Felix Salmon

Improving America’s healthcare cost consciousness

Felix Salmon
Aug 25, 2011 17:34 UTC

If you haven’t read Sharon Begley’s wonderful Newsweek cover story on how less healthcare can mean better health, I’d urge you to do so now — it’s one of those articles where I just want to quote pretty much the entire thing. All manner of medicine, it turns out, from CT and MRI scans to antidepressants, have a habit of making people not better but worse.

The good news is that Big Medicine seems to be getting the message, and that’s having a real effect on Medicare cost inflation. Here’s Peter Orszag:

Partners HealthCare has used its health IT to be more selective about which patients should have diagnostic imaging tests, such as MRIs and CT scans. The cost to Medicare for imaging tests nationwide roughly doubled from 2001 to 2009. And such tests are not only expensive but potentially dangerous. Frequently imaged patients face an increased risk of cancer because of exposure to excessive radiation.

Doctors at Partners now order imaging scans through the computer system and are automatically queried about the patients’ characteristics. For each case, the software then provides an “appropriateness” score, reflecting evidence- based protocols for the image requested.

In a follow-up column, Orszag looks at another hospital, Mt Sinai, where he recently joined the board — a focus on reducing readmissions rates there has helped reduce its Medicare billing inflation to 2% — vastly lower than the 12% annualized inflation rate in Medicare costs that we’ve seen on average over the past 40 years or so.

The big question here, raised most promiently by Maggie Mahar, is why we’re seeing this unusual slowdown in Medicare costs right now. Mahar and Orszag say that a lot of the reason is the Affordable Care Act: a rare instance of a piece of legislation actually having its intended consequences. The act is designed to pay more for outputs and less for inputs — that is, to encourage the use of medical procedures only if they improve health outcomes, and to discourage them if they don’t.

I buy that. And if the healthcare industry broadly takes to heart the lessons of Begley’s article, then it’s easy to imagine a world where we can have our cake and eat it — lower healthcare costs (or, at least, lower healthcare-cost inflation) along with improved health outcomes.

The problem here is the incentives. From a public-policy perspective, there’s no doubt that getting doctors to order fewer harmful drugs and procedures is a really good idea. But from the point of view of the doctors and hospitals, they’re going to be leaving money on the table. Recent legislation includes some financial carrots and sticks, in a pretty well-designed manner.

Under the first stage of the HITECH Act, doctors who adopt electronic health records can receive incentive payments of as much as $44,000 from Medicare or $63,750 from Medicaid; hospitals can qualify for payments of $2 million or more. As of early August, Medicare providers had received $400 million in incentive payments for health IT, and much more is in the pipeline. Surveys suggest that while the first-stage incentives are available, at least two-thirds of American hospitals will adopt new systems.

Starting in 2015, the Medicare subsidies for adopting health IT systems are to be replaced by penalties for not doing so.

But it seems to me that the jury’s still out on whether these incentives are going to bend the famous cost curve over the medium to long run. Medical cost inflation is volatile and unpredictable, and downticks often just result in mean-reversion upticks the following year. The way to make sure these effects last is to get Begley’s message out to the population as a whole — and then to give them some amount of skin in the game when it comes to the cost of the procedures they do undergo. When people pay even a tiny amount of their direct healthcare costs, they become much more conscious of what those costs are. And the one thing this country really needs is much more cost-consciousness when it comes to healthcare.


@djseattle, you said what I was going to say, and more eloquently. Felix, we all have much more, ahem, money in the game than we did a decade ago. We can use the web to “educate” ourselves as consumers, but we can never be the same educated consumers as we are when buying a car. Our doctor is our personal expert, and we generally do what he/she says, and will buy all of the additional bells and whistles, even if a chunk of the cost is coming out of our pockets.

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Warren Buffett’s magical fairy dust lands on BofA

Felix Salmon
Aug 25, 2011 14:00 UTC

Behold the power of Buffett! With a $5 billion investment which will pay him $300 million per year in perpetuity, Warren Buffett has managed to boost the share value of Berkshire Hathaway by something north of $12 billion. Oh, and Buffett also gets a massive free option on BofA stock — the right to buy 700 million shares at $7.14 apiece, at any point over the next decade. If exercised, that would give him 7% of the company.

