, the range is between 3 and 9 jobs.

Elmendorf writes that reducing employees’ payroll taxes “would have effects similar to those of reducing other taxes for those workers”; he doesn’t go into any detail about the behavioral economics of quietly reducing withholding versus sending out splashy rebate checks.

So, let me apologize to Greg Mankiw for calling him disingenuous yesterday: there’s clearly much more of a consensus here than I thought.

I’m not yet persuaded that employer-side tax cuts are better: I still think that for three main reasons, employee-side cuts make sense right now. The experience of the last cuts shows how invisible they are and therefore how likely they are to be spent; the size of corporate cash piles shows how unwilling companies are to reinvest extra temporary cashflow; and in general employers are richer than employees, so giving the tax cut to them seems regressive. But it’s clearly credible and intellectually honest to believe otherwise.

That said, I love Elmendorf’s idea of cutting employer-side payroll taxes only for those employers who increase their payrolls. That policy would surely have a very large bang-to-buck ratio.

Looking forward to seeing the video of the Mike Lazaridis interview at AllThingsD. I love trainwrecks — AllThingsD

Kid Dynamite clears up the unemployment confusion. If you’ve been out of work for 99 weeks, there’s no new UI for you — KD

“Looking at American politics from a 100,000-foot level, conservatives have won” — MoJo

Design analysis of why Google Maps is so much better than Bing and Yahoo — 41Latitude

Excellent skepticism from Carl Zimmer on bugs eating arsenic. I wish he’d been harsher on Science, though — Slate

This is why I can’t wait for the arrival of BankSimple, or at the very least for some kind of concerted effort to require banks to communicate in English. It’s a letter I just got in the mail from Citi:

Why do banks tell their customers to read such stuff carefully, when it’s incomprehensible no matter how carefully you read it? For one thing, it makes no sense unless you’ve retained your Checking Plus (variable rate) Account Agreement and Disclosure, and nobody does that. (Incidentally, the Agreement and Disclosure is not available online: I looked.)

So in a fit of masochistic perversity, I decided to do what I was told, and call Customer Service to ask them what on earth this notice meant. It took a while to get a human, of course: I had to type in my social security number, and then my PIN, and then my ATM card number, and then another PIN, which was apparently wrong, and then my mother’s maiden name, and then the last four digits of the social security number I typed in at the beginning. At which point I was told that “at this time we are experiencing heavy call volume” (it was 11pm), before Ricky answered the phone and asked for my ATM card number (again), and my date of birth, and the last four digits of my social security number (for the third time), and for the date of letter. Then, finally, he put me on hold.

Eventually, Ricky came back to tell me that he was talking to his colleague but that he’d worked out that “you have a change in the rate that the account is set at”. He went away again, came back, said “All right sir, you still with me?” — and then we were disconnected, 16 minutes into the call.

Naturally, since I am clinically insane, I called back. ATM card number, mother’s maiden name, 0 for operator, 1 for questions about accounts, 1 again, “all of our associates are currently servicing other clients, and we are experiencing long call delays”, “thank you for holding”, and finally I get James. Who actually answers my question!

“All the letter is letting you know,” James told me, “is that previously, if the prime rate would change during a cycle, your interest rate would change during that cycle and we would backdate it to the whole cycle. Now, whatever the prime rate is on the first business day of the month, that rate will stay in effect the whole month.”

A simple explanation, in plain English, from someone who clearly understood what he was saying, and who could explain it a few different ways if I didn’t understand it the first time.

Citibank clearly employs people with brains, even to answer phones at 11pm on a Tuesday night. So how come it’s apparently beyond their abilities to write letters in plain English in the first place? I didn’t ask James that, but he volunteered the information anyway: “Everybody’s getting one of these,” he said. “It took us quite a long time to get an explanation of what it meant.”

In other words, that language about “if you have any questions, please call Customer Service” wasn’t put there to be helpful, since no one bothered to inform Customer Service about the changes before the letter went out. It was just put there as standard boilerplate, and was put in, I’m sure, by the same person who decided that if you’re telling customers about a change in terms, you shouldn’t say what the old terms were, thereby making it impossible to work out what the change is.

