Felix Salmon

In a blatant publicity bid, Abercrombie & Fitch has offered to pay a “Jersey Shore” cast member not to wear their apparel. Ouch. That organization is like a publicly traded organization of Mean Girls. At least it received its comeuppance, losing more than 8% of its value.

LA to S&P: “You’re fired.” Now no more ampersands in this post, I promise.

Dude, where’s my inflation?

Here’s a rather interesting, rigorous analysis of how the unemployed re-orient their time priorities. Read it, if you can spare the time.

Christine O’Donnell walks off the set of her interview with Piers Morgan. Perhaps she found out that his people came to this country to burn witches.

After wasting our time with two days of Media Power Bachelors and Bachelorettes, the New York Observer can at least claim credit for one new happy couple. (Created by this amusing app.)

“The Elite Illusion”, a new paper from Atila Abdulkadiroglu, Joshua Angrist, and Parag Pathak, is causing quite a stir in the blogosphere today. (An ungated version is here; see commentary from Mathews, Yglesias, and Salam.)

The main lesson of the paper — which doesn’t surprise me in the slightest — is that students at highly-selective schools, like Stuyvesant in New York or Boston Latin, don’t seem to perform any better than students who might well have gone to those schools but didn’t. In other words, the outperformance of such schools on tests is a function of how selective they are; it’s not a function of how good the teaching is.

A couple of points are worth making here. First is the difference between selective public exam schools, on the one hand, and selective private schools, on the other. The latter are much more expensive, both for parents and on a cost-per-student basis. Reihan Salam is also right that when it comes to hiring teachers, public schools have lots of bureaucratic nightmares that private schools can often avoid.

That said, the lesson of this paper is emphatically not that you’d be better off sending your kid to a private school than to a public exam school. You wouldn’t — as the exam results alone indicate. There aren’t a lot of studies of public vs private schools, but the ones which do exist generally show no difference at all in educational outcome, once you control for the socio-economic status of the kids being admitted. Essentially: middle-class kids who grow up with two well-educated parents and lots of books around the house will generally do very well in school no matter where they go.

This new paper shows that there’s not much difference between public schools, either — even though everybody “knows” that the highly-selective exam schools are better than the alternatives, and many parents will only send their kids to a public school if they get in to one of the very selective ones.

That said, Salam — who went to Stuyvesant — does make one good point which undercuts slightly the thrust of the paper:

The 100 most competitive students at Stuyvesant were indeed very competitive, with almost all attending selective schools, etc. The least competitive students fared less well… I was one of them, incidentally, and I clawed my way out with the help of a few people who continue to be my closest friends, all of whom have gone on to distinguished careers.*

He then quotes Jesse Anttila-Hughes, who teases out the implications of the study, which looked at the kids near the cut-off (she’s he’s one of them), not the brightest kids in the school. The study is essentially taking the experience of kids who are in the bottom 10% of Stuyvesant, and comparing them to kids who are in the top 10% elsewhere. If you’ve ever been a kid, you’ll know that massive difference in relative ability will have enormous repercussions when it comes to your educational outcomes.

Anttila-Hughes continues:

A major reason specialized schools exist is not to help marginal kids do better but to allow superstar kids to do extraordinarily well. Stuy is famously referred to as a “haven for nerds” and like many top schools succeeds by virtue of giving driven and talented kids the chance to do what they want and the resources to do so… I strongly suspect that the causal effect of going to the school is hugely nonlinear in ability.

This might be true — but on the other hand, it might not be. Nerds flourish in the most unlikely places (like Far Rockaway High School), and while there’s a high density of nerds at Stuyvesant, we’d need another study to show how they fare there compared to elsewhere.

In general I think that the obsession over the relative merits of different schools is a classic example of the narcissism of small differences. Some kids fit in much better at this school than at that one — and just as many would be better off at that one rather than this one. There’s no easy way of generalizing, no sense in which School A is in general a significantly “better school” than School B. When it comes to educational outcomes, by far the most important factors determining them are external to the school — the kid’s health, wealth, and home surroundings. And most important of all, of course, is the character and personality of the individual person being educated — something which is much more innate than subject to shaping.

So if your kid doesn’t get in to Stuyvesant, it’s no bad thing — in fact, it might well be a good thing, given that your kid would probably in that case have been near the bottom of the Stuyvesant class. And before you shell out on school fees, ask yourself whether the money wouldn’t be better spent on other forms of education — books, computers, travel, theater, and the like. School’s important. But it’s not nearly as important as most middle-class parents think it is.

*Update: Apologies to Reihan Salam: this is a misleading ellipsis. He was one of the bottom half of Stuyvesant students, not one of the least competitive students in the whole school. He emails to say that “unfortunately, I think it would’ve been far harder for me to get from, say, the tenth percentile to a stronger position than from the 50th percentile”.

My Gastronomics column today is about pop-up restaurants, and how they’re generally what Ryan Sutton would call a bad deal. Essentially, you take the amount of money you’d normally pay at a polished operation which spends a lot of money and effort on what the Zagat guide would call “decor and service”. And then you spend it on food alone, with little if any attention paid to the decor-and-service side of things.

The piece is inadvertently timely, coming as it does in the wake of GQ restaurant critic Alan Richman’s mea culpa when it comes to the important question of service:

Everyone takes poor service personally. Get a bad table and you’ll wonder if the hostess finds you unworthy. Find yourself with a disrespectful server and you’ll feel worse, because you’re expected to tip…

Critics like me deserve some blame for the current proliferation of impossibly low service standards in so many casual New York restaurants. We tend not to censure lackadaisical conduct, thinking this is what customers want and that we would appear out of touch if we disapproved…

I wish I had never been so forgiving in my reviews of New York restaurants. I should long ago have paid attention to this disastrous decline in service. Casualness in restaurants does not automatically make customers feel more relaxed. It often has the opposite effect…

I appreciate an atmosphere lacking formality. I love Momofuku Ssäm Bar in Manhattan and Schwa in Chicago, both unpretentious and unfussy—but also attentive. They employ people who know how to take orders, fill glasses, clear plates, drop checks. Neither neglects customers. These days, too many new restaurants do. Their motto might as well be Too Cool to Care.