This is very reminiscent of the time when Buffett did something similar with Goldman Sachs, in the immediate aftermath of the collapse of Lehman Brothers. That too boosted the stock in the short term (although not as much as this), and the investment turned out to be an excellent one for Buffett, even though Goldman’s common shares are still trading below that September 2008 level.

There are basically two aspects to these deals. One is the capital raise itself, and the other is the magical Buffett fairy dust. The capital raise, in this case, is extremely expensive: Buffett drives a hard bargain. But the deal is worth it, for BofA, because of the magical Buffett fairy dust aspect. If BofA had simply brought this deal to market, offering $5 billion in preferred stock with generous attached warrants, I can guarantee you that the market would have come down harshly on the bank. It’s not enough money to move the needle when it comes to BofA’s capital; it’s extremely expensive; it’s potentially enormously dilutive to shareholders.

But the fact is that Bank of America isn’t playing a financial game, it’s playing a perceptions game. As John Hempton says, the standard analysis of BAC stock right now is a game where analysts “are fitting their analysis around the stock price”. I plead guilty to that: like many people, I think that Bank of America needs to raise capital largely because the stock price is screaming, loudly, that Bank of America needs to raise capital. This is not an unreasonable stance to take: especially when it comes to leveraged financial institutions, the stock price can be, and often is, a self-fulflling prophecy.

But Hempton’s point is well taken: by the same token, the stock price is not a particularly good guide to the value of a bank. And that means that when a bank’s shares are severely depressed, as BofA’s were yesterday, there’s a lot of room for Warren Buffett to come along and give them a nudge up to the next eigenstate.

The big question now, then, is what happens next. Does this investment singlehandedly turn BofA around and set its stock path on a lovely upward trajectory? In order for that to happen, BofA will need a steady stream of good news to ratify today’s stock boost. A settlement with the US attorneys general, for starters, would be wonderful. So I hope that BofA Brian Moynihan is being strategic here, rather than just tactical. If he has a medium-term plan for getting the market’s respect, and just wants to start it off with a bang, then this is a great way of getting there. But if he thinks this is a magic bullet, I think he’s going to be very disappointed.


Remember when Charles Schwab sold his company to Bank of America for ten percent ownership? He was on the board of directors but when they called BOD meetings they would not tell him. It was a different era.

He ended up buying back his company out of disgust.

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Nick Rizzo
Aug 25, 2011 05:40 UTC

It turns out that Facebook’s “Places” application won’t be killing Foursquare after all.

After 42 years of confusion, we finally have an answer for how to spell Gaddafi’s surname in the Latin alphabet. Hint: it’s not Gaddafi.

Groupon is like a shark: it needs to keep moving (growing) to survive. Jeff Bercovici at Forbes outlines some of its problems.

The price of gold fell on Wednesday by a virtually unprecedented amount. Gold skeptics were not shy about expressing their pleasure. If they really wanted to mess with the Gold Bugs, they’d learn these easy steps to counterfeit gold bars.

And it turns out that writing a cinematic flop has a lot in common with working on a losing election campaign.


Thanks for finding that! The link is fixed now.

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Thanks, Steve

Felix Salmon
Aug 24, 2011 23:26 UTC

It’s a sad day: only this morning I was reminiscing about my days exploring the Apple Macintosh in Palo Alto in 1984. Like much of the world right now, I’m reliving Steve Jobs’s greatest hits on YouTube, I’ve got a bit of a tear in my eye, and yet I can’t imagine how Jobs could possibly go out on a higher note than this.

Jobs took Xerox PARC’s ideas about what the personal computer could be and made them reality; he brought back Apple Computer from the brink of death to being the most valuable company in the world; he created a whole new class of electronic device, with the iPad; he even reinvented the telephone. And, of course, he’s still around, at least for the time being — he’ll stay on as Apple chairman (and, in one of the most touching parts of his resignation letter, as “Apple employee”).

So thank you, Steve, for everything you’ve done. You’ve relieved me of more money than I care to mention in public, and I don’t begrudge you a cent of it. In fact, even with the massive run-up in Apple’s share price over these past years, I’ve always been convinced that the best use of $1,000 or so has always been to buy an Apple computer, rather than Apple stock. The extra productivity conferred by the machine, I’m convinced, will give you a much better return on your money than any equity.

