Opinion

Felix Salmon

Counterparties

Felix Salmon
Jul 22, 2011 05:10 UTC

Are the Winklevii the whiniest multi-millionaires in the world? Yes, they are — WSJ

The best thing about the release of OS X 10.7 Lion? It means there’s a new John Siracusa review — Ars Technica

Grover Norquist Contradicts Grover Norquist — NPR

It’s almost impossible to read this and believe James Murdoch didn’t know why he was paying off Graham Taylor — NYT, see also

Lucian Freud, Adept Portraiture Artist, Dies at 88 — NYT

Jay Walder, M.T.A. Chief, Resigns Suddenly — NYT

Can you pick Wendi Deng out from her middle-school volleyball team photo? — Reuters

Ryan Chittum on Murdoch’s press defenders — CJR

How Superman saved the planet — SMBC Comics

COMMENT

Obviously, Obama shold be negotiating with the real power broker,Grover Norquist.

Norquist and Rush Limbaugh are professors at this very elite GOP college.

http://www.flickr.com/photos/30835791@N0 7/sets/72157614241935013/

Posted by hsvkitty | Report as abusive

Greece defaults

Felix Salmon
Jul 21, 2011 22:39 UTC

The latest Greek bailout is done — the official statement is here — and it involves Greece going into “selective default,” which is, yes, a kind of default.

I can’t remember a major financial story which has been covered so inadequately by the financial press. All the incomprehensible eurospeak seems to have worked, along with the fact that the deal was announced in Brussels, where the general level of journalistic financial literacy is substantially lower than it is in London or New York or Frankfurt. On top of that, statements are coming from so many different directions — Eurocrats, heads of state, the Institute of International Finance, Greek officials, Portuguese and Irish officials, you name it — that it’s extremely hard to put it all together into one coherent whole.

Oh, and to complicate things even further, most of the day’s discussion was based on various widely-disseminated draft documents which differed substantially from the final statement.

This is a bail-in as well as a bail-out: while Greece is getting the €109 billion it needs to cover its fiscal deficit, both the official sector and the private sector are going to take losses on their loans to the country.

As such, it sets at least two hugely important precedents. Firstly, eurozone countries will be allowed to default on their debt. Secondly, a whole new financing architecture is being built for Greece; French president Nicolas Sarkozy called it “the beginnings of a European Monetary Fund.”

The nature of massive precedent-setting international financing deals is that they never happen only once. There’s lots of talk today that this deal is for Greece and for Greece only, but some of the more explicit language to that effect was excised from the final statement. On thing is for sure: these tools will be used again, in future. They will be used again in Greece, since this deal is not enough on its own to bring Greece into solvency; and they will be used in other countries on Europe’s periphery too, with Portugal and/or Ireland probably coming next.

As far as the public sector is concerned, the European Union will do four main things. First, it will extend the maturities on Greece’s debt from the current 7.5 years to somewhere between 15 years and 30 years: the loans that the EU is currently giving Greece aren’t designed to be repaid, in some instances, until 2041.

Second, the interest rate on those loans will be extremely low — essentially, Greece is getting those EU funds at cost, currently about 3.5%. The EU is also extending these ultra-low financing rates to Portugal and Ireland, so as not to implicitly punish countries which don’t default.

Third, the EU will put together its own stimulus plan for Greece. The phrase “Marshall Plan” was taken out of the final statement, but there’s still talk of “mobilizing EU funds” and building “a comprehensive strategy for growth and investment.” This is vague, of course, but it does at least constitute an attempt to help Greece through a period of very painful austerity.

Fourth, the Maastricht treaty will get resuscitated, with all eurozone countries except Greece, Ireland and Portugal committing to bring their deficit down to less than 3% of GDP by 2013. Paul Krugman is screaming about this, but this was a central part of the eurozone project from the get-go, and clearly the eurozone needs some kind of fiscal straitjacket for its constituent members to prevent the rest of them from running up enormous deficits and then getting bailed out by Germany.

Finally, the EU will provide “credit enhancement” for Greece’s private-sector bonds. This is a central part of the default plan, and it looks a lot like the Brady plan of the late 1980s. The official statement from the IIF, which is representing private-sector creditors in this matter, is a little vague, but essentially if you’re a holder of Greek bonds right now, you have three choices.

