Felix Salmon

from Ben Walsh:

How generous is Mitt Romney?

Ben Walsh
Sep 25, 2012 10:03 UTC

Mitt Romney's campaign likes to trumpet its candidate's generosity. The summary of Friday afternoon's docu-dump of Mitt and Ann Romney's 2011 tax returns hailed the couple's "generous charitable donations". They made $13.7 million and donated $4 million, which is impressively described as "amounting nearly 30% of their income".

John Podhoretz, looking through the misleading income-to-donations lens, thinks Romney is an "extraordinarily, remarkably, astonishingly generous man". Conor Friedersdorf is less hyperbolic, but still throws out praise: Romney "seems to be a very generous guy...good on [him] for giving lots of money to charity".

Giving away almost a third of your annual income sounds laudable, but for someone of Mitt Romney's wealth, charity should be assessed by net worth, not income. The Romneys' net worth is currently estimated at $250 million. $4 million is just 1.6% of that net worth.

It's an odd kind of generous for a man to be worth a quarter of a billion dollars, earn $13.7 million on that $250 million (a 5.5% return), and then donate 30% of that $13.7 million.  No wonder he conflates paying taxes with giving to charity. Generosity is generally tied to the concept of relinquishing wealth -- and that is not what Romney is doing. If Romney's massive base of wealth continues to appreciate at its mediocre 2011 rate of return, and if he continues to give at the same rate as he did this year, then in a decade, he'll have a net worth of  $373 million and will have made $53 million in donations. $53 million is real money, but the trend here is all wrong. As Romney ages, his net worth should go down, not up.

If they really wanted to make an impact on causes they care about with the massive wealth they've accumulated, the best thing for the Romneys to do is give away as much as possible, as soon possible. Charitable contributions are most effective when they are front-loaded. Romney, at 65 years old, won't end up with lower net worth than he has now unless he gives much, much more aggressively. Right now, he's on track to just keep on accumulating.

Once you reach the Romneys' level of rich, you have to give with determination to counteract the structural momentum of your wealth. As Ezra Klein said, "that’s the nice thing about being rich: It makes you richer". On its current trajectory, the Romneys' wealth will just go on gathering. They have and will continue to make donations, but but not at a level that even comes close to reducing their net worth. In contrast to the 11 additional billionaires who have taken the Gates/Buffet pledge to give away half of their wealth in their lifetimes, the Romneys aren't chipping into their net wealth -- and don't seem to have a plan to. Instead, they're content to make relatively small annual gifts. In fact, back in January, Romney thought he had actually given an an even lower lower portion (19%) of his income to charity than is now being reported, thanks to an inaccurately high estimate of his income.

There is, however, one cause Romney has devoted a large portion of his net worth to: his political campaigns. He spent $44.6 million of his own money losing to John McCain in the 2008 Republican presidential primary. When he ran for governor of Massachusetts, he self-financed $6 million of the $9.4 million the campaign spent in total. If Romney gave to charities annually like he gave to his first presidential campaign, he'd give away half his current net worth in just four years. And if he made that commitment, I'm sure Bill Gates and Warren Buffet would happily share a stage with him to laud his generosity.


I just wanted to remind people who feel Romney is generous that the tithe is considered not only Romney’s duty, but his ticket to being a ruler of his own heavenly kingdom in the afterlife. He also cannot attend his church or use the power structure of the church if he doesn’t tithe.

It has little to do with goodness of heart. (and even his self-named charity is a tax deduction he front loads to his benefit, with lots of deductions but little being used for charity)

Although the Mormon church is not the only one to use a money grab (extort by using such promises to excessively or exorbitantly charge) it would be wise to remember when comparing how generous he is in THIS life and why.

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Counterparties: Apple’s “headaches”

Sep 24, 2012 21:44 UTC

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com

The most telling quote about Apple’s recent stumbles didn’t come from CEO Tim Cook. It came last month from Terry Gou, the chairman of Apple manufacturer Foxconn. Discussing the rise of robots in production Gou said: “As human beings are also animals, to manage one million animals gives me a headache”.

If you’ve been in a coma, Apple’s “animals” have been quite productive lately: The iPhone 5 came out last week, selling some 5 million phones in three days. In a few years, Apple could very well be the first company valued at $1 trillion. But, yes, there have been “headaches”. Riots shut down Foxconn’s factory in the Chinese city of Taiyuan on Monday. Reuters reported that at least 40 people were hospitalized, and 5,000 police were dispatched — though it’s unclear if the riot came from a fight among workers or in a clash with guards. Engadget’s Richard Lai has pictures.