Well-run restaurants recognize that thoughtful service enhances an evening out, and that a bit of formality might be required in order to reach that goal. Customers these days tend to confuse discipline and manners with arrogance. Perhaps they are remembering the excess stuffiness of decades past. That hardly exists any longer. Arrogance today is exhibited by inconsiderate servers who do almost nothing for customers other than slap plates down in front of them and expect a generous tip. Arrogance is a restaurant believing it can prosper without looking after its customers.

I half-agree with Richman here: he’s right that restaurant critics are indeed to blame for much of the bad service we’re seeing. They nearly always concentrate on the food, with the rest of the dining experience something of an afterthought; what’s more, while they’ll say good things about good service, they do tend to soft-pedal complaints about bad service.

But in fact the food press more generally should shoulder an even greater part of the blame. Reviewers at least care about service — but outside of restaurant reviews it’s barely mentioned at all. Pop-up restaurants, in particular, get lots of buzz just before they open, when no one knows what the quality of service is like — and food reporters breathlessly detail their opening dates and their menus just because they’re new.

The desire of food bloggers and reporters to cover pop-ups is analogous to the desire of financial reporters to cover daily moves in the stock market: it’s happening now, it’s news, so therefore it must be reported — ideally as breathlessly as possible. And just as stock-market reporting is generally unhelpful when it comes to individual investment decisions, reporting about pop-ups is equally unhelpful when it comes to working out where to eat this evening. All that buzz makes the restaurant top of mind, even when you can almost certainly get a better meal for a lower price with better service and fewer kinks in the kitchen at just about any long-established place.

As a general rule, any food event is going to be a disappointment, compared to an old-fashioned meal at a polished restaurant — and pop-up restaurants count as food events. Leave ‘em to the hipsters: if you love your food and love your restaurants, best avoid pop-ups entirely.

The US government, when it taxes individuals, taxes only what they earn, and not what they spend; this is one big reason why we have a gaping budget deficit. Every other developed country in the world has some kind of consumption tax, as indeed do many US cities and states. If the US is serious about getting its fiscal house in order, a consumption tax of some description is likely to be necessary.

Bloomberg has come out in favor of a value-added tax of the kind familiar to those of us from Europe. It’s a tried-and-tested solution, and it’s superior in just about every way imaginable to the flat sales taxes that Americans are used to right now. It’s spread along the supply chain instead of being back-loaded at retailers; it is much more adaptable to an economy based on services rather than goods; and it easily captures online activity from places like Amazon.com which current sales tax regimes find hard to deal with.

There would also be a reduction of tax-collecting bureaucracy: rather than having to operate their own sales-tax regimes, states and cities could simply use the national one instead.

Any sales tax, of course, is regressive, and would therefore need to be combined with some kind of income-tax credit. But if you take that as a given, then there are real advantages to consumption taxes: for one thing, they provide an incentive to save and invest rather than to spend. That might be bad for the economy in the short term, but it’s good in the long term: we need to get our national savings rate up. And there could even be a short-term benefit, as Bloomberg points out:

The time needed to implement a VAT — as much as two years — could even provide a much-needed economic stimulus. If people knew the tax was coming, they would probably make big purchases now.

Count me in with the idea of a national consumption tax, then. But there are other ways of implementing such a thing, and it’s also worth resuscitating the progressive consumption tax idea that Robert Frank laid out very clearly in 2007.

Under such a tax, people would report not only their income but also their annual savings, as many already do under 401(k) plans and other retirement accounts. A family’s annual consumption is simply the difference between its income and its annual savings. That amount, minus a standard deduction — say, $30,000 for a family of four — would be the family’s taxable consumption. Rates would start low, like 10 percent. A family that earned $50,000 and saved $5,000 would thus have taxable consumption of $15,000. It would pay only $1,500 in tax. Under the current system of federal income taxes, this family would pay about $3,000 a year.

As taxable consumption rises, the tax rate on additional consumption would also rise. With a progressive income tax, marginal tax rates cannot rise beyond a certain threshold without threatening incentives to save and invest. Under a progressive consumption tax, however, higher marginal tax rates actually strengthen those incentives.

Frank laid out his tax as an alternative to the income tax; my feeling is that given how-do-we-get-there-from-here problems and also diversification benefits, it’s worth keeping them both at some level. We should keep the income tax, at a lower level than it is now, and increase Frank’s standard deduction to say $40,000 a year. Anybody spending less than that pays no consumption tax at all, while consumption of hundreds of thousands of dollars a year could be taxed at say 20% and consumption in the millions could be taxed at a higher rate still.

All of this could conceivably be done in a revenue-neutral way, with income taxes falling to make up for the new consumption taxes. But that would defeat a large part of the purpose, which is to get US incomes and expenditures roughly in line with each other. Up until now, the federal government has essentially been taxing with one arm tied behind its back. If we want to get serious about the deficit, then it’s time to free up as many new sources of tax revenue as we can find — including such things as a carbon tax, a wealth tax, a financial-transactions tax, and, yes, a consumption tax.

Lots of good news today! Regulators still have no particular way to unwind big banks, while Bruce Bartlett argues that aggregate demand isn’t changing any time soon. The German economy, Europe’s best hope, is starting to get echt scheisse. And Texas governor Rick Perry thinks Ben Bernanke is “almost treasonous.” Thanks, Rick.

Meanwhile, Manchester United is considering raising $1 billion in an IPO in Singapore. Is Man U being short sighted? Perhaps they’ll apply corrective vision to the back end of the deal. I always preferred the Red Rebels, anyway.

Here’s a possible explanation for why people bought T-bills after the downgrade: Is money a Giffen good? The troubled NY City Opera must be hoping that its subscriptions are Giffen goods: minimum subscription price is UP 400%.