  1. You can do nothing, and hope that Greece pays you in full and on time.
  2. You can extend your maturities out to 30 years, and accept a modest coupon of 4.5%; in return, your principal will be guaranteed with an embedded zero-coupon bond from an impeccable triple-A-rated EU institution, probably the EFSF.
  3. You can extend your maturities out to 30 years, take a 20% haircut, and get a higher coupon of 6.42%; again, the principal is guaranteed with zero-coupon collateral.
  4. You can extend your maturities out to 15 years, take a 20% haircut, get a coupon of 5.9%, and have only a partial principal guarantee through funds held in an escrow account.

The first option is by far the most interesting. No one has come out and said that Greece is going to default on bondholders who don’t exchange their bonds; instead, there’s just a lot of arm-twisting of big banks to do all this “voluntarily.” But that won’t stop the credit rating agencies giving Greece’s bonds a default rating — this is a coercive deal, which clearly reduces the value of banks’ Greek debt. (After all, just look at those haircuts.)

Is it possible for other bondholders — those who haven’t had their arms twisted — to free-ride on the back of this deal and continue to get paid in full? I suspect that it probably is. Which is one reason why this Greek restructuring won’t be the last.

Overall, this looks like a deal which can quite easily be scaled up and used as a framework for future default/restructurings. I don’t know if that’s the intent. But there’s nothing here to reassure holders of Portuguese and Irish bonds — or even Spanish and Italian bonds, for that matter — that they’re home safe. Greece will be the first EU country to default on its debt. But I doubt it’ll be the last.

COMMENT

If Greece defaults, it won’t be the first government to renege on its financial obligations, but its failure would set a new record, both for scale and complexity.

At the moment, the dubious honour of biggest deadbeat goes to Argentina, which failed to make good on its government debts in December 2001, to the tune of about $100 billion US.
but yes its quite important that What Will Be Outcome Of Greece Debt Crisis. http://www.abnglobalonline.com/what-will -be-outcome-of-greece-debt-crisis/

Posted by CienMichel | Report as abusive

The personal-finance metaphor

Felix Salmon
Jul 21, 2011 14:41 UTC

Paul Krugman has been railing against what he calls “the false government-family equivalence” for a while: what’s true at the family level — if your income goes down, for instance, you need to spend less money — is not necessarily true at the government level.

But the metaphor is back, in a new form. And this time it’s coming from the left. Here’s Larry Summers:

The idea that adults who have some agenda, whatever the merits of their agenda, are really prepared to threaten sending the United States into default, to pursue their agenda, is beyond belief.

You know, I have had arguments with my college-aged children about spending, and sometimes we discuss whether they should spend less, whether they should pay, whether I should pay. We don’t entertain the option that because we can’t resolve our argument, Visa should get stiffed.

Nemo has extended the metaphor to full-on allegory length, talking about a woman who orders a $40 pizza when she only has $20 to spend. And Michael Kinsley has a whole column driving home the equivalencies:

What does Michele Bachmann teach all those kids about the importance of living up to your obligations?

Say, for example, that one of them owed some people, oh, about $14.3 trillion dollars. Would Bachmann tell her children that a debt is a moral obligation that an honorable person will go to great lengths to pay if at all possible? Or would she tell them, Well, it all depends. Whether you pay back money that’s been loaned to you is a practical question. And if you calculate that you’d be better off reneging, then by all means do so. It’s perfectly O.K.

Does Bachmann teach her kids that it doesn’t matter why you owe the money or what you spent it on—that if you owe it, you have a duty to repay it? Or does she tell them that your obligation to repay depends on whether—in your own opinion—you spent the money wisely or wasted it? Does she say it’s a matter of principle, or does she say it’s a matter of what you can get away with?

It’s all well and good to say that the government is like a household and should always honor its debts. But households don’t always honor their debts — this is why very few people have perfect credit ratings — and if they’re a few days or weeks late on a payment, the world doesn’t come to some calamitous end. So as an argument, this is not a very strong one.