A reporter from the Shanghai Evening Post recently went undercover in the Taiyuan plant and, if this rough translation from Micgadget is accurate, got to experience what it’s like to produce an iPhone 5:

An iPhone 5 back-plate run through in front of me almost every 3 seconds. I have to pickup the back-plate and marked 4 position points using the oil-based paint pen and put it back on the running belt swiftly within 3 seconds with no errors. After such repeat action for several hours, I have terrible neckache and muscle pain on my arm… We worked non-stop from midnight to the next morning 6 a.m but were still asked to keep on working as the production line is based on running belt and no one is allowed to stop. I’m so starving and fully exhausted.

Apple is struggling to meet demand for their latest phone, but it’s also struggling to manage its users’ expectations. If you were puzzled to have your iPhone tell you that Las Vegas has melted, you’re likely familiar with the well-documented problems with its new maps program. To Anil Dash, Apple’s ditching of Google maps for its own undercooked program shows blatant disregard for users: “Given that Apple has a bigger cash hoard than the vast majority of countries, it seems as if this is more an issue of priorities than resource constraints”. Joe Nocera, for his part, wonders if Apple has peaked.

Kontra at Counternotions – nice blog name, by the way — suggests another answer: With nearly half a billion users, Apple simply has us all at its mercy. We’ll just have to wait for Apple to wow us with a better product. “Apple has a justifiable fear of key third parties dictating terms and hindering its rate of innovation,” he writes, adding, “Yes, Apple’s evil”. — Ryan McCarthy

On to today’s links:

New Normal
How climate change is reshaping Greenland’s economy (and its culture) - NYT
Free checking is getting more expensive - WSJ

China’s car obsession is creating “weapons of mass urban destruction” - FP

US surgeons operate on the wrong body part as often as 40 times a week - WSJ

The Fed
You really, really don’t need to rush to buy a home - Pragmatic Capitalism
Goldman: QE3 could total up to $2 trillion and last until 2016 - Calculated Risk

Japan’s problem: debt “backed only by an aging, shrinking population of taxpayers” - Peter Boone and Simon Johnson

Having sex once a week rather than month is the “happiness equivalent” of earning an extra $50,000 - Guardian

Village Voice Media sold in a management buyout - Forbes

Profiles in Projection
If Joe Weisenthal were a Transformer, he would be a Bloomberg terminal - BI

42% of workers in the mining industry and 27% of finance workers are sleep-deprived - NYT

Crisis Retro
History repeats itself — in inflation fears – FT Alphaville

Mitt on airplanes: “the windows don’t open. I don’t know why they don’t do that” – LAT


The fight at Foxconn was reported elsewhere as being between a restaurant owner and hands and the people who had to eat his food; presumably it was sub-standard and the customers threw it in his face.

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Can progressive economists join forces with the church?

Felix Salmon
Sep 24, 2012 17:37 UTC

Last week I was invited to hear Joe Stiglitz talk on “God, hope, happiness, death, suffering, values, grace, and evil” at Union Theological Seminary. With a menu like that, how could I resist?

The event was billed as an “innovative lecture series” combining, essentially, God and mammon: it was organized in large part by INET, an organization devoted to “new economic thinking” and backed — to the tune of $75 million — by George Soros and Bill Janeway. But, frankly, it was an inauspicious beginning, and although in principle I’m a big fan of making economics much more interdisciplinary, I think the idea of connecting it with theology, in particular, is not going to be easy or even particularly helpful.

One of the problems was that this was not a lecture: Stiglitz just sat and answered open-ended questions, and most of the time, when he did so, he talked about his latest book. The book is about inequality, and religious types tend to care a lot about inequality, but they tend to look at economics in very different ways.

Stiglitz’s conception of inequality is very much at the macroeconomic and the political level: he’s still thinking about things in terms of maximizing utility, right here on our mortal coil. Stiglitz has a broader conception of utility than most, but he still found time to get very excited about the way in which he had the empirical evidence to prove that he was right and the IMF was wrong during the famous Stiglitz-Rogoff debates in 2008. More generally, his book’s whole thesis is built around the empirics of inequality, and the empirics of inequality are pretty much all financial. How much money do the rich have, relative to the poor? How much do they earn, relative to the poor? How likely is it that a poor person will become rich, or vice-versa? And which patterns of wealth and income distribution end up being the most effective, in terms of creating broad-based prosperity?