Here at Reuters, I made sure that I could work on a Mac before I accepted this job, and even though we’re standardized on PCs, you see Apples all over the company, up to and including the CEO’s office. None of that is going to change with Jobs’s departure as CEO. Does Apple still have an outsize personality who can slice away extraneous features on hardware, say no to the demands of the marketplace, and give us not what we think we want but what we never knew we wanted? I think it does: Jony Ive fits the bill quite nicely. And Apple’s amazing relations with its suppliers — the way that it can get chips and hardware into its devices that the rest of the world can’t get its hands on for any amount of money — is now baked in to the organization, rather than being reliant on a single man.

The formula, then, is clear. And with or without Jobs, Apple is, for the foreseeable future, going to coin simply astonishing amounts of money. It made $7.3 billion of profit just in the last quarter, on revenues of an almost unimaginable $28.6 billion. That makes Apple one of the most profitable companies the world has ever seen — and makes its stock look almost cheap, even at a market cap of $350 billion.

No one man can be responsible for all or even most of that kind of performance. Jobs has always been the exception who proves the rule as far as the cult of the CEO is concerned — he’s one of very, very few CEOs who really did make an enormous difference to their company. But even so, he’s just one guy, and he’s built around him a super-talented team who know exactly what’s expected of them. We’re not going to see Tim Cook coming out and talking about “one more thing” at a WWDC keynote presentation, but we don’t need to. Apple is a dominant company now, and is more than big enough to be able to withstand a leadership change at the top.

Today’s news, and tomorrow’s, will rightly be all about Jobs. But in a few years’ time, I look forward to the seeing the case studies showing how Apple, seeing an entirely predictable event coming down the road, set up an elegant and model handover from Jobs to Cook. Jobs knows that he will be judged on this — and I’m quietly confident that he’s done it perfectly.


At the risk of offending friends and colleagues who labour in the anonymity of the South Bay, I’m moved to laughter when I read of someone contrasting the suburbs of Cupertino and Santa Clara, and hoping to draw out a real distinction.

The vast swath of that portion of Santa Clara Valley has long been filled out by cookie-cutter suburbs. Cupertino is no different in any meaningful regard than Campbell, Los Gatos, Sunnyvale, Mountain View, Palo Alto, or even the less-dense areas of the city of San Jose.

That Apple chose Cupertino back in the eighties is an accident of time and circumstance. That they choose to remain there is (I believe) more of happenstance–they want to move into the former Hewlett-Packard campus that existed long before Apple was even formed.

I don’t fault those who live and work in the South Bay for being proud of the firms that are part and parcel of the physical geography of the place. Just as I wouldn’t do so in any of the other places where I’ve worked where a significant concentration of an industry’s wealth is forced into narrow geographic confines (cf. Wall Street, Hollywood).

To Kaleberg’s point about the corrosive effects of “crowning glory” architecture: I share the feeling that Apple’s efforts in this regard will prove to be a distraction–not a major one, but just enough so that the carefully balanced spinning wheel that is the Cook-led company can suddenly find itself in dangerous precession.

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Haiti: Dalberg vs Rolling Stone

Felix Salmon
Aug 24, 2011 20:13 UTC

Dalberg, the self-styled “Global Development Advisors”, are unhappy at the way they were portrayed in Janet Reitman’s Rolling Stone article on what’s happened to Haiti — and vast amounts of development aid — since the earthquake. They’ve just put out a press release on the subject, three weeks after the article appeared; they also sent me a document written by Dalberg’s Dan Altman and sent to Rolling Stone, in which they ask for corrections to the article. (Both are in PDF form, sorry.)

Dalberg’s main argument — they have lots of silly little ones — is that when they were looking at the cost of resettling people to a given site, they had no mandate to stop and wonder whether that site was actually habitable — whether, for instance, it was situated next to an open-mined pit, a 100-foot vertical cliff, and ravines. Their job, they say, was just to “compare the costs and amounts of time needed” to settle people at that site compared to some other site. They even “reiterated the need for additional assessments”! So you can’t really blame them for simply making cost comparisons, rather than saying that most of the sites they were looking at were non-starters.