And tactically, wheeling out the household-finance metaphor plays right into the hands of those who, like Barack Obama, are prone to talking about how “government has to start living within its means, just like families do.”

I’m beginning to think that the most politically corrosive movie of the past 20 years was Ivan Reitman’s Dave, from 1993, where the president, armed with nothing but his neighborhood accountant and a couple of bratwursts, manages to fix the budget over dinner.

It’s an attractive and romantic notion, which is why it plays so well in congressional races; it’s almost an article of faith, at this point, among Tea Party types. All we need is some common sense, and the problem’s solved. And that’s also why the personal-finance metaphor is so toxic and dangerous. I can see why people reach for it, at times like these. But they should maybe think twice before doing so.

COMMENT

@Curmudgeon – I might not be reading your question right, so apologies if this is off the mark. But to a first approximation, no. American debt is dollar-denominated, so the debt burden isn’t affected by exchange rate fluctuations.

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Counterparties

Felix Salmon
Jul 21, 2011 04:28 UTC

Letters to First Great Western — Letters to FGW

Glenn Mulcaire Legal Fees Halted by News Corp — NYT

“iPad was a $6 billion business last quarter. That is twice as big as Dell’s entire consumer PC business.” — NYT

Predictably fantastic analysis of the Murdochs’ testimony by Nick Davies — Guardian

Piers Morgan vs Louise Mensch on CNN — YouTube

COMMENT

Going back to the talk about insider info… Paper on market impact of news:

http://arxiv.org/PS_cache/arxiv/pdf/0803  /0803.1769v1.pdf

Posted by Danny_Black | Report as abusive

A few Murdoch questions

Felix Salmon
Jul 20, 2011 22:53 UTC

After taking phone calls about Rupert Murdoch on Brian Lehrer’s show this morning and then immediately doing an hour-long diavlog with Alex Massie on the subject, I’m beginning to get a little Murdoch-ed out. But there are three newish points that are worth raising.

Firstly, what was the mechanism by which it was agreed that Rupert and James Murdoch would appear in parliament together? Having James by his side was a godsend for Rupert, and James clearly took his role as a shield for his father very seriously. I’m sure the more aggressive MPs would have preferred to be able to grill Rupert on his own, as they did Rebekah Brooks. How did that not happen?

Secondly, according to Michael Tomasky, there is a strong case that News Corp really could be prosecuted under the Foreign Corrupt Practices Act in the US, were the Justice Department so inclined.

And thirdly, just check out the number of Murdoch defenses on the WSJ op-ed page over the past couple of days:

  • The original, notorious, anonymous op-ed;
  • A paean to Murdoch by Robert Pollock, the WSJ’s editorial features editor;
  • Bret Stephens arguing that the News of the World was less bad than the Guardian and the New York Times;
  • An argument by two former Justice employees that News Corp should not be prosecuted under the FCPA;
  • Holman Jenkins saying that phone-tapping was “tolerated, routine and abetted by official agencies”;
  • James Taranto attacking Joe Nocera’s complaints about the WSJ; and
  • James Taranto, again, the following day, attacking other Murdoch’s attackers, and clamoring for press freedom.

I’m sure that there will be many more to come. But I’m sure this is far from what the Bancrofts expected when Murdoch promised them that the WSJ would enjoy total editorial independence.

Update: Here’s Bloomberg’s Max Abelson on those WSJ defenses of News Corp; he not only did it better than me, he also did it faster.

COMMENT

I think it’s awesome, going through my feed reader, how the raging about News Corp. stops the minute it was revealed The Mirror (and many other non-News Corp. British Papers) was(were) being investigated.

Because the bartender didn’t lie to Hugh Grant and this was being done by everybody.

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Rent vs buy datapoint of the day

Felix Salmon
Jul 20, 2011 22:05 UTC

It’s never possible to know for sure, at any given time, whether it’s a better idea to rent or to buy. If rents and prices both go up in the future, then buying’s likely to have been a good idea. And if they both go down, then renting is sure to have been the better idea.

But never mind the future — what about the past? In a wonderful paper, Eli Beracha and Ken Johnson went back and actually did the math on whether it would have been better to rent or buy over the past 30 years. And the answer is clear: it would have been better to rent.