The myriad ways in which banks extract money from their customers are well known. But why are they so dreadful at communication when it comes to perfectly anodyne announcements like this? Maybe it’s just so that if and when a less anodyne announcement arrives in my mailbox, I won’t even try to read it. Maybe it’s just that there are far too many lawyers floating around in a bank which was brought to its knees by the leadership of its former general counsel. Or maybe it’s simply that no one cares, not when the number of banks communicating in English is zero. But I suspect that the real reason is that information asymmetry is so ingrained in banking culture that these notices are treated as a regrettable legal necessity, rather than an opportunity to actually communicate something germane. Is it possible to change that culture? I have my doubts.

Jimmy P has discovered a secret GOP plan to push states to declare bankruptcy in order to avoid bailing them out. Like most secret plans, it was splashed all over the Weekly Standard in a piece by David Skeel, and it does make a certain brutal sense:

Although bankruptcy would be an imperfect solution to out-of-control state deficits, it’s the best option we have, at least if we want to have any chance of avoiding massive federal bailouts of state governments…

The effectiveness of state bankruptcy would depend a great deal on the state’s willingness to play hardball with its creditors. The principal candidates for restructuring in states like California or Illinois are the state’s bonds and its contracts with public employees. Ideally, bondholders would vote to approve a restructuring. But if they dug in their heels and resisted proposals to restructure their debt, a bankruptcy chapter for states should allow (as municipal bankruptcy already does) for a proposal to be “crammed down” over their objections under certain circumstances.

Skeel doesn’t mention the single biggest problem with this idea. If it were implemented, or if it even looked like it might get implemented, prices of municipal bonds would plunge, and most states would find it pretty much impossible to borrow money. As such, facing a massive and immediate liquidity crisis, they would be in more need of a federal bailout than before the bankruptcy legislation was seriously mooted.

The fact is that there’s only one reason to invent a Chapter 8 bankruptcy provision for states—and that’s to come up with an efficient and legal way to impose losses on bondholders and other creditors. (Chapter 9, which applies to cities and other municipal entities, doesn’t apply to states.) The creditors, fully aware of this, would immediately cease lending, certainly to the rockier states like California, Illinois, and New York. That’s not what we want. As a result, unless or until those states can bring their budgets into a primary surplus, introducing such a provision would certainly do more harm than good. And if those states can bring their budgets into a primary surplus, then we don’t need the bankruptcy provision, since they’ll be easily capable of rolling over their debts.

If the states had a bankruptcy provision all along, then I’m sure some people would be thinking seriously about whether it made sense for one or more states to file. But they don’t, and there’s basically no way of getting there from here. As such, the idea’s a non-starter.

Martin Niesenholtz, the head of digital at the NYT, clearly hasn’t been taking my advice when it comes to how to build a paywall. Instead, he’s pre-emptively cracking down on a tiny and financially meaningless minority of hypothetical readers who might want to find ways around his wall:

“We will take great pains to make sure that the first-click-free policy isn’t abused in any way,” said Martin Nisenholtz, the Times’ digital chief. “Google has been quite cooperative in terms of setting a limit for the number of free articles that can go in for any one day, so that you can’t just sit and engineer your way into a free use of the website.”

What this says to me is that the NYT is spending too much time designing its paywall, and is disappearing down rabbit-holes best left unexplored unless and until it becomes clear that they need examining.

The NYT‘s paywall is designed to be porous: readers coming in from some other site (Google, Twitter, Facebook, Reuters) will always be able to read the article they’re looking for, even if they’ve used up their monthly quota. As a result, it’s more of a navigation fee than a charge for content.

That’s fine—except Nisenholtz now seems to be backpedaling from that concept, and saying that he’s going to “take great pains” to crack down on people who read a lot of nytimes.com without paying the company.

That’s silly, for three reasons. Firstly, great pains tend to come at non-negligible expense, and there’s no point in spending significant amounts of money unless you think you’ll recoup those costs in extra revenues. In this case, Nisenholtz seems to think that (a) there will be a large number of people trying to find a way around the NYT paywall — and that (b) a significant proportion of those people will end up giving in and subscribing (as opposed to simply going elsewhere), if the paywall is made hard to get around. I very much doubt that he has any concrete evidence that either proposition is true, let alone that both of them are; common sense, then, would dictate that he wait until he gets such evidence before working on bolstering the wall.