This is telling enough in and of itself. But it’s another response, from Altman’s letter, which really jumps out at me. Responding to a quotation in the article from Glenn Smucker, Altman says that “in fact, Smucker is a competing consultant and has a clear conflict of interest when commenting on Dalberg’s work”.

This I think encapsulates exactly what Reitman is talking about in her article: a culture where Haiti is overrun by consultants, all of whom are competing with each other for juicy million-dollar mandates. Dalberg even goes out of its way, in its press release, to say that when it got interns to work on the Haiti project, their work “was provided free of charge in excess of Dalberg’s contractual obligations”, as though Dalberg’s first duty is to their contractual obligations, as opposed to, well, the people of Haiti.

Dalberg then inserts this dig at Reitman:

Since the Rolling Stone article’s publication, questions have arisen about the credibility of its sources and its use of reported material. For those seeking a more accurate account of the current situation in Haiti, Dalberg recommends the book Haiti After the Earthquake by Paul Farmer of Partners in Health and the article “Eighteen Months After the Earthquake: A Return to Haiti” by David Weiss of CHF International on The Huffington Post.

The “questions have arisen” formulation is mealy-mouthed and unhelpful: I asked Dalberg’s PR person, Lucy Mele, what exactly it meant, but I can’t tell you what her response was, because she made sure to tell me it was off the record.

And what about Dalberg’s preferred sources? Well, one of them is David Weiss of CHF, described in Reitman’s article thusly:

Although CHF has been meeting on the project since June 2010, the rebuilding progress in Ravine Pintade has been painstakingly slow. Lee admits that the organization, a vast NGO with relief operations in 25 countries around the world, has never done “micro-urban planning,” as she calls it — nor have the half dozen or so other NGOs planning similar projects in Port-au-Prince. “It’s a complete learning experience for all of us,” she says. All that’s needed to make the project a reality, she adds, are more funds.

Critics regard such claims with amusement: CHF, which works out of two spacious mansions in Port-au-Prince and maintains a fleet of brand-new vehicles, is generally considered one of the most ostentatious NGOs in Haiti. It is also one of the largest USAID contractors in Haiti and enjoys a cozy relationship with Washington: Its president and CEO, David Weiss, is a former State Department official and lobbyist. “There is a shocking lack of transparency and accountability in aid, and it’s crystallized in this relief effort,” says Schwartz, the anthropologist. “For an NGO in Haiti, the criteria for success is raising money, filling out paperwork and making sure the money is ‘accounted for’ — meaning they can show donors that they spent the money. But nobody goes out there and judges the project, or even verifies that the project exists. In the majority of the cases, nobody even talks to the community.”

The other source recommended by Dalberg is the universally-admired Paul Farmer. But his view of Haiti is, I think, closer to Reitman’s than it is to the professional-aid-consultant nexus of Dalberg and CHF. Farmer recently told NPR that “if you look at Haiti, many billions of dollars have gone into development aid there that have not been effective”.

And what about his book? Well, I happen to have it on my desk right now. Open it up to the introduction, and he starts talking about the reconstruction effort: “the relevant knowledge needed to be historically deep,” he writes, “because the damage caused by the quake and the responses to it were rooted in Haitian history”; he continues by saying that the recovery commission in Haiti, “good intentions aside, has become another obstacle to Haiti’s recovery”.

Later on in the book — and I’ve only given it a very brief scan — Farmer talks about how “there was little evidence to suggest that the tsunami of goodwill that crashed over Haiti after the quake could effectively address” its layered afflictions:

Whether one looked at job creation, health, education, potable water, or safe and affordable housing, similar conclusions could be drawn. First, great weakness in the public sector made it difficult to deliver even basic services at a significant scale; second, not enough of the pledged earthquake relief reached those in need through mechanisms that might address this central weakness. In other words, existing development and reconstruction machinery did little to mitigate Haiti’s acute-on-chronic problems in spite of many good intentions and extraordinary generosity.

Elsewhere, Farmer echoes Reitman (or maybe it’s more correct to say it’s the other way around) when he says that Sean Penn “had better ideas and more commitment to implementing them than did many of the self-described experts”. One can’t help but suspect that he’s thinking of the likes of CHF and Dalberg here. While Penn gets three mentions in the book, Dalberg and CHF get none.