In New York City, a judge tosses the lawsuit against the Prospect Park West bike lane, while GQ critic Alan Richman ravages hot new restaurant M. Wells.

Police in Santa Cruz, California are using a computer program to predict when and where crimes will occur and stop them before they start. No word on what happens if only two of the three pre-cogs agree.

Reuters’ own Anthony De Rosa is a New York Observer Media Power Bachelor. Congratulations, Soup. While Felix wasn’t eligible for that list, you are eligible to win a very handsome signed drawing of everyone’s favorite British finance blogger by becoming a fan of Reuters on Facebook. You’ll also win my undying enmity, as that print was supposed to be mine.

Warren Buffett’s op-ed on Monday calling for higher taxes for the very rich clearly touched a national nerve. Which is one reason there’s been a steady stream of arguments from the right explaining that in fact he’s wrong when he says that he pays much lower taxes than anybody who actually earns money from a job. And there’s one argument in particular which seems to be very popular.

Here’s Daniel Indiviglio:

The income that a corporation makes is first taxed at 35%. Then, a dividend is paid out — after taxes. If you obtain that dividend, should it be taxed? Well, it already was — at 35%. For this reason, it makes sense to tax it at 0%. If you tax it more, then you are taxing the income it produced twice.

And here’s Tim Worstall:

In the U.S. system from our $100 first we take $35 at the corporate level. Then we take another $15, or the dividend tax rate of 15%, from the recipient. Giving us a tax rate of 50% on dividends. We’ve taken $50 from the total amount that was to be used to pay dividends.

And here’s the WSJ:

Much of his income was already taxed once as corporate income, which is assessed at a 35% rate (less deductions). The 15% levy on capital gains and dividends to individuals is thus a double tax that takes the overall tax rate on that corporate income closer to 45%.

Amazingly, the WSJ editorial page is the most honest of the lot here, insofar as it admits that U.S. corporations don’t actually pay 35% tax on their corporate earnings. In fact, U.S. corporate taxes account for just 1.8% of GDP, the lowest number in the OECD, far behind, say, Switzerland (3.3%), Britain (3.6%), Japan (3.9%), or Australia (5.9%). We could literally impose that tax burden twice over and still only come up to the OECD average of 3.5%. So much for the WSJ’s idea that “this onerous tax on capital is a U.S. competitive disadvantage in the global economy”.

But there’s a deeper conceptual problem with the double-taxation argument. Money sloshes around the economy, and it’s taxed at various points along its journey. If I pay sales tax, for instance, I do so with my post-tax income: you can’t deduct the sales tax you pay when you file your taxes every year. Follow a dollar on its way around the economy, and you’ll find it being taxed at city, state, and federal levels; as income and as capital gains; and in many other ways besides. If it’s used to pay for a plane ticket or a cellphone bill or a hotel room, for instance, there are likely to be all manner of taxes imposed on it.

In fact, I’m a fan of the idea that one great way to simplify the tax code is to get rid of the deductibility of tax payments altogether; in particular, state and local income taxes should not be deductible. That deduction costs the federal government some $50 billion a year, for no good reason. By definition, all of that money goes to people who itemize their taxes, who are generally rich: 16% of it, in 2004, went to people earning over $1 million per year, and the number has probably risen since then.

All money has been taxed at some point along the line, many times over. Indeed, given the extremely modest rate of growth of the money supply, the government basically just taxes the same monetary base over and over again in order to generate its revenues. If we didn’t impose taxes on money which had already been taxed, then we wouldn’t have any taxes at all.

So enough, please, of this idea that if corporate profits are taxed once, at the corporate level, then that means they should never be taxed again when they show up as individual income. That income is unearned: if anything, it should be taxed at a higher rate than earned income, because we want to encourage people to create value by working, rather than just living parasitically on the labor of others. If you want to make an argument that unearned income should be taxed at a lower rate, go right ahead. But don’t give me the dual-taxation argument. Because the same argument can be applied to just about any tax you like.

Update: A group called Citizens for Tax Justice has more reasons (PDF) why the dual-taxation meme is silly. A few:

First, about two thirds of personal dividends paid by taxable corporations go to tax-exempt entities such as retirement plans and university endowments. In all likelihood, a similar percentage of capital gains on corporate stock are also tax-exempt.

Second, taxes on capital gains earned outside of tax-exempt plans are not imposed until shareholders sell their corporate stock at a profit. This means that those taxes can be deferred indefinitely. And even if individual shareholders do report taxable capital gains, they often will offset such gains with capital losses (by selling stocks that did poorly at the same time).

Third, even personal dividends and capital gains that show up on tax returns are not subject to the Social Security tax of 12.4 percent that applies to the earnings that make up most or all of the income of middle-class taxpayers.

There’s an opera to be written here somewhere: a man devotes 15 years of of his life to an unpaid labor of love, and when he finally gets noticed by the object of his affections it’s when he’s told to go away and stop what he’s doing forthwith.

Zachary Woolfe has the backstory. Brad Wilber’s Met Futures was a regular destination for opera lovers around the world, including those who worked at the Met: it aggregated all the information available about who was going to be appearing in future productions at America’s greatest opera house. And then, suddenly, it didn’t:

In May, Mr. Wilber was contacted by the Met for the first time. He received a phone call from Sharon Grubin, the company’s general counsel, who asked Mr. Wilber to take down Met Futures…

Mr. Wilber agreed to remove the list, which he did early last week. “I’m not by nature an especially subversive person,” he said. “And I always told myself that if it got to the point where the Met expressed concern I would take it down.”

Representatives from the Met’s communications department offered him some CDs, which he accepted, and they spoke with him about the tone and content of his farewell post.

This is the best-case scenario as far as what the Met thinks it wants is concerned: Grubin clearly gauged her approach to Wilber perfectly, and couldn’t be happier with the outcome.