This very strong result is expressed in this particularly ugly chart:

rentbuy.tiff

This needs a little bit of explanation. Basically, you consider two people, one of whom rents and the other of whom buys. If it costs more to buy than to rent, the renter takes the difference and invests it in the market — a mixture of stocks and bonds which has the same amount of risk as home equity. After eight years, the buyer sells. Then you see who’s worth more money.

The lines on the chart above are what you get when you take the amount of money that the renter has and subtract the amount of money that the buyer has. When the number is positive, the renter wins, when the number falls below zero, you would have been better off buying.

The chart looks at rolling eight-year periods, starting with people who bought in 1978 and ending with people who bought in 2001; while there are significant regional variations in the northeast, which had a nasty property slump in the 1990s, the big picture is that there are a hell of a lot more datapoints above zero than below it. And The only negative datapoints are the ones which involved selling during the bubble. Here’s how the paper describes the chart in English:

When the U.S. as a whole is considered, renting was preferred to buying 75% of the time. On average, the annual required appreciation return was 2.04% higher than the actual appreciation. In retrospect, the period spanning the mid 1990s to the early 2000s was the only time frame in which buying was preferred to renting. This narrow time period is associated with homeowners that purchased a home just before the recent boom and sold it shortly before its sequential bust. However, because most homeowners never transfer back to be renters, it seems unlikely that most homeowners, who benefitted from home appreciation during the boom period, avoided the subsequent housing collapse.

The authors go to great pains to make this as accurate a comparison as possible. Specifically, they do a lot of things which weight the scales toward owning rather than renting:

  • They assume a standard 30-year mortgage with 20% down and no nasty tricks.
  • They give the owner the option to refinance every year.
  • They give the owner the benefit of the mortgage-interest tax deduction.
  • They don’t allow homeowners to lose money on an underwater mortgage: the authors assume that you’re buying in a non-recourse state, and that the rational homeowner will strategically default rather than lose money on a sale if that’s the most lucrative option.

Even so, renting still comes out ahead. The people at e21 explain why:

Unless someone possesses the cash necessary to buy a residence, he or she will be renting one way or another. The choice is between renting the property directly or instead renting the capital necessary to buy the property…

The principal component of each mortgage payment – i.e. the portion of the mortgage payment that goes towards reducing the principal mortgage balance instead of interest – is an added expense renters don’t have. During the housing boom, the wealth created from housing was not principal amortization, but rather large price gains on a highly leveraged asset. A 20% increase in the price of a house purchased with 5% down results in a doubling of the homeowner’s equity. These wealth gains proved illusory and were a function of the leverage involved (20-to-1 in the case of a 5% down payment) rather than anything related to housing.

There is an important proviso to add to all this. Back to the paper:

Individuals, on average, were better off in economic terms to have rented for most of the years in the study period. This first result is strongly dependent upon fiscally disciplined individuals that, without fail, reinvest any residual savings from renting…

While this first finding might seem to fly in the face of the homeownership paradigm (specifically wealth creation), it is reasonable to find that most individuals still preferred homeownership during the sample period because ownership is in essence a self-imposed savings vehicle… while renting may have been wise, any extra savings from renting might be spent on non-wealth enhancing goods resulting in any benefits from renting versus owning disappearing in a cloud of consumption spending rather than savings.

To put it another way, a mortgage is a commitment device. You’re forced to spend all that money on your mortgage each month; if on the other hand you rent, you’re very likely to simply spend the excess, rather than save it. The e21 people reckon that only “myopic households” would not otherwise save the difference, but that’s just not realistic. People stretch to make their mortgage payments, and without the mortgage there there’s no need to stretch so hard, and you can enjoy your life more instead — go out, go on holidays, buy nicer clothes or extra iPads.

But the exercise in the paper is well worth running all the same. People get real value out of consumption, and so when you buy rather than rent you’re essentially denying yourself all that extra fun and pleasure. And if you both rent and deny yourself the extra fun and pleasure, then you’ll end up with more money than the buyer.