These are important questions, no doubt, and religious types do worry about them. But rather than looking for high levels of GDP or productivity growth, or worrying about the effects of international capital flows on domestic interest and exchange rates, the kind of people who hang out at places like Union Theological Seminary tend to have their eyes on a greater and much more eternal prize. Economists, especially on the left, love to quote Keynes’s dry statement that “in the long run, we’re all dead”; you can imagine how far that kind of rhetoric will get you in a church or mosque or shul. Religious leaders  don’t tend to rely very heavily, if at all, on empirical data; few of them feel the need to prove that they are right. And as a result, when Stiglitz took his passionately-argued economics a few hundred feet from the east side of Broadway to the west side, he entered a world which was much more alien to him than the conferences he attends in Shanghai or Dubai or Davos.

Stiglitz is constitutionally incapable of talking about economics without bashing right-wingers, and hilariously, even in a chapel, he decided to keep to his standard criticism that the economics spouted by Republicans was essentially “theology” rather than anything scientific or empirical. I have numerical proof that I’m right, he said; my opponents only have faith!

Of course, the reception to Stiglitz was perfectly polite. But when the questions arrived, it was fascinating to see the angle they arrived at. The convention is, when an economics Nobel laureate talks, that the questions will engage his arguments on their own merits. But at Union, Stiglitz was faced with questions he probably never gets elsewhere.

Most notably, Cornel West had a fantastic rejoinder to Stiglitz. I agree with all the points you’re making, said West, but can’t you see that you’re not changing any minds here?

West’s point is simple and powerful. Stiglitz, and most of the people at Union, look at the state of America, and especially at the degree of inequality, and want to change that. And if you look at the history of successful campaigns to effect change in America, they tend to be based overwhelmingly on the power of storytelling, often of the moral variety, rather than on the power (which is always pretty limited) of logical argument. Narratives — stories — move people in a way that Stiglitz’s econometrics never could. And the most powerful narratives are religious ones.

This is an area where INET is attempting to find common cause between lefty theologians and lefty economists. It’s a good idea in theory, but if the first evening is any indication, it’s not likely to work. Because in reality, there is still a huge gulf between the way the two groups see the world. Theologians aren’t into maximizing marginal utility; many of them are deeply suspicious of the entire capitalist system. (For instance, at one point a fellow panelist, Betty Sue Flowers, told Stiglitz that economics was a poisonous ideology which had captured the country, and which needed to be countered with faith and love.)

I found myself thinking about the concept of meritocracy — a word coined, by Michael Young, in disgust at the way the world was moving. Little did he suspect that in no time at all it would be co-opted, and that economists would start looking at meritocracies as societies which do a very good job, empirically speaking, of maximizing their citizens’ utility. At this point, the idea of meritocracy is deeply entwined with the American Dream, and no politician dare suggest that it might be fundamentally unfair.

To many theologians and philosophers, by contrast, especially the ones on the left, meritocracies are fundamentally unfair in a world where all God’s children are equal. Meanwhile, the less radical and more conservative arms of the church tend to align themselves very much with Republican rather than Democratic ways of looking at the world, largely because of their beliefs surrounding abortion, gay marriage, and the like.

Indeed, the left has its work cut out for it when it comes to shaping the kind of narratives that West was calling for: it hasn’t been able to frame inequality as a moral issue, while the right has been spectacularly successful in framing its pet causes as moral issues which should be taken very seriously by all citizens of faith.

Stiglitz responded to West by basically saying “yes, you’re right, we need people able to weave powerful moral narratives around these themes. But don’t look at me, I’m just going to keep on telling Republicans they’re wrong, using all the dry econometric tools at my disposal”.

And this is where I think Stiglitz has failed to learn from Occupy. He credits himself as being one of the driving forces behind the idea of the 1%, and of course he went down to Zucotti Park to address the crowd down there. But if they were listening to him, I don’t think that he was listening to them. He wasn’t hearing their deeply moral anger, not only at the 1%, but even at the whole structure of capitalism — maybe he’s too steeped in economics to be able to do that.

There was just one question from the audience at the event, from a woman who said that she loves the Bible. “It says there’s something deeply unhealthy about the pursuit of wealth,” she said, and she’s absolutely right about that. But you’re not going to find many economists who agree with that, and certainly Stiglitz didn’t. He’s happy to say that the very rich suffer from moral turpitude — but he doesn’t draw the obvious conclusion, which is that the things which make us rich also make us bad.

I’m not religious, and I spend my life in the world of intellectual argument — I’m naturally on the economists’ side of things when it comes to constructing narratives. I also don’t kid myself that there’s any nobility, be it moral or otherwise, in being poor. But I do see the power of religion when it comes to sending messages to the world. And I do see the left straggling far behind the right when it comes to harnessing that power. And, after attending this INET event, I see very little chance that they’re going to catch up.