While Dalberg and CHF are good at getting US government money and spending it, then, I’m inclined to trust people like Reitman and Farmer when it comes to the realities of Haitian reconstruction or the lack thereof. And Dalberg’s response to Reitman hasn’t changed my mind on that in the slightest.


Let me be less cryptic: the best aid groups mean well, the worst are just good at learning how to become self-sustaining in an aid ecosystem that focuses on discrete projects rather than doing anything whatsoever to change the circumstances that allowed a disaster of such magnituded to happen in the first place. Amartya Sen is really good about stuff like this, pointing out how in reality what look like natural disasters (e.g., famines) are often really political disasters — for instance, the Haitian earthquake was of a lesser magnitude than the Chilean earthquake, the Christ Church, New Zealand quake, and of course, much lesser than the recent Japanese disaster. These were all disasters in their own right for their own reasons, but none came even an acre close to the overwhelming loss of life in Haiti — even if you reduce it by half on the assumption that it was wildly exaggerated due to the unusually intense chaotic aftermath that didn’t occur in these places that experienced more intense quakes.

The point simply being, as an individual, my response is to ignore these and a host of other groups because they are just another symptom of Haiti’s dysfunction and the dysfunctional response of aid groups to it. They certainly are not offering anything that approximates a solution to anything that really matters. It boggles the mind that a consultant would be paid to do this, when you could just as easily pay the average Haitian to just relocate, because I am guessing most Haitians already know how to find a crappy piece of real estate to subsist in.

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How the money-market rescue operation worked

Felix Salmon
Aug 24, 2011 17:16 UTC

Bloomberg has got its hands on new data from the Fed, and it’s looking a bit desperate in its attempt to squeeze news out of that data. Its latest scoop, under the headline “Fed Made State Street Profitable as Middleman”, starts like this:

State Street Corp. (STT) and JPMorgan Chase & Co. (JPM) profited during the financial crisis by borrowing $200 billion almost risk-free from the Federal Reserve under a program intended to rescue money-market mutual funds.

What on earth does it mean to borrow money “almost risk-free”? There’s risk involved in lending money, of course. But I have no idea what risk-free borrowing might be. On top of that, the profits here seem incredibly modest. The Fed lent State Street $89 billion; State Street then took that money and bought various securities from money-market funds. It held those securities to maturity, and ended up making a profit of $75.6 million.

That’s a return of 0.08%.

It’s hard to get too worked up about this: the Fed needed to do something about money-market funds; it was legally incapable of conducting this operation itself; and therefore it got State Street and JP Morgan to help set up the program, paying them a modest 8bp fee for doing so. Bloomberg tries to find an expert of some description to get outraged about this, but the best they can do is to find a finance professor who thinks the fee was “appropriate”:

“The program was enacted without any bidding process and awarded on the basis of whoever was there at the moment,” said Joseph R. Mason, a finance professor at Louisiana State University in Baton Rouge. While the banks’ return may have been appropriate, the lack of competitive bids is troubling, Mason said. He noted that for State Street, JPMorgan and other participants, “there was virtually no risk.”

That’s true — but you can be sure that if there was risk involved, State Street and JP Morgan would have charged much more than 0.08%. It’s also worth noting that the Fed itself made much greater profits on the program than the banks did: some $543 million in total.

State Street didn’t get its $75 million for nothing. For one thing, it helped to design and set up the program. And it also took the risk that it could end up buying debt which wasn’t indemnified by the Fed and which might end up defaulting. There’s operational risk in all of these schemes, especially when they’re set up in a hurry and have to get implemented in the middle of a financial crisis.

And the Bloomberg headline is I think a bit misleading: the way I read it, at least, it’s saying that the Fed program was responsible for making State Street profitable. That’s not true. In fact, it’s just saying that State Street’s role as a middleman was profitable. Which is true, but hardly news: if a bank can’t make money by acting as a middleman, then it won’t act as a middleman.

The big picture, here, is not that the State Street program made money, but that the program to rescue money-market funds worked. Many of these funds faced enormous redemption requests in the days after the Reserve fund broke the buck; thanks to this program, all of them managed to meet those requests. Ultimately what happened was that hundreds of millions of dollars which would normally have gone to depositors in money market funds went instead to the Fed, with State Street and a few other banks taking a small slice. The funds were saved, the Fed made a handy profit, and the system didn’t collapse. Sounds like a big success to me, rather than any kind of scandal.