One other proviso: if you’re a super-long-term buyer who has no intention of ever selling your home, then this analysis starts to break down. The paper assumes you sell after 8 years; if you don’t sell, then you save a bunch of transaction costs for starters. And if you hold on to your house for more than 30 years, you get to live in it rent-free, which is wonderful. (Although if you do that then you lose out on the full refinancing opportunities built in to the model — they assume that you always refinance with a new 30-year mortgage.)

Finally, the authors note that we’re in a historically unusual point right now, with very low mortgage rates and historically reasonably low price-to-rent ratios. Which means that now might be one of those rare times when it actually makes sense to buy rather than rent. But these things are very contingent on local prices and rents. As a general rule, the more of a premium you pay to buy rather than rent, the better off you’re likely to be just renting.

Indeed, that seems to be what we’re seeing in the latest housing statistics: the rise in housing starts was concentrated in multiple-family homes, which are generally rental units, and a huge proportion of existing home sales were cash purchases, which also indicates that they might end up on the rental market. It’s hard for a professional landlord to take a single-family suburban home and turn it into a rental, but I am seeing hints that the US is moving back to renting rather than owning. Which is a great thing over the long term, especially for labor mobility. But it’s certainly bad for single-family house prices in the short term.

(via Salam)

COMMENT

It amazes me how many people miss the flaw in this study. In one sentence the entire study is proven faulty. It is “The paper assumes you sell after 8 years;” Of course renting would be better than buying if you sell every 8 years due to amortization, selling fees, and financing fees on the new home. This study “assumes” that renters are smart enough to invest every penny saved vs buying, but the buyers are so dumb that they don’t understand the simple principal of amortization over the life of the loan. If you buy a home, never refinance, and live in it for 30 years, you will FAR outperform a person renting and investing the difference.

Posted by NateSt | Report as abusive

Felix TV: Action bias

Felix Salmon
Jul 20, 2011 19:22 UTC

After my post on financial advisors last week, Josh Brown, a/k/a the Reformed Broker, got in touch saying that at some point he and I should discuss action bias — the way in which advisors feel the need to do something just to make their clients think they’re earning their keep. I was happy to oblige.

Josh is convinced that the new Pimco Total Return ETF is going to be the big game changer in the battle between mutual funds and ETFs: I think he’s right about that, since there’s no conceivable reason why you’d want to pay a 1% fee on a Total Return mutual fund when you can pay 0.55% on a Total Return ETF instead.

In the short term, this means a loss of income for Pimco, as investors rotate out of their mutual funds and into cheaper ETF flavors of substantially the same investment pool. But as Ari Weinberg will tell you, the main job for Pimco is to gather up as many assets under management as it can; the income flows from there. And the ETFs mean many fewer headaches for Pimco, too:

Mutual funds no longer have to divide the rents from buying/selling mutual fund shares on their behalf. In fact, with in-kind creation, they don’t even have to pay commissions internally to collect assets. Assets just walk in the door through creation.

Funds operating this way can now keep even more of the expense ratio and, theoretically, spend more of it on doing what they are supposed to be doing: providing returns for investors.

One of the ugliest parts of the mutual-fund world is the way in which many fund managers essentially bribe brokers to push their funds by loading them up with enormous fees and then kicking back commissions to the broker in question. ETFs don’t have that problem. But they do pose another risk: they’re so easy to buy and sell that many brokers and advisors are tempted to trade in and out of them far too much. That’s the action bias.

Frankly, you don’t want a broker or advisor keeping an eye on a fluctuating market and actively investing on your behalf. You want someone who will tell you that you’re overreacting, and that the best thing to do is nothing. That’s a truly valuable service.

COMMENT

How I fight action bias for my clients (from my 8 rules):

7) Rebalance the portfolio whenever a stock gets more than 20% away from its target weight. Run a largely equal-weighted portfolio because it is genuinely difficult to tell what idea is the best. Keep about 30-40 names for diversification purposes.

8) Make changes to the portfolio 3-4 times per year. Evaluate the replacement candidates as a group against the current portfolio. New additions must be better than the median idea currently in the portfolio. Companies leaving the portfolio must be below the median idea currently in the portfolio.

By limiting the number of times that I trade, I make better, more rational, and fewer decisions. I act more like a businessman, and less like a stock jockey. I end up with a portfolio turnover rate of ~30%/year, rather than 130%/year more common to mutual funds.