It seems to be that your post is a smug self referential slab of poor quality thinking and not particularly good writing. If this is what your US readers are fed I am not surprised at the level of economic and philosophical povery in the US. There is absoliutely no attempt to get to grips with the discusion nor any recognition that economics faces a serious moral crisis. Its easy to be cynical world wise but what have you ever done for the improvement of man that bears any comparison to what Stiglitz has done in the areas of development economis and the reassement of economic pririties. Your video says more about you than it does about INET and its efforts to get the economics profession to rethink. Sorry if I have been a bit shrp but frankly your piece was drivel and totally shallow

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JP Morgan’s depositors needn’t worry about its gambles

Felix Salmon
Sep 24, 2012 16:27 UTC

Bill Cohan declares, today, that the money JP Morgan lost in its infamous “London Whale” trades actually belonged to depositors. He’s wrong about that.

Here’s Cohan’s argument:

To my mind, the money that Iksil lost was depositors’ money. Iksil worked for the CIO, where depositors’ money is invested until it is lent out. The trade lost almost $6 billion in cash, which we know is real because hedge funds such as Saba Capital, run by wunderkind Boaz Weinstein, and Blue Mountain Capital staked out the other side of Iksil’s trade and made a fortune. How could there be any confusion that the money Iksil lost came from the bank’s depositors?

This is just silly. If you deposit money at a bank, you’re lending that money to the bank. Bank deposits count as liabilities on the bank’s balance sheet: they’re money that the bank owes to its depositors. And like all other debt, bank deposits are a contractual arrangement: the bank borrows your money — and agrees to repay it — on certain terms. Often, those terms include an effective call option: the depositor can ask for her money back at any time.

Once money is borrowed, the borrower can do with it as she wishes. If JP Morgan borrows money from depositors and then gambles it in London, then any profits it makes on those gambles are profits of JP Morgan — and any losses it makes on those gambles are losses of JP Morgan. The bank’s obligations to depositors are unchanged.

I believe that JP Morgan shouldn’t be allowed to gamble its excess deposits in London like this, and in that sense I’m not that far removed from Cohan: it does matter where the bank is getting its billions. JP Morgan has lots of excess deposits just because it’s too big to fail and is therefore a place where most companies and rich individuals want to deposit their money: they know the bank is safe and that they’ll be able to get it back whenever they want it.

But just because the money came from depositors doesn’t mean that it belongs to depositors. Depositors have no particular claim to that money in particular; they have their own place in the pecking order when it comes to seniority, but there’s no pool of JP Morgan funds that depositors have some kind of privileged access to. So long as JP Morgan remains solvent, the money belongs to JP Morgan, and depositors just have claims on the bank.

Cohan then says that depositors only avoided losing money because JP Morgan was lucky enough to avoid a bank run. But again that’s silly: if depositors did end up losing money because of a bank run (and I doubt they would, but that’s a separate issue), then the cause would be the bank run, not some losses in London. Banks are always at risk of a run, and there’s no reason at all to believe that the London Whale losses changed that probability at all.

Cohan also says, unhelpfully, that “taking money out of depositors’ accounts is exactly what banks do”. But of course this isn’t true at all. A bank account is just that — an accounting of how much money the bank owes the depositor (or, if it’s in negative territory, how much money the customer owes the bank). The bank can take money out of depositors’ accounts by charging that depositor those fast-rising fees. When that happens, the amount of money the bank owes the depositor goes down. But it can’t take money out of depositors’ accounts by lending that money to someone else, or even by gambling it in London, since those activities don’t have any effect on the amount the bank owes the depositor.

If you borrow money from a bank, you owe that money back to the bank however well or badly you invest it. The same is true of the money that the bank borrows from you. Cohan is trying to gin up controversy where there is none: his headline reads “Exactly Whose Money Did the London Whale Lose?”, and he simply refuses to accept the simple fact — patiently explained to him by JP Morgan spokesman Joe Evangelisti — that the answer is “JP Morgan shareholders’”. Instead, he goes all faux-naive:

Evangelisti said depositors lost nothing and, in fact, the CIO account has an embedded $10 billion unrealized gain. This leaves me feeling a little like the casino executive in “Ocean’s Eleven” who, upon realizing the casino’s vault had just been robbed of close to $163 million, incredulously asks Andy Garcia’s casino-owner character: “I don’t understand. What happened to all that money?”

This really isn’t hard to understand. The CIO account is huge — on the order of $360 billion. It goes up, and it goes down. When it goes up, JP Morgan treats those gains as profits for the benefit of shareholders. When it goes down, the losses are borne by the shareholders as well. Overall, the account has gone up, but during a few fateful quarters it went down, and as a result shareholders lost money in those quarters. No one’s denying that there were losses. But it’s just not true to say that depositors suffered any losses, because they didn’t.