Whether the Met was right to try to take down Met Futures is another question entirely. Whether you’re making books or music or films or musicals or Broadway shows or operas, you’re generally going to have a substantial staff of people, armed with a large budget, devoted to trying to create advance buzz for your product. Brad Wilber, singlehandedly, and at no cost to the Met, did a better job in the advance-buzz stakes than most Met staffers. They should have been showering him with love and attention — and given the accuracy of his listings, it’s entirely plausible to believe that he had a few back-channels open for much of Met Futures’s existence.

There are two stated reasons why the Met wanted Met Futures taken down: that sometimes there were errors; and that it “muddied negotiations with artists”. Given the large disclaimers on the site, which in no way looked officially affiliated with the Met, I can’t believe that either was a particularly big deal. But organizations like the Met tend to attract control freaks, and it was probably inevitable that if Met Futures caused even a little bit of trouble for someone senior enough in the organization, that this day would arrive. A small but salient immediate problem is a lot more noticeable than a significant long-term benefit which is hard to notice or quantify.

And so Grubin was charged with approaching Wilber with the intent of getting the site taken down. As Woolfe says, she had no legal leg to stand on — but when the general counsel of the Met talks to someone with no legal training, her position alone gives her a lot of authority. My guess is she didn’t belabor any legal points; she just introduced herself and asked nicely. In my experience that’s by far the most effective tactic to take if you want someone to take something down. Nastygram cease-and-desist letters can work, but people don’t like bullies and if the letter gets made public it can be highly embarrassing for the company which sent it out.

The Metropolitan Opera, then, has proved itself surprisingly adept at taking down one of the most effective promotional mechanisms it had. Very silly. But at least that’s better than moving out of your home and then socking subscribers with a 400% hike in subscription prices when you ask them to travel all over New York City to see your productions, as New York City Opera seems to have done, even as it seeks to turn its orchestra into a freelance band with no vacation pay, tenure, leave, health insurance or instrument insurance.

All in all, it’s hard to get excited about New York opera these days; the last opera I went to was actually in Philadelphia. The creaky subscription-based ticketing architecture at these companies is so old that it can’t even encourage people to go to smaller or more experimental pieces by lowering the prices for them. And although the new-music scene in New York feels extremely vibrant, none of that excitement ever seems to spill over into the opera world. If the Met is actively shutting down expressions of fandom by devoted opera lovers like Brad Wilber, I don’t see that changing any time soon.

Back in April of 2010, Elizabeth Dwoskin of the Village Voice, with the help of two reporter/translators, put together an excellent 4,700-word article on the complex dynamics at 55 and 61 Delancey Street, in downtown Manhattan. There was a new landlord, Madison Capital, which was better than the old landlord, but was still harassing rent-controlled tenants. There was a lot of mutual incomprehension between the mostly-Chinese old tenants and the mostly-white new tenants paying market rate. And nobody really had a full grasp of the facts.

So it’s a bit weird, 16 months later, to find the NYT’s Michael Powell put together something much less nuanced and much more one-sided on the same issue — with one of the worst abuses of the “analysts say” construction I’ve seen in a long time:

Madison Capital bought these two tenements, at 55 and 61 Delancey, in 2008 for $20 million total. (The same buildings sold for $6 million in 2003.) The tenants of the 45 apartments, predominantly Chinese and Dominican, generally pay $1,000 or so each a month. Newer arrivals, N.Y.U. students and post-college kids, pay $3,000 or so. To turn a profit, analysts say, Madison needs a minimum of $6,500 per apartment.

Which leads suspicious souls — I plead guilty — to suspect Madison’s real long-term play is to demolish the tenements and build one of those blue-glass condos where no one ever thinks of putting up a curtain.

Powell doesn’t mention that the buildings come with eight retail units, housing glamorous market-rate tenants like the Berkli Parc cafe and James Fuentes gallery. I’m no expert on retail rents on Delancey Street, but let’s be conservative and put them at $5,000 each, for a total of $40,000 a month. On top of that add $6,500 per apartment in residential rents — the “minimum” that Powell thinks Madison needs to make a profit on the buildings. The total comes to a nice round $4 million per year.

I really don’t think you need to be making $4 million a year in order to turn a profit on a $20 million investment. Let’s say that Madison took out an 80% mortgage at 5% interest: then its annual interest payments would be about $800,000. Add on a couple of hundred thousand dollars in management costs, and you’re still talking about costs in the $1 million range for the two buildings. That’s a quarter of the kind of money that Powell thinks Madison needs to turn a profit.

And frankly it’s pretty silly to think that Madison wants to tear down two perfectly good old tenements and replace them with glass condos — especially since it would be much easier and cheaper to take the existing buildings and convert them to condos over time. At a purchase price per apartment in the $400,000 range in what is now one of the most overheated property markets in America, there’s definitely potential profit there — and it’s a lot easier to sell apartments to their existing tenants than it is to try to vacate two huge buildings with 53 different tenants so that you can tear them down and build something else.

I would dearly love to know the identity of the “analysts” Powell talked to in order to get his crazy $6,500-per-apartment estimate. What’s the minimum qualification needed to be considered an “analyst” for the purposes of the NYT? On the basis of this article, simple numeracy would seem to be lacking.

Warren Buffett called on Congress to tax the rich more heavily, which would include fellow richie Carl Icahn’s potential half-billion dollar capital gain in the Google-Motorola deal. Kudos to Staska for predicting that deal, by the way, though he low-balled how much the Goog was willing to shell out.

An analyst estimates that AOL is spending $160 million a year–half the cost of buying the Huffington Post–on its local news network Patch.

Record labels, apparently not screwed enough at the moment, are facing the threat of losing much of their backlist to artists and songwriters such as Bruce Springsteen and Billy Joel.

Presumably as some mysterious element of their plot to take over the world, Carlyle Group is reportedly selling America’s ninth-largest cable operator for about $3 billion while also paying over $4 billion for clinical research company Pharmaceutical Product Development, Inc.