Posted by DavidMerkel | Report as abusive

The smart and charming Larry Summers

Felix Salmon
Jul 20, 2011 17:49 UTC

I’ve always had a bit of a cognitive disconnect with respect to Larry Summers. Many of the people I respect the most, and pretty much everybody I know who has spent much time with him, are clear: he’s absolutely brilliant. Most of them would give him some kind of Japanese-style Living National Treasure status.

On the other hand, if you judge Summers by his actions, either in word or in deed, he’s much less impressive. Reading his journalism tends to feel like wading through sludge while being nagged by a persistent feeling that he’s not writing for you anyway. Seeing him interviewed isn’t much more fun, at least when he’s holding political office. And everywhere he goes he’s accompanied by controversy, be it memos at the World Bank or financial deregulation at Treasury. As for Harvard, his career there has been academically successful but otherwise disastrous, whether you’re talking about interest-rate swaps or speeches about women’s aptitude or scandal over Andrei Shleifer’s role in Russia in the late 90s.

But Summers is out of the White House now, and clearly doesn’t have much in the way of immediate ambitions: he’s not going to re-enter politics for the foreseeable future, and he’s certainly not going to become president of Harvard again. He’s free to take lucrative gigs at companies like Square and Andreessen Horowitz, and live the very comfortable life of a Harvard University Professor. And so he’s loosening up a bit, and in his interview with Walter Isaacson at Fortune Brainstorm yesterday you can see why people come away from talking to him so very impressed. (And you can also see why the likes of Square and Andreessen Horowitz love to have access to him.)

This is Larry at his most relaxed and brilliant: when he isn’t overthinking what he wants to say and how he wants to say it, he has a natural fluency with ideas and can actually get them across very clearly indeed.

He starts off disarmingly, talking about the Winkelvii: “if an undergraduate is wearing a tie and jacket on Thursday afternoon at three o’clock, there are two possibilities,” he said. “One is that they’re looking for a job and have an interview; the other is that they are an asshole. This was the latter case.”

Then he launches into one of the best summaries of our present macroeconomic situation that I’ve seen. It’s worth quoting at length:

I think the biggest problem the country has right now is not the budget deficit. The biggest problem the country has right now is the jobs deficit. Yes, there’s a risk that we will misplay things and make the mistakes of the 1970′s, and have inflation and have excessive borrowing.

But far and away the larger risk is that we will make the mistakes of 1937, and that we will not have a recovery that is sustained, that we will make the mistakes that Japan made, and that we will have a decade or two of stagnation. The right question to be focused on is how to stimulate demand.

Look out there, guys. The Treasury bond rate, Treasury note rate for ten years is 2.85 percent. Nobody is failing to invest because 2.85 percent is too much. They are failing to invest because there are no customers in their store. They are failing to invest because their factories are sitting empty. They are failing to innovate because they’re not sure how large the market for the product will be.

That is the problem that we need to address. By the way, an extra percent a year on the growth rate for the next five years will do more for the budget than any amount of the entitlement-cutting that’s under discussion.

So I think the President has been right to be focused, and I think he could even focus more intensely on what is, I think, the central problem, which is how to get enough demand and enough confidence going, so that this economy achieves escape velocity from the recession.

We’ve been flying out of the recession, but we’ve been flying out of it dangerously close to stall speed, and doing something about that should be our top priority. I mean it is crazy.

MR. ISAACSON: Does that mean more stimulus?

DR. SUMMERS: Well, you can call it that. That’s one part of it. It is crazy if you think about it, that we have schools across this country where we tell our kids that education is the most important thing in the world, but we ask them to study in classrooms where the paint is chipping off the walls.

We can borrow money to invest in fixing that, at 2.8 percent. Twenty percent of the people in the country who are doing construction are unemployed, and we’re not trying to do something about that, when we have a major demand problem? It just doesn’t make any sense.

We have infrastructure in this country — I mean you can argue whether we need a new high speed rail system or whether we don’t need a new high speed rail system. But I don’t know what the argument is for letting bridges collapse. I don’t know what the argument is.