The United States has a two-tier system of deposit insurance. There’s the formal insurance provided by the FDIC, which covers deposits up to $250,000. And then there’s the informal too-big-to-fail insurance: the fact that JP Morgan is so big that the government would always step in before any of its depositors had to suffer losses. This system has served America well. And there’s really no good reason to scare people into thinking that their money is being gambled away in London, when in reality it’s perfectly safe. It’s the shareholders, not the depositors, who need to keep an eye on such things.


I am with streeteye.

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What education reformers did with student surveys

Felix Salmon
Sep 23, 2012 16:56 UTC

Amanda Ripley has a thoroughly (if inadvertently) depressing story in the new Atlantic about the rise in the way in which teachers are evaluated by means of multiple-choice tests given out to students. She says the idea is “revolutionary”:

Research had shown something remarkable: if you asked kids the right questions, they could identify, with uncanny accuracy, their most—and least—effective teachers.

This is probably true, although just how revolutionary it is remains to be seen. These tests really are a great tool for judging which teachers are the most effective and which are the least, across various axes. But from reading Ripley’s rah-rah article, it seems very much that they’re used for precisely the wrong reasons, and barely used at all for the right ones.

It’s impossible to argue with the assertion that the quality of a child’s education rises with the quality of the teacher — just as it’s impossible to argue with the assertion that kids can be very good judges of how good their teachers are. But the important thing here is how these tests are used: are they used by teachers to improve the instruction they’re giving kids, or are they used by managers to come up with yet another key performance indicator to impose on the teachers under their charge?

One way to answer that question is to look at the questions which Ripley isolates as being particularly informative.

Of the 36 items included in the Gates Foundation study, the five that most correlated with student learning were very straightforward:

1. Students in this class treat the teacher with respect.
2. My classmates behave the way my teacher wants them to.
3. Our class stays busy and doesn’t waste time.
4. In this class, we learn a lot almost every day.
5. In this class, we learn to correct our mistakes.

When Ferguson and Kane shared these five statements at conferences, teachers were surprised. They had typically thought it most important to care about kids, but what mattered more, according to the study, was whether teachers had control over the classroom and made it a challenging place to be.

You see what Ripley did there? Measuring how well children are being educated is an astonishingly difficult job. Increasingly, these days, and especially since No Child Left Behind, we’re using test scores as a proxy for quality of education. Everybody agrees that it’s a poor proxy, although there’s disagreement about exactly how poor.

In any case, along comes the Gates Foundation with a 36-question survey, severely chopped from a much longer one developed by Ronald Ferguson. Since there are 36 questions, the survey essentially measures teachers along 36 different axes, all of which are aligned with each other to differing degrees. In and of itself, that’s more useful than just measuring test scores, which are much less teacher-specific and which only provide one axis of educational quality.

But then what do the reformers do? They regress the survey answers against test scores, look at which survey questions align most closely with that test-score axis, and declare that those axes — the ones which test scores, by definition, are already measuring — must be the “most important”. Did you think that caring about kids was of paramount importance? Silly you! It turns out that caring about kids isn’t as correlated with test-score results as, say, whether the class learns to correct its mistakes. And therefore, we shouldn’t be worrying as much about whether teachers care about their kids; we should be worrying more about other things, instead. That’s what the test-score regressions tell us, so it must be true!

This reminds me a bit of the way in which investment banks are prone to taking tens of thousands of risk positions, reducing them all to a single value-at-risk number, and then using their VaR way too much, despite the fact that it’s of only limited utility. Except in this case it’s not even all of the survey answers which get used: most of them are simply discarded.

If Ripley and the Gates Foundation wanted to find a new and powerful and rich way of measuring how effective teachers are, they would use all the information at their disposal, and then they would underweight the answers to the questions most correlated with test scores. After all, test scores are already given far too much weight, for lack of other measures to look at. Instead, they do the exact opposite, and use the surveys to double down on the inherently flawed idea that test scores are a good proxy for educational prowess.

Now if that was all they did, it would feel a bit like a wasted opportunity. But it gets so much worse. Check out this theme running through Ripley’s piece:

Should teachers be paid, trained, or dismissed based in part on what children say about them? … This past school year, Memphis became the first school system in the country to tie survey results to teachers’ annual reviews; surveys counted for 5 percent of a teacher’s evaluation. And that proportion may go up in the future… The New Teacher Project, a national nonprofit based in Brooklyn that recruits and trains new teachers, last school year used student surveys to evaluate 460 of its 1,006 teachers… In Georgia, principals will consider student survey responses when they evaluate teachers this school year. In Chicago, starting in the fall of 2013, student survey results will count for 10 percent of a teacher’s evaluation… On average over the past decade, only a third of teachers even clicked on the link sent to their e-mail inboxes to see the results. Presumably, more would click if the results affected their pay… This school year, Washington, D.C., will make the survey available to all principals and teachers who want to use it. Chancellor Kaya Henderson says that next year, the survey may count toward teacher pay and firing decisions.