Secondly, there are so many ways to get around paywalls—simply deleting your cookies generally does the trick—that there’s no good reason to believe the NYT‘s “great pains” are going to actually work very well in practice.

Finally, the less porous the wall, the more annoying it is—for subscribers and non-subscribers both. That’s simply the way that paywalls work. Strengthening your paywall sends the message that you don’t trust your subscribers, or your subscribers’ non-subscriber friends: you’re treating them as potential content thieves.

Why would Niesenholtz do this? Why won’t he just satisfy himself with raising revenue from loyal readers, rather than trying to prevent people from reading lots of stories? It should be flattering that some people want to read NYT content so badly that they will take the long way round the paywall. Instead, Nisenholtz seems to find it downright threatening. And one possible reason is hinted at by Rick Edmonds:

A Kindle subscription to the Times cost $19.99 a month, and Scott Heeken-Canedy, president of The New York Times newspaper, said that might be indicative of where pricing for full Web access will end up.

If by “will end up” he means “will end up eventually, after we’ve quietly raised the subscription price half a dozen times,” then Niesenholtz’s tactics don’t make sense. But if by “end up” he means “will end up being when the paywall goes live next year”, then they do.

$20 per month is a large amount of money for people to pay for a product they’re used to getting for free, and indeed it’s so large that most of the NYT‘s regular readers will simply refuse to pay it. In that situation, the subset of people who will pay but only if the paywall is a tough one might start becoming relevant.

Niesenholtz says that 15% of current visitors view 20 pages or more per month. But people won’t pay $20 to read 20 pages per month: that kind of money only begins to be worth paying once you start reading a few pages per day, or say 100 pages per month. Let’s say that 5% of current visitors fall into that bucket, and that of that 5%, only one in ten will actually pay $20 a month for website access. (I’m not counting print or iPad subscribers who get free access to the website with their other subscription.)

At that point, Niesenholtz is directly monetizing just 0.5% of his visitor base—a number which is small enough that grabbing a few people who otherwise like to find a way round paywalls could actually make a significant difference.

I think it would be silly to start the paywall experiment at a high $20-a-month price point. Somewhere between $5 and $10 would make more sense. But if the NYT really is considering making nytimes.com a $240-a-year product, then maybe that explains their newfound emphasis on cracking down on those who would try to get around it.

ARJTurgot2 left this comment on my chart of US taxes:

You are, of course, going to follow up this chart with a second one that comprehensively reflects the changes in State and Local taxes, especially including sales taxes, that have changed since 1950. And that data is going to include things like registration and usage fees, especially gasoline, telecommunications and sin taxes on things like liquor and cigarettes. I understand that is going to vary widely from state to state, so two, perhaps, should be instructive: say New York and California?

If someone wants to point me to a dataset which gives me that information, I’ll happily chart it. But in the meantime, I pulled table D1 (Californian GDP) and table M13 (Californian state tax collection) from the California statistical abstract. That only gives data from 1967 to 2007, unfortunately, and the GDP series changes slightly in 1997. But in any case, here’s the result:

It seems to me that tax revenues have been floating pretty steadily around roughly 5.5% of GDP since the mid-70s, with a brief blip up to a high of 6.8% during the dot-com bubble. I’m sure that the recession has brought the ratio down of late. But what I’m not seeing is any indication that the decline of federal tax revenues is made up for by a concomitant increase in state tax revenues.

Greg Mankiw discusses the economics of the payroll tax cut, and raises the question of whether it might have been better used to cut employers’ share of payroll taxes, rather than employees’ share:

This payroll tax cut goes entirely to the worker. This increases work incentives, but the main motivation is probably to increase take-home pay, consumer spending, and aggregate demand…

An alternative would have been to reduce the employer’s share of the payroll tax, at least to some degree. Given a sticky wage, this policy would have reduced the cost of hiring and, to the extent labor demand curves slope downward, increased employment. It would also have increased business cash-flow and, to the extent that firms are cash-constrained, increased business investment.

After raising the question, Mankiw stops short of answering it, leaving the possibility open that maybe Congress and the White House came to the wrong decision for political reasons. But of course they didn’t: this is a no-brainer.