And there are fewer Freemasons than there have been in a long, long time.

Paul Krugman has an important column today about Rick Perry’s record of job creation in Texas:

So where does the notion of a Texas miracle come from? Mainly from widespread misunderstanding of the economic effects of population growth…

Texas tends, in good years and bad, to have higher job growth than the rest of America. But it needs lots of new jobs just to keep up with its rising population — and as those unemployment comparisons show, recent employment growth has fallen well short of what’s needed.

The unemployment numbers are interesting, but I thought it would be interesting to look at the employment numbers instead — and to see how employment in Texas compares to employment in the rest of the country. So Nick Rizzo collated the data for this chart, taking employment figures from Google’s Public Data Explorer, and filling it out with population data from the Census Bureau and — for the 2011 population of Texas — the Texas Department of State Health Services. Here’s the result:

The employment-to-population ratio in this chart is lower than the employment-to-population ratio we normally see, because it includes everyone, from infants to convicted felons. According to the figures we have for 2011, 44.7% of the total US population has a job, compared to 43.5% of the Texas population.

And Perry’s record is pretty bad, here: he inherited a ratio of more than 47% in Texas from George W Bush, and has presided over a steady decline ever since — including every year of the Bush presidency bar 2005.

The single most important task facing the US is to turn the employment numbers around and get the employment-to-population ratio rising again. Obama has been bad on this front. But Perry’s decade-long record in Texas is no better.

I’m very late to Adam Ozimek’s interview with David Levey,  the former Director of Sovereign Ratings for Moody’s. Levey makes a couple excellent points about sovereign ratings, starting with this one:

On methodology, things changed in the mid-2000s. Under pressure from regulators and issuers, the agencies were forced to “open the black box” and become much more explicit about their criteria, scorings, weights attached to various factors, etc. There was a tendency to move to a “scientistic”, quantitative, formulaic approach. I tended to resist that (being a great admirer of Hayek). I saw risk assessment as a multidisciplinary, highly qualitative, judgment process involving a varied weighting of factors.

I fear that this is exactly the reason why S&P started coming out with weirdly precise deficit-cutting targets — the “chop $4 trillion over ten years, or we’ll downgrade” phenomenon. Sovereign ratings are always more of an art than a science, and the pressure to become quantitative and formulaic has been deleterious at both major ratings agencies.

Levey also explains how ability and willingness to pay are inextricably intertwined:

Neither willingness nor ability can be defined independent of the other. “Willingness” depends on political calculations of the degree of sacrifice that would be required to make payment, which in turn depends on the financial resources available or easily raised. “Ability” depends on how much additional resources for debt payment the government can “squeeze out” through reductions in spending or increases in taxation — a political consideration. So the relation between them is -to use an old phrase-”dialectical” and the analysis is based on what Adam Smith called “political economy”. This may sound like “scholastic” nit-picking, but the point is vital for guiding the rating decision process.

It is reasonable, therefore, for S&P to keep one eye on debt ratios when it’s judging the US willingness to pay: the higher the amount of debt a country (or any debtor, for that matter) has, the lower that debtor’s willingness to pay becomes. If I only have $5,000 outstanding on the mortgage on my $300,000 home, I’m going to be extremely willing to pay that debt. If I have $500,000 outstanding, then, not so much. But as Levey says, these things aren’t scientific. And it’s silly to try to move from a general principle — the higher your debts, the lower your willingness to pay them — to something spuriously quantitative, like putting a dollar amount on the point at which your willingness to pay will fall.

Levey also says that I’m wrong about the difference between S&P and Moody’s. He’s much more of an expert on this subject than I am, so it’s worth taking his views seriously. But his stated reasons for disagreeing with me are pretty weak. He gives three:

First, S&P “notches” for subordinated debt, meaning that they are taking into account that a default on that debt is likely to have a greater severity than on senior debt.

No, it doesn’t mean that at all. Subordinated debt is more likely to default — that’s what subordinated means.* And because it’s more likely to default, it has a lower credit rating. You don’t need to look at severity in order to give a different credit rating to subordinated debt than to senior debt.

Second, market participants would find ratings almost impossible to use without comparability of meaning. So — in a sense — the markets more or less force equivalence of meaning on the agencies.

Essentially, Levey is saying here that S&P has to do what Moody’s does, since the markets think the two agencies are doing the same thing. I don’t buy it.

Third, if the meanings were that different, there would be a lot more “split ratings” (situations where the agencies rate differently) than there are.

This isn’t really true. The main case in which the difference in methodologies would result in a split rating is a case where there’s a significant risk of default, but where the likely loss given default is zero, and the likely recovery rate is 100 cents on the dollar. This is exactly what we’re looking at in the case of the US sovereign rating, and it applies to entities with US sovereign guarantees as well. But beyond that, it’s rare elsewhere. In general, if an issuer defaults, they’re not likely to pay off their debts in full. And as a result, S&P and Moody’s are likely to have similar ratings.

The ratings could diverge at the other end of the spectrum, too — Moody’s might have a lower rating than S&P, if the default probability were low but the loss given default was likely to be enormous. When does that happen? Mostly in the world of structured credit, where Moody’s had a vested interest in ignoring the fact that recovery values in the event of default were generally zero.

All that said, I suspect that what Levey’s saying here does have some truth to it: S&P is well aware of how its ratings are interpreted by the markets, and does little to disabuse the markets of that impression. I do think that the difference between S&P and Moody’s explains why S&P downgraded the US and Moody’s didn’t. But I don’t think the difference is all that big in their general day-to-day operations.

*Update: Greycap points out, in the comments, that really the meaning of the term “subordinated” is what happens to the debt in bankruptcy: that the claims are junior to other claims after the company has defaulted. This is true. But by the same token, everybody knows this, and lots of companies restructure or otherwise work out their debts “in the shadow of bankruptcy” — essentially trying to replicate the likely outcome of a bankruptcy case without all its myriad associated costs. It’s very easy, in that situation, for subordinated debt to suffer a haircut or become converted to equity while senior debt remains whole.