No! Stop! Do none of these people get it? What everybody wants, here, is better teachers. These surveys could be instrumental in helping to improve teaching. Teachers would be able to see where they score well and where they score badly, and ask themselves how to improve their scores in areas where they are weak. Principals could see which teachers were good on which axes, and set classes up so that students ended up with a balanced range of teachers. And generally, everybody could treat this data as an interesting and very rich way of improving educational outcomes.

Instead, reformers are rushing to use this data as a quantitative performance-review tool, something which can get you a raise or which can even get you fired. And by so doing, they’re turning it from something potentially extremely useful, into a bone of contention between teachers and managers, and a metric to be gamed and maximized. Check out Ripley’s language here:

The variation within the school was staggering—as it is in many places. In the categories of Control and Challenge—the areas that matter most to student learning—Nubia and her classmates gave different teachers wildly different reviews. For Control, which reflects how busy and well-behaved students are in a given classroom, teachers’ scores ranged from 16 to 90 percent favorable; for Challenge, the range stretched from 18 to 88 percent. Some teachers were clearly respected for their ability to explain complex material or keep students on task, while others seemed to be boring their students to death.

The first thing Ripley does here is throw out nearly all of the rich survey data, in her attempt to boil everything down to one or two simple numbers per teacher. She concentrates on things she calls Control and Challenge, and declares in an omniscient tone that these areas “matter most to student learning”. She then gives each of those metrics a neatly rankable percentage, so that any school can point easily to which teachers are the Best in Control (“clearly respected for their ability to keep students on task”), or Worst in Challenge (“boring their students to death”).

You can see how this might not go down very well with teachers, who are meant to be working as a group to broadly educate a cohort of children, but instead are being isolated and compared against each other, with potentially career-ending consequences for those who score low. The minute that the scores start being used in that way, the teachers understand what’s really going on here, and they resent it. What’s more, they do so for good reason: the more that an enormous quantity of complex data is reduced to a couple of performance-review datapoints, the less useful that data becomes.

School reformers in general, it seems to me, tend to be obsessed with the idea of Good Teachers and Bad Teachers, as though the quality of the education a kid gets in any given classroom is somehow both predictable and innate to the teacher. And yes, at the extremes, there are a few great inspirational teachers who we all remember decades later, and a few dreadful ones who had no idea what they were talking about and who had no control of their classes. But frankly, you don’t need student surveys to identify those outliers. And the fact is that schools are much more than just the sum of their parts: that’s one of the reasons that reformers love to talk about excellent principals who can turn schools around.

The trick to improving education is to make schools better, not to find ever-more-cunning ways to reward and punish teachers. Especially when there’s no evidence whatsoever that such reward-and-punishment schemes actually make those teachers better educators, rather than simply resentful. There’s a reason why certain schools develop a reputation for excellence which can last for centuries: there’s something institutional going on, a virtuous circle which lifts up everybody. Making education granular — isolating not only certain teachers but even certain aspects of how those teachers teach — is a classic example of missing the forest for the trees, for no good reason.

I don’t doubt that student surveys could, in theory, be very useful in the large task facing administrators and teachers — how to make schools better and improve the quality of the education they provide. They would show where schools were weak and where they were strong; which teachers have managed to crack certain nuts where the rest of the faculty is having difficulty; that kind of thing. In short, they could be tools for diagnosing and improving the quality of a school’s education as a whole.

But the reformers rush straight past all that, and decide that the first best use of such data is to use it in performance reviews, and use it to give raises to good teachers and pink slips to bad ones. And, of course, the minute you start doing that, it becomes impossible to use the data for anything else, since the scores then become an end in themselves, rather than a means to an end.

The toothpaste is out of the tube, now: I frankly can’t see how anybody is going to be able to use these surveys effectively at this point, now that they’re associated in teachers’ minds with performance evaluations and disciplinary procedures. This is the bit that reformers seem to have a great deal of difficulty understanding: it’s incredibly difficult to improve the quality of teachers just by promising to pay them more if certain numbers are high, or by threatening to fire them if certain numbers are low. Student surveys, as originally conceived by Ronald Ferguson, could have been a great tool for improving the quality of eduction. But at this point, I fear, it’s too late.


Nice article, Felix! Thank you for covering this topic. I agree with you, for the most part. Over-reliance on metrics that are implemented in a centrally organized or generic way is not likely to improve teaching and quality of education.