And the bigger story is that the government looked the other way as money market funds became as systematically and socially important as savings accounts. There is a scandal, in that the Fed was forced to put something together at the last minute, instead of relying on some sort of deposit insurance. The fact that it worked out fine this time is cause for relief, but not celebration.

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Steve Brill’s blinkered view of education

Felix Salmon
Aug 24, 2011 14:03 UTC

If you don’t have the time or inclination to read Steve Brill’s book on education reform, then his bombastic op-ed on the subject is a pretty good alternative. And similarly, if you didn’t read Diane Ravitch’s 4,400-word review of “Waiting for Superman” in the NYRB, then her 1,000-word response to Brill captures the heart of her argument. Reading them side by side, the conclusion I come to is that Brill protests far too much.

Brill’s running theme is that there are discoverable facts about education, and that when a crack reporter (Brill himself, natch) spends lots of time poring through arbitration-hearing testimony and union contracts and the like, those facts will become clear and can be reported in a straightforward manner. It’s the “trust me, I’m a reporter” approach.

Meanwhile, Ravitch stays out of the weeds, reporting instead the result of large-scale empirical studies which show that charter schools don’t in fact outperform unionized public schools, and that US educational underperformance is much more attributable to child poverty than it is to bad or unionized teachers.

Brill says that Ravitch “cherry-picks all kinds of data,” but the fact is that his own data is invariably bottom-up and anecdotal, based largely on what he himself has reported. And then comes the point at which I pretty much decided that he’s full of hot air:

I have now worked my way through a fog of claims that give new meaning to the notion that if you repeat something that is plainly untrue enough times it starts to seem true, or at least becomes part of the debate. For example, there’s the refrain from the deniers, including Ravitch, that charter schools skim only the best students in a community. Some may, but not the best ones like those in the KIPP or Success Academies networks, where students are admitted by lottery and which teach the same ratio of learning disabled students as the traditional public schools. Those are facts.

I’m sorry, Steve, but it is not “plainly untrue” that charter schools generally have more of the brighter, richer kids in any given community, and fewer of the poorest ones who generally drag down test scores. Indeed, it’s an empirical fact. There’s a famous story in statistics about the guy who fires an arrow at a barn door, and then claims he hit a bullseye by painting a target around it. Brill seems to be doing the same thing here: he’s the one cherry-picking the best-performing charter schools, and then claiming that they’re somehow representative of charter schools as a whole, and that the “facts” of what happens at KIPP somehow disprove the broader data being cited by Ravitch.

Later on in his piece, Brill concedes, of charter schools, that “probably not more than half are performing significantly better, if at all, than traditional public schools.” Which is his way of saying that Ravitch is right; he doesn’t mention the Stanford CREDO study, the best impartial judge of this matter, which concluded that 17% of charters were better than a matched public school; 37% were worse; and 46% were the same. I suppose “not more than half” is one way of saying “17%.” But somehow Brill has convinced himself that the lessons of that 17% are scalable, even when — as he himself admits — what he’s looking at here is “a few thousand successful charter schools mostly run and taught by a relatively small corps of highly-motivated, best-and-brightest types, many of whom soon approach burnout,” rather than anything which has ever been successfully implemented on a universal scale.

The point here is that Brill never really makes the case that granular reporting on union contracts and the like is the best way to diagnose problems with a nation’s educational system, or to propose solutions. It’s pretty much impossible to find a union which isn’t unhelpful at times, and at the margin it’s probably fair to say that the interests of teachers are not always fully aligned with those of the children they’re educating. As a result, it’s hardly surprising that Brill manages to find ways in which teachers’ unions can impede rather than enhance the quality of education in specific instances.

But Brill’s obsession with unions seems to have blinded him to everything else which determines educational outcomes. And when he says that Ravitch wants “to rebut the simple and obvious argument that effective teaching is what counts the most in the classroom”, he’s straying so far from his beloved facts that he comes across mostly as a la-la-la-la-I-can’t-hear-you zealot. As a general rule, anybody who thinks that anything about education reform is “simple and obvious” is wrong, and in fact Brill’s “argument” is no argument at all: insofar as it’s even true, it’s only true tautologically.