Update 2: Greycap seems to think that a default on subordinated debt while the senior debt remains whole “arguably has never existed in the history of the world and will never exist until the end of time”. Just off the top of my head, isn’t that exactly what we saw at Anglo Irish Bank?

Fred Wilson has nice things to say about my analysis of the NYT paywall — thanks, Fred! — but it’s worth teasing out one area where he and I might differ.

Fred says that the NYT “went with the FT’s model”, and I’ve also heard privately from another person making an impassioned case that the NYT and FT models are basically the same.

But they’re not.

The NYT paywall is so porous that it can be considered to be a genuinely freemium model. If you follow a link to the NYT site, you will never run into the paywall — no matter how many times you do so or how many NYT articles you’ve read that month. If you then want to stay on the NYT site and read other stories there, it’s very easy to do that too: the paywall might appear, but it’s easy to circumvent. (One popular way of doing this: just strip off the extra garbage in the URL which summons the paywall.)

That’s why I likened the NYT paywall to a polite “please keep off the grass” sign, with symbolic low green hoops separating would-be readers from their desired content. If they want to get there, it’s easy to do so; the NYT is just making it clear to them that it would like them to pay for a subscription first. Being both polite and reasonably wealthy, it turns out that hundreds of thousands of nytimes.com readers have done just that.

At the FT, by contrast, the paywall was much less porous from day one, and has been tightened up substantially since then. In fact, with the exception of Google’s First Click Free program, the FT has deliberately made it as hard as it possibly can for non-subscribers to read its content.

The difference between the NYT and the FT, then, is that the porousness of the paywall is a feature at the NYT and a bug at the FT. Yes, both of them have an official meter which counts how many stories you’re allowed to read before the paywall gets thrown up. That’s the crack-dealer model of selling content: give ‘em a little for free, and soon they’ll be begging for more. The free stories you read before the paywall goes up aren’t a porous paywall, they’re an integral part of the whole paywall model.

Put the question this way: when it comes to paywalls, is the FT more like the NYT, or is it more like the WSJ? The WSJ doesn’t have a meter; it has a more old-fashioned system where some articles are free to everybody and others sit behind the wall.

But I’m more interested in how forbidding the wall is, rather than in where and how exactly it’s placed. Both the FT and the WSJ are signed up for First Click Free, which means that both of them are susceptible to the elaborate workaround of copying the headline, pasting it into Google News, and then clicking through from there. Beyond that, both of them basically make it as hard as possible for non-subscribers to read stories behind the wall.

If I link to a WSJ or FT article, I can have no assurance that my readers will be able to read it. The same is true with respect to sharing that article on Twitter or Tumblr or Facebook or even LinkedIn. (The exception is Google Plus, since First Click Free is in effect there.) More generally, if a non-subscriber wants to read a specific story behind the WSJ or FT paywall, it’s very hard for them to do so, compared to the NYT site, where it’s much easier.

That’s why I like the NYT paywall and lump the WSJ and FT paywalls together. Whether there’s a meter or not is pretty much irrelevant, especially considering the way in which the FT has steadily tightened up its meter to the point at which non-subscribers can barely read anything at all. Even subscribers, like myself, find it very hard to read FT content a lot of the time: try following a Twitter link to an FT story on your mobile device, or trying to read an FT story in Flipboard, and you’ll see what I mean.

The NYT paywall is generous to subscribers and non-subscribers alike, and the NYT has managed to keep both goodwill and traffic with respect to its non-subscribers. That can’t be said of the WSJ and FT, who take a much more hostile and adversarial approach to the people who aren’t paying them hard cash. The NYT sees value in remaining accessible to everybody; the FT and WSJ see value in restricting access only to paid subscribers.

Which is why I think it’s fundamentally misconceived to think of the FT paywall as being very similar to the NYT paywall. Rather, it’s at heart the same as the WSJ paywall: a way of restricting content as much as possible to subscribers exclusively. The NYT is a free website with a mechanism for getting readers to subscribe; the FT and WSJ are subscription websites with some content available for free. It’s the NYT model which I love, not what’s going on at the FT.

You’ve heard it here and everywhere: Google is buying Motorola Mobility for $12.5 billion. But here’s the media twist to the story: you didn’t hear it anywhere first.

Deal scoops are the most basic currency of business journalism. Once a deal is certain to get done, but before it’s officially announced, an M&A banker on one side or the other (it’s nearly always the bankers, rather than the lawyers or the actual companies doing the deal), tactically leaks news of the deal to a carefully-chosen source.

Virtually everybody wins when this happens. The leak always takes place when markets are closed, so there’s no risk of insider trading on the news. The banker leaking the news gets to control the story, since the journalist isn’t going to call around before publishing it. And the journalist gets a big scoop.

I’ve never been particularly impressed by these scoops: if a piece of news is going to come out in a press release in a few minutes or hours, then getting it first, while markets are closed, has little value to readers. But journalists fight incredibly hard to get them, and financial journalism’s biggest names have been made this way — think Charlie Gasparino or Andrew Ross Sorkin.

But given the value being created for bankers and journalists alike by the existence of the market in scoops, it’s notable when a deal like this one comes along with no advance word at all — not even someone reporting it breathlessly on CNBC five minutes before the press release comes out.

Is there a reason for this dog not barking? It might conceivably be a function of the buyer in this case. Leaks more often come from the buy side, rather than the sell side, and there’s normally a nod and a wink from the acquirer to the banker before they happen. If Larry Page made it clear that he didn’t want such shenanigans going on around his biggest deal ever, then that would probably have sufficed to shut them down.

And then there’s the more general decline of the scoop ecosystem. No longer is it possible to control the way that a story is received by leaking it strategically for prominent placement on the front page of the WSJ or NYT or FT. All those publications will put the news online first, it will instantaneously get disseminated across hundreds of news sites, and the resulting front-page story — if it even makes the front page, seeing as how it’s now commodity news — will be reported out rather than a single-source affair.