Felix, you made an analogy with quantitative risk measures, and how (mis-)usage of such has over-simplified financial transactions risk. In education, it is even more egregious to rely on metrics, computer aggregated data, and a system of student critiques of teaching staff. My point is this: At least the individuals who were in charge of risk management in banking were adults. (They might not have behaved maturely, but they had the cognitive maturity to know how to). High school, or middle or elementary school students are children. As others have said, one needs to spend time as a teacher or educator or hall warden in a junior high school to realize how minors can be. They aren’t ill-willed or malicious, but they ARE still learning, and still in a nascent stage of cognitive and social development.

Let’s put that aside though. Without the passage of time, it is non-obvious whether a teacher is good or not. Very obvious measures such as teacher absentee rate exist, of course. Yet that doesn’t require sophisticated new metrics or methods to gauge accurately.

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Counterparties: Mitt overpays to keep his word

Ben Walsh
Sep 21, 2012 22:47 UTC

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com

As of this afternoon, Mitt and Ann Romney’s 2011 tax returns are now public. As if you needed any reminder of how mind-numbingly complex the financial details of a man worth $250 million are, that means returns for Mitt and Ann Romney, along with their estimated return, which was completed in January and allowed them to be granted an extension, the Mitt Romney Trust, the Ann Romney Trust, and the Family Trust. A summary statement from Romney’s trustee, Brad Malt, and a letter from Romney’s tax preparers, PricewaterhouseCoopers, were also released.

In total, it’s thousands of pages of tax arcana — far beyond your average 1040. But simplicity was not what anyone was expecting from a man whose $13,696,951 in income puts him in the top 0.01 percent, as the NYT’s Annie Lowrey highlights.

The Romneys paid $1,935,708 in taxes on that income, for an effective tax rate of 14.1%. Oddly, Romney could have paid even less, but chose to deduct only $2.25 million of just over $4 million in charitable donations. Why under-deduct? BuzzFeed’s Zeke Miller asked the Romney campaign and they said that Romney “was in the unique position of having made a commitment to the public that his tax rate would be above 13%. In order to be consistent with that statement, the Romneys limited their deduction of charitable contributions”.

In effect, before releasing their tax returns, the Romneys reduced the size of their charitable deduction so their effective tax rate would conform to Mitt’s previous statement that’d he’d never paid less than 13% in taxes. (Had he claimed the full $4 million deduction, their effective tax rate would have likely been around 12%.) The release also combines taxes and donations, which the NYT’s David Firestone says doesn’t add up: “charity and taxes cannot be conflated to make it sound like you are “giving away” a larger portion of your income than you are”. While it fulfilled one pledge, Romney’s under-deduction means he overpaid his taxes in 2011. And he’s previously said that if he overpaid his taxes, he wasn’t qualified to be president.

In comparison, the Obamas paid $162,074 in taxes on $789,674 in 2011 income, a 20.5% effective rate.

Also released today, medical disclosures for Romney and running mate Paul Ryan revealed them to be in freakishly good shape, describing Romney as a “vigorous man” with “reserves of strength, energy, and stamina that provide him with the ability to meet unexpected demands”. — Ben Walsh

On to today’s links:

The Fierce Urgency of Whenever
SEC chair: You guys should really deal with this money market reform thing - WSJ

EU Mess
Germany, the IMF and the ECB are squabbling over the Greek bailout bill - WSJ

New Normal
New York has the highest income inequality in America - NYT

The battle over what’s in the Dodd-Frank bill will never, ever end - DealBook
Three states are suing over the constitutionality of Dodd-Frank - Competitive Enterprise Institute

Good Questions
Mark Cuban: What business is Wall Street in? - Blog Maverick

The worst failures of Apple’s terrible new map system - Huffington Post
Apple’s iOS 6 iPad clock design is a blatant rip-off of a famous Swiss design - CNET

All British pensioners over 65 get a £10 Christmas bonus - NYT

Welcome to the new LBO boom - Reuters
High-frequency trading: even worse than you think - John Carney

New Normal
The huge disparities in US public school financing - Bloomberg

Story Time
“The narrative structure of the global weakening” - Robert Schiller

It’s Academic
Study says the average Death Row last meal is incredibly high in calories - SSRN

The Fed
Kocherlakota changes his tune: “You have to learn from the data” - WSJ

First-Hand Accounts
On the difference between British and German traders - Guardian

Kickstarter matures

Felix Salmon
Sep 21, 2012 17:09 UTC

In the wake of my post on Tuesday about the Kickstarter campaign for Lifx lightbulbs, there were two very welcome developments yesterday.