All of this is a pity, because we desperately need some grown-up discussion about the way that America’s kids are educated, rather than the all-heat-and-no-light fights that we normally get.

My feeling is that by far the most important factor has nothing to do with unions, and everything to do with the fact that schools are locally funded: that’s a great way of pouring the greatest amount of resources into precisely the schools which need them least.

Way back in 1984, I went to a US public middle school which had so many brand-new Apple Macintosh computers that there were always a few free. I’m sure the educational outcomes of my class there were pretty stratospheric. But they probably would have been just as high even without all the money and resources lavished on us by the local community in Palo Alto. Meanwhile, just across the freeway in East Palo Alto, local schools, starving for resources, were underperforming. There’s nothing fair about that. And until we fix the system whereby schools are funded by property taxes, schools in poor areas are always likely to have serious problems.


Ravitch is just completely out there.

The problem is not poverty, it is a culture which does not value education. Students from subcultures that value education tend to do well, independent of wealth. Students from subcultures that don’t, tend to do less well.

In any case, your assessment is wrong, because spending per pupil is not correlated with results.

What we need is pressure on parents and consistent messaging to students that doing your homework is important and you have to work hard to learn. Our president, whose mother got him up before dawn to study, should be leading this effort, instead of trying to placate the unions.

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How to regulate payments

Felix Salmon
Aug 23, 2011 21:43 UTC

If you go to the Finovate conference in New York next month, or any similar event, you’ll be surrounded by exciting and aggressive young payments companies. They have names like Dwolla and Jwaala and Modo and Square, and most of them are going to fail. That’s as it should be: it’s the Silicon Valley way. There are lots of bright ideas floating around, and eventually one or two of them will really gain traction; at that point they’ll be bought or otherwise co-opted by the broader banking industry and will make their way into the mainstream. Meanwhile, the big banks and card companies are slowly rolling out their own products, and of course PayPal continues to do extremely well, with revenues of more than $1 billion per quarter on payment volume of more than $3,500 per second.

Aaron Greenspan is unlikely to be one of the winners in this space: his payments startup, FaceCash, has yet to get off the ground. But his attempts have at least yielded this very interesting paper, which details the rather crazy network of regulations that any payments company needs to navigate. If your idea of fun is navigating a Kafkaesque bureaucratic maze while spending hundreds of thousands of dollars, then I’d highly recommend setting up a payments company. Here’s some of the wonderful facts about payments regulation that Greenspan has turned up:

  • You’ll need to file e-reports with the Financial Crimes Enforcement Network. In order to do this, you’ll need a Windows computer (not a Mac), running Windows 2000 or XP, and Internet Explorer (not any other browser). Plus various unwieldy plug-ins. Secure!
  • In order to check whether a given Social Security number belongs to a dead person — a basic security check — the US Department of Commerce will charge you rates starting at $995 per lookup, and rapidly rising to as much as $14,500.
  • When companies ask for a driver’s license, they currently have no way of checking online to see whether that license is valid.
  • Of the 50 states, not one yet has a web-based license application process.
  • None of the major online payments companies has yet managed to get is licensed in Wisconsin.
  • None of the major phone companies has got licensed in any state, despite the fact that they all want to move into the space in one way or another.
  • Universities’ money-transmission programs, like Harvard’s Crimson Cash and Stanford’s Cardinal Dollars, are also unlicensed. “Consequently,” writes Greenspan, “the presidents, provosts and trustees of every private university in the nation with such programs (which are exceedingly common) are unknowingly committing federal crimes, and could be incarcerated.”
  • Maryland’s license fee is $4,000.00 in even-numbered years, but $2,000.00 in odd-numbered years.

Greenspan concludes, sensibly enough:

It is clear that the federal government needs to spearhead an effort to bring money transmission regulation, or non-bank regulation more generally, under one (and only one) roof. Whether that roof is the Department of the Treasury’s or the Consumer Financial Protection Bureau’s remains to be seen.

That roof should be the Consumer Financial Protection Bureau, since payments are at the heart of consumer finance — but also because the CFPB is housed at the Fed. And where I part ways with Greenspan is that I don’t think that the CFPB should necessarily be letting a thousand flowers bloom, here.