Michael Cooper had a great article in the NYT in October about the last payroll tax cut, a/k/a “the Tax Cut Nobody Heard Of.” The idea is that the less noticeable a tax cut is, the more effective it is:

The tax cut was, by design, hard to notice. Faced with evidence that people were more likely to save than spend the tax rebate checks they received during the Bush administration, the Obama administration decided to take a different tack: it arranged for less tax money to be withheld from people’s paychecks.

They reasoned that people would be more likely to spend a small, recurring extra bit of money that they might not even notice, and that the quicker the money was spent, the faster it would cycle through the economy.

Economists are still measuring how stimulative the tax cut was. But the hard-to-notice part has succeeded wildly. In a recent interview, President Obama said that structuring the tax cuts so that a little more money showed up regularly in people’s paychecks “was the right thing to do economically, but politically it meant that nobody knew that they were getting a tax cut.”

So we know that people spend payroll tax cuts rather than saving them, which is exactly what we want any fiscal stimulus to do. Businesses, by contrast, are another thing entirely: they’re sitting on large and growing piles of cash, and showing little if any propensity to spend any excess cash which falls into their laps.

I certainly can’t imagine that a 1-year cut in payroll taxes would incentivize any employer to hire more people. A 2% cut in payroll taxes on a worker earning $30,000 a year amounts to a one-off payment of $600: very nice for the worker, but not remotely enough to get the employer to hire someone else. After all, payroll taxes will go back up to their normal levels in 2012.

And while business investment might increase “to the extent that firms are cash-constrained,” as we’ve already seen, they’re not really cash-constrained at all. Certainly large companies aren’t.

So really there’s no conceivable reason to give this tax cut to employers rather than employees. And if Mankiw weren’t being disingenuous*, he might make that a bit more obvious.

*Update: Apologies to Mankiw, I’ve now changed my mind, and no longer think he was being disingenuous. (But I’m still a fan of employee-side tax cuts.)

Back on October 1, the Fed put out a short, bland press release announcing “a delay in the issue date of the redesigned $100 note.” Sometimes, there’s a great little story hidden behind such news, and in this case it was CNBC’s Eamon Javers who found it:

An official familiar with the situation told CNBC that 1.1 billion of the new bills have been printed, but they are unusable because of a creasing problem in which paper folds over during production, revealing a blank unlinked portion of the bill face.

A second person familiar with the situation said that at the height of the problem, as many as 30 percent of the bills rolling off the printing press included the flaw, leading to the production shut down.

The total face value of the unusable bills, $110 billion, represents more than ten percent of the entire supply of US currency on the planet, which a government source said is $930 billion in banknotes. For now, the unusable bills are stored in the vaults in “cash packs” of four bundles of 4,000 each, with each pack containing 16,000 bills.

Officials don’t know exactly what caused the problem. “There is something drastically wrong here,” a person familiar with the situation said. “The frustration level is off the charts.”

Javers had time to put together his story, and it shows. But according to some weird rule of journalism, the minute that CNBC ran the story, a full nine weeks after the original press release came out, everybody else felt that they had to have it too, and have it immediately.

And so it came to pass that Brady Dennis of the Washington Post started making phone calls to Treasury, Thomas Grillo of the Boston Herald called up the printers, the AP phoned the Bureau of Engraving and Printing, and Alex Branch of the Fort Worth Star-Telegram called the Bureau’s Engraving and Printing Western Currency Facility, all in the service of re-reporting hastily what CNBC had already reported carefully. Charles Riley of CNNMoney spoke only to “an official familiar with the situation,” while Dan Arnall of ABC spoke to “sources.” None of them, with the honorable exception of WaPo’s Dennis, credited CNBC; Krystle Gutierrez of Fox in Dallas even put an “originally reported by myfoxdfw.com” slug on the bottom of her story, mentioning CNBC nowhere.

On top of that, lots of sites rewrote the CNBC story, giving CNBC credit but doing no new reporting themselves, and sometimes mangling the facts along the way.

$100 bills are sexy things: even the rich get a frisson from handling them. As such, they’re irresistible to news editors, especially on a very slow news day. But aren’t we meant to be entering the age of reporting a few stories well and then linking to the rest? Haven’t we always worked under the general principle of “faster than anyone better, better than anyone faster”? I can’t help but think that if news organizations put a tenth of the amount of effort into external linking that they do into re-reporting other people’s stories, we’d have a much more vibrant and useful news culture.