I mean every time, and unfortunately it’s fairly often, I fly in and out of Kennedy Airport to any other airport in the world that you might fly to from Kennedy — you can fly to Europe, you can fly to Asia, any of those places, and you compare Kennedy Airport with the airport where you land, and you ask yourself which is the airport of the greatest country, richest, most powerful country in the world?

I mean, and you know, you can say airports aren’t that important or whatever. But it is symbolic of an approach to infrastructure that probably never made any sense, and certainly doesn’t make any sense when you can borrow money at 2.8 percent and you’ve got 20 percent of the construction workers unemployed.

So I’d rather see us focus on the jobs deficit. I’d rather see us focus on the public investment deficit. I’d rather see us focus on the human capital deficit. Those are deficits that we need to focus on also.

Yes, in the long run right now, thanks mostly to what happened during the Bush administration, the United States of America taxes 14 percent of GDP. Fourteen percent. That’s about four and a half percent below the average of what we’ve done over the post World War II period, and we now have the oldest population that we’re ever going to have, a larger debt than we had before.

We have, apart from the aging of the population, a public sector that’s heavily involved in health care, and in every country in the world, health care has grown relative to GDP. The idea that somehow 14 percent is adequate, or that the priorities starting at 14 percent should be to cut taxes, is crazy.

Summers covers a lot of bases here, in plain English. “I’d rather see us focus on the jobs deficit. I’d rather see us focus on the public investment deficit. I’d rather see us focus on the human capital deficit.” That’s powerful, and undeniably true, and it’s a cause for great regret that no one in the Obama administration seems to be capable of saying such things in public.

Later on, Summers has great insights about the move from a manufacturing economy to a services-based economy and how the importance of advances in healthcare to national wellbeing, even if such things don’t show up in GDP statistics. He also has this very interesting observation:

If you look at the price earnings ratio for technology companies relative to the price earnings ratios for all industrial companies, you take that ratio, PE technology divided by PE industrial, you can plot that ratio over the last 40 years, and it is at the lowest point that it’s ever been.

Does someone have this chart to hand? I’d love to see it. Obviously, Summers is talking his book here, now that he’s a venture capitalist. But at the same time, his arguments are strong:

The Internet, the last time there was an Internet bubble, was 120 million people dialing up.

The Internet today is two billion people and two billion mobile devices, with wireless connectivity at a far more rapid pace. Today, the businesses have cash flow, which they didn’t ten years ago. So I think it’s a little facile to assume that just because the numbers are big, that it’s obviously a bubble.

This, then, is the Summers who is liked and admired by the people who like and admire him; I’m glad he’s finally giving the rest of us a glimpse of that Larry. And I’m beginning to think that instead of asking him to write a monthly column for us, we at Reuters should just phone him up unexpectedly, ask him a couple of good questions, and simply transcribe the answers. The result would probably be significantly more fluent and more interesting than anything he laboriously constructs on his own.

COMMENT

I took one micro class and I could spout that chatter. What I find disturbing about the remarks Summers made about women as president of Harvard is that it shows you something about what his mind does at rest–what kind of speculation he engages in. Well, and that fact that he thinks so highly of himself that he would say it out loud, although I suppose it’s better that we know that about him than have it be the kind of conversation he only engages in while safely ensconced in the old boys clubhouse.

What bothers me about Obama is that the above didn’t bother him.

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Counterparties

Felix Salmon
Jul 20, 2011 05:58 UTC

Utterly depressing column by Nathan Myhrvold, patent troll — Bloomberg

How to differentiate an economist from almost anyone else in society — Gelman

Paying taxes your employer keeps, by David Cay Johnston — Reuters

Wendi Deng’s Five Best Enraged Expressions — Awl

SNL’s “Ronald Reagan mastermind” sketch — YouTube

US Treasury Awards $142.3 Million to Benefit Organizations Serving Economically Distressed Communities Nationwide — CDFI

“Hackgate” – the movie trailer — YouTube

COMMENT

As a matter of curiosity, how do you explain all the bank failures in the 80s and the relative robustness of non-US, non-UK banks in the crash if Glass Steagal was a casual reason for stability? What was that about data and theories?

Posted by Danny_Black | Report as abusive
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