Right now, there’s a vacancy in the scoops market: there’s generally been one go-to reporter on the M&A beat, and there isn’t one any more. Steve Lipin gave way to Sorkin, and Sorkin has now largely given up his scoopmongering for grander jobs as a book author, newspaper columnist, website editor, and TV anchor. But maybe Sorkin will be the last of the breed. Mike Arrington still gets a lot of scoops in the tech world, but the big M&A scoops from Wall Street just don’t seem as important any more, thanks largely to the speed of the internet.

Sorkin’s Dealbook was clearly set up to bring together a large number of excellent financial journalists who care about this kind of thing and who can deliver scoops — but it hasn’t done particularly well on that front. Wall Street bankers don’t care half as much as Silicon Valley dealmakers do when it comes to the most important blogs in their area — but they know that the era of the important front-page newspaper M&A scoop is largely over.

So while it’s still possible that someone new will come along and inherit the mantle that Lipin passed to Sorkin, I’m not holding my breath. And maybe that’s a good thing. Because it might free up precious journalistic resources to concentrate on real enlightenment, rather than evanescent exclusivity.

The economic historian James Macdonald emails with a very different version of my earnings-yield chart. Instead of going back to 1985, he’s found annual data all the way back to 1920. And instead of using Treasury bonds — a sui generis asset class with its own dynamics surrounding flight to quality and the like — he’s uses the yield on BAA-rated bonds instead. The result is fascinating:

Writes Macdonald:

It is not reasonable to relate earnings yields to T-bonds. They are not comparable investments. The proper comparison is with the corporate bond yields. My preference is not even AAA, since that is quite rarefied, but rather BAA – definitely investment grade but more reflective of the typical corporation and more susceptible to market jitters.

The historical pattern seems to me to be as follows:

• a twenty-year period from 1920-1940 when bond and earnings yields were more or less comparable
• a twenty-year period from 1940 to 1960 when earnings yields were significantly higher than bond yields
• a twenty year period from 1960 to 1980 when the two yields were more or less comparable
• a twenty-five year period (?) from 1980 to 2005 when earnings yields were significantly lower than bond yields. (I put a question mark, because there is also a major divergence of yields in 2009. However, I take that as a temporary aberration because of the collapse of S&P earnings during the Great Recession thanks to the losses of the financial sector).

Now the two yields are more or less the same. Are we supposed to take that as a signal to sell bonds and buy shares?

I am not at all convinced, at least on the basis of the historical evidence. We may be entering a long period when the two yields track each other. Or we may be entering a period (perhaps to be expected after a major financial disaster) when investors demand a premium yield from shares compared to bonds. In any case, the period from 1985 onwards can scarcely be taken as the historical norm, since, as we know from other statistics, such as long-term PE ratios, shares have been overvalued for almost the whole of this period.

My feeling is that a long-term period when investors demand a premium yield from shares compared to bonds is precisely the kind of period that a long-term investor wants to be putting her money into shares rather than bonds. Again, there are market timing issues here — shares might fall rather than rise for much of that period, especially during times when the premium is rising rather than falling. But if you just go back to basics and look at securities as giving you ownership of an income stream, then it seems perfectly sensible to me to pick the larger stream, given the choice.

If there’s a big risk to this strategy, it seems to me, the risk is overleveraged companies. If companies get in over their head and find themselves unable to make their interest payments, then their equity can be wiped out, and ownership transferred to bondholders. But in this particular economy, I don’t see that as a big risk — certainly not for BAA-rated companies. We saw during the financial crisis that nearly all non-financial public companies had been decidedly conservative with respect to the big debt binge known as the Great Moderation; if you were looking for massive corporate leverage, you needed to look to private equity deals.

And what if we’re just entering another period akin to the 60s and 70s, where the two yields track each other while rising? Again, I think I’d rather be in stocks, if only because they’ll do much better than bonds if and when inflation kicks in.

Finally, there’s the possibility I raised in my original chart — that stock prices are uncommonly cheap relatively to bond prices right now. Which certainly seems to be the case if you think that history began in 1985. If stocks revert to the post-1985 norm of yielding less than bonds, then moving from bonds to stocks at these levels would probably make a fair amount of sense on a mark-to-market basis. As a long-term investment, though, stocks might look a bit less attractive: you’d be less reliant on earnings and more reliant on capital gains to make up the difference.

What really surprises me about Macdonald’s chart, however, is nothing to do with the difference between stock yields and corporate bond yields, but rather the way in which nominal corporate bond yields move very slowly and smoothly. There does seem to be something reassuringly safe and reliable in that orange line. So if your priority is preservation of nominal capital, rather than maximizing your long-term net wealth, there’s something pretty attractive about corporate bonds, too.

Update: I missed this on Friday, but Jake from EconomPic Data has his own version of the chart, using T-bonds but going back even further than Macdonald does. I love this:

What happened in 1970 or thereabouts that this correlation suddenly became so strong, after barely existing before that? Could it possibly be the arrival of Modern Monetary Theory and Modigliani-Miller?

Kevin Drum doesn’t think much of Michael Lewis’s latest European dispatch for Vanity Fair — and neither do I. There’s precisely one thought-provoking paragraph in the entire 9,600-word article:

One view of the European debt crisis—the Greek street view—is that it is an elaborate attempt by the German government on behalf of its banks to get their money back without calling attention to what they are up to. The German government gives money to the European Union rescue fund so that it can give money to the Irish government so that the Irish government can give money to Irish banks so the Irish banks can repay their loans to the German banks. “They are playing billiards,” says Enderlein. “The easier way to do it would be to give German money to the German banks and let the Irish banks fail.” Why they don’t simply do this is a question worth trying to answer.