Greenspan has a compelling and impassioned case that change and competition is needed, not least because the current system of interchange fees is much more expensive than it should be. Instead, the CFPB, working closely with Treasury and the Fed, should aggressively encourage payment at par. And in turn, that means it’s going to be very difficult for startups to enter this space: if payments all clear at par, the way that cash and checks and even clearXchange do, then there’s no revenue stream for the intermediary.

So yes, let’s have a massive consolidation of payments licensing laws — they’re a mess right now, and they do precious little good for anybody. But at the same time, let’s think seriously about the public-policy aspect of payments regulation: what’s really in the public’s best interest here? The answer isn’t a balkanization of the payments space into dozens of competitors all chasing scale and fee income. Instead, it’s simple and universally-accepted mechanisms for one person or merchant to pay another person or merchant directly, with neither of them paying on a per-transaction basis for the privilege. That’s far from impossible: in fact, it already exists in most countries around the world. It’s time that it existed here, too.


I think the core issue is the increasing use of rewards cards. Those rewards are paid for with much higher interchange fees which of course are paid for by the merchants. Using interchange fees to pay for basic infrastructure, fraud, the initial float, and a reasonable profit margin makes sense to me. Using them to pay for rewards programs is hard to justify. My understanding is that merchants have to accept all cards, so their prices must reflect the higher interchange fees for rewards cards. Because rewards cards are generally given out to higher income consumers, we have a situation where the poor subsidize rewards for the rich. I’m a capitalist, but I think the current system is flawed.

Posted by CrazyMajority | Report as abusive

Adventures with paywalls, FT edition

Felix Salmon
Aug 23, 2011 14:05 UTC

Every so often, I get puzzled looks from FT types when I complain about their paywall, and say that it’s not only user-unfriendly for non-subscribers, it’s particularly user-unfriendly for subscribers, too.

Here’s what greeted me this morning when I followed a link to an FT story:


What happened was that the page started loading — it got as far as the headline. Then it greyed out, and the paywall box appeared. (And then — this is my favorite bit — a video flash ad started playing on top of the paywall box; it went away before I could get a screengrab.)

You can see, in the greyed out bit, that I’m logged in to the site: it says “Welcome felix” right there. Yet the paywall is asking me to login again.

When I did that, I ended up at the FT.com homepage, rather than the article I wanted to read. So I went back to the link which sent me to the FT and clicked it again. This time, I got this:


This is not much of an improvement. I’m still logged in, but now it thinks I’m a registered reader who’s used up his quota for free articles and who isn’t a subscriber. Not true! I’m a paid subscriber.

If I click on the big button saying “Click here to continue”, however, it treats me as though I have no subscription:


But if I make my way to the “Your account” link, the site still tells me that I have “Unlimited FT.com access”. Ha.


Now I have a theory for what might be going on here. This is the link I was following; if you look at the URL, it’s a bit of a mess, seems to include the address twice, and has the string “Authorised=false” in the middle. Here it is:


I have no idea what might be going on here, but I seem to run into this problem quite a lot when I follow FT links which other people have shared using various social media tools. When a link to the FT escapes into the wild, it seems, the FT tends to treat it with extreme prejudice, and errs on the side of shutting it down. The FT’s OK with people sharing links using its own internal sharing tools, but good old-fashioned linking is not something it’s very cool with.

This is why I say that the FT and NYT paywalls are very different beasts. If someone’s doing the NYT a favor by linking to its stories, the NYT will welcome all those visitors. The FT, by contrast, sends them away, even if they’re FT subscribers.

The FT site works fine for subscribers who read it the old-fashioned way, starting at the homepage and then clicking around. As does the web app on the iPad. But for those of us who get our news from feeds, following links from email or Twitter or Facebook or an RSS reader, the FT paywall is a disaster. And it generates a large amount of ill will from people like me who pay hundreds of dollars a year for “unlimited access” to the site.


I just cancelled my subscription to the FT out of disgust. They dropped the print edition in Texas and equivocated about access to FT.Com. I was using it for teaching purposes in a university–marvelous, ideal vehicle–but their pricing structure and dreadful customer service has led me to this. They obviously don’t give a damn how many educated subscribers they lose.

Posted by Nosoymexicano | Report as abusive