Sadly, Lewis doesn’t bother trying to answer that question. Instead, he returns to the running theme of the article, which might be evident if I excerpt a few words from here and there:

excrement – anality – Scheisse (shit), Dreck (dirt), Mist (manure), Arsch (ass) – The Money Shitter – crapping – rear end – toilets – “shit” – “my little shit bag” – laxative – “Purgation-Calendar” – anal – “As the fish lives in water, so does the shit stick to the asshole!” – scatological – “I am like ripe shit, and the world is a gigantic asshole” – sitting on the john – indulgence in fecal imagery – Scheisskerl (“shithead”) – feces – one of his favorite things to do with women was to have them poop on him – filth – coprophilia – The Call of Human Nature: The Role of Scatology in Modern German Literature - bowel movements – ring of filth – shit – Scheisse – splattered by their mud – a men’s bathroom – urinate – sat in the stall – “shit” – crap – crap – “Lick my ass” – “Lick my ass” – anally obsessed – stewing in their own filth – energetic anality – a blowout with prostitutes – anality – “Kackwurst is the term for feces” – ‘shit sausage’ – Bescheissen: “Someone shit on you.” Klugscheisser: “an intelligence shitter” – “you are said to shit money: Geldscheisser” – Die Kacke ist am Dampfen: the shit is steaming – a secret fascination with filth – “Scheisse glänzt nicht, wenn man sie poliert—Shit won’t shine, even if you polish it” – “Scheissegal: it just means I don’t give a shit.” – stick figures engaged in anal sex – simulating anal sex onstage

Which is not to say that there isn’t a sub-theme here. There is:

Nazi – Hitler’s favorite words – Hitler’s doctors – Hitler – the Nazis’ ambition – provincial Nazis – Hitler – Göring’s Air Ministry – Hermann Göring – the only advantage to the German financial system of having no Jews – the new Holocaust Memorial – Jewish Museum – spending decades denying they had ever mistreated Jews – Nazi-era expropriation of shares in the zoo owned by Jews – Hitler’s bunker – German guilt – “the Jews” – there are no Jews in Germany, or not many – “They never see Jews” -When they think of Jews – their victims – terrible crimes – a Jew whose family was driven out of Germany in the 1930s – Aryan – A Jew’s Life in Modern Germany - HOLOCAUST – Nazis – Hitler – A landscape once scarred by trenches and barbed wire and minefields – another Holocaust Memorial

Yes, the article’s about Germany. And, like Lewis’s previous articles on European countries, it’s an attempt to shine a light on the European financial crisis through the lens of national stereotypes. This is a dangerous exercise at the best of times, but in this case Lewis has gone way over the line. His article fails to say anything new or interesting about what happened in Germany during the crisis. And that’s fine, it has a lot of company in that respect. Everybody has an off day. But this essay is worse than that: it forces us to re-examine all of Lewis’s previous articles in the series as well.

Lewis’s articles on previous countries have all been criticized within those countries for precisely the kind of stereotyping which is so pointlessly offensive in this one. Not only has Lewis descended to an extended scatological riff which demonstrates absolutely nothing about the Germans’ propensity to buy subprime-backed bonds; he’s done so while violating Godwin’s Law. (Full disclosure: I’m half-German, so not entirely impartial in this case.)

Lewis is the best writer in financial journalism by some large margin, and much of what he does when reporting and writing his stories is simply unique. His technique is a labor-intensive one: Lewis talks to an enormous number of people, works out what story he wants to tell, and then puts together various tales and individuals he’s discovered over the course of his reporting in the service of telling that story in the most entertaining and compellingly readable way. It doesn’t matter how important you are, or whether you’ve given Lewis an important nugget of unreported news: if it doesn’t help the structure of his story, he’ll happily leave it out.

There are other financial journalists who are excellent writers, albeit not very many of them. Matt Taibbi and the NYT’s David Segal spring to mind. But none of them are willing to subsume news in service of the story to the degree that Lewis is.

This is not, in and of itself, a bad thing. In fact, in many ways it’s admirable. Lewis is an expository journalist by nature, and a master storyteller; he’s not a muckraker or news-breaker. We have far too few storytellers in financial journalism, while there are literally thousands of journalists looking to break incremental pieces of news. It’s clear where Lewis’s value lies — he can explain what’s going on to a broad audience of Vanity Fair readers, and doing so in a way that they love to read. No one else could make them care about Greece’s role in the European financial crisis; Lewis’s article on the country is a veritable master class on how to take a dry and recondite subject and make it thoroughly entertaining.

But Lewis’s incredible facility at storytelling is a powerful tool, and we have to be able to trust the craftsman who wields it. Lewis’s stories tend to be far more deeply reported than they seem at first glance, and in order for us to trust that he stands on the side of the angels we have to be able to trust in his judgment about what exactly the real story is. Because his raw material is extensive enough to support just about any thesis he wants.

And this is why the Germany story worries me. Not because it’s wrong, exactly. Lewis hasn’t suddenly converted to some crazy theory of the European financial crisis which fundamentally misstates what’s going on, or misleads his readers. But when he reaches so readily for the feces and fascists, Lewis does make us question his broader judgment. No honest accounting of Germany’s role in the financial crisis would — or should — include either.

I’m inclined to see the lapse of judgment in this case as being one of style rather than substance, and I continue to be a huge fan of Lewis’s journalism generally. But the lines do blur. Malcolm Gladwell has said that good non-fiction writing “succeeds or fails on the strength of its ability to engage you”, rather than on its necessarily being right convincing. The result, at least in Gladwell’s case — and, for that matter, in Taibbi’s, too — is oversimplification in the service of style. Lewis, with his Germany piece, has done something a bit different: he’s demonstrated so little faith in the ability of his subject matter to be interesting that he’s resorted to the laziest stereotypes of all. You could even say he’s the kind of person who files a polished and prestigious article for Vanity Fair, but who, on closer inspection, turns out to have filled it up with excrement.

Update: Gladwell responds in the comments, to say that while he’s OK with readers being engaged but not convinced, he’s not OK with being wrong.