First, Lifx announced that, having passed the $1 million mark, they were going to cap the amount of money they are raising via Kickstarter. They’re over $1,200,000 as I write; they’ll cap out at just about $1,300,000.

“We want to put all our energy into developing the product, rather than building a large company (at this stage)”, they write. “We’ve raised more than enough to execute on what we’ve proposed to do so now we are going to get down to the business of creating a full production run of LIFX smartbulbs fit for homes across the world.”

On top of that, if you look at the Lifx product page, you’ll see that the $5,000 option for ordering 25 packs of 4 bulbs has disappeared: that’s partly because such wholesale offers weren’t allowed even when the Lifx project was announced.

Still, the Lifx team got in just under the wire, because Kickstarter yesterday announced new rules which would disqualify their campaign in its current form. In a post headlined “Kickstarter Is Not a Store”, they lay them out: all Kickstarter projects are now required to have a “risks and challenges” section, allowing backers to judge whether “the creator is being open and honest about the risks and challenges they face.”

On top of that, if you’re trying to fund a project designed to make things and ship them out — if you’re in the Hardware or Project Design sections — then product simulations are forbidden, as are product renderings like the picture of a perfect lightbulb which currently graces the Lifx page. “Products should be presented as they are,” write the Kickstarter crew. “Over-promising leads to higher expectations for backers. The best rule of thumb: under-promise and over-deliver.”

Finally, you can’t offer multiple quantities of a product at all. The famous Pebble watch, for instance, persuaded more than 10,000 people to order two or more watches; between them those backers contributed some $3.3 million, and are expecting to receive more than 30,000 watches. (Initial estimated delivery: this month. Actual delivery: your guess is as good as mine; the company’s not talking.)

Given that Pebble wound up taking in more than $10 million in all, they would have been fine without those multiple-quantity presales. And the Kickstarter people are right: selling many of a thing — up to and including Pebble’s $10,000 “MEGA DISTRIBUTOR PACK” — sends a clear message that you actual have many of these things to sell. Once you’re up and distributing, then you can sell as many of your widgets as you like. But before your widget exists, by all means offer a future widget in return for people helping out with development costs. But don’t turn your Kickstarter page into an e-commerce shopping site.

“It’s hard to know how many people feel like they’re shopping at a store when they’re backing projects on Kickstarter,” the new rules say, “but we want to make sure that it’s no one.”

Yesterday’s new rules are an important step in that direction. Kickstarter is a wonderful way of crowdfunding projects; if the public were to start thinking of it as SkyMall for vaporware, that would be just as horrible for creators as it would be for Kickstarter themselves.

What’s more, now that projects like Lifx are going to be forced to be upfront about their risks and challenges — including the probability that backers will not receive any products at all — those backers are likely to be much less upset if and when things do go wrong. As ever, transparency is a good thing. And these new rules will make it much harder to hide serious weaknesses behind video-editing cleverness.


I’m actually mixed here. On one hand, I think it’s too easy for someone to make a slick sales pitch that they can’t deliver on. On the other, there is a high bar set now that demands an actual physical item before funding can be sought.

Personally, I would rather see an unattractive, but functional, prototype that proves that there’s some possibility of manifesting the project than a rendering and a bunch of copy telling me about this amazing idea the entrepreneur has had.

If you can’t build anything at all without kickstarter funds, then perhaps your idea isn’t as fully formed as you’d like folks to believe. When a maker, LIFX in this case, states that now that they have funding they’re going to find the best experts out there to help them finish the design on their product, I have to wonder…just how much designing did they really do before they launched this thing?

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Should banks get to deduct their interest costs?

Felix Salmon
Sep 21, 2012 13:08 UTC

I’m delighted to welcome Jesse Eisinger to the ranks of people who think it’s high time that we abolished — or, at the very least, significantly curtailed — the tax deductibility of interest. Paul Volcker was an early member; the CBO has been making the case for a while; and Treasury has been very explicitly in favor since February.

The last time I wrote this idea up, I quoted Dan Primack, who suggested that 65% of corporate debt interest should be tax deductible, along with 100% of interest at companies with less than $20 million in revenues. To which I added: “(And, presumably, banks, too.)”

But Jesse isn’t making that presumption: he thinks that even banks — especially banks — should be hit by such a change.

What isn’t well appreciated is how much the debt deduction helps the banks. The first way is direct: Banking is a highly leveraged industry. Banks use more debt than equity to finance their activities. The tax break makes the debt cheaper and encourages banks, at the margin, to gorge on more.

This is absolutely true. And I completely agree with Anat Admati, and many others, that banks should have less debt and more equity. But, I’m not convinced that fiddling around with the deductibility of interest is the right way to go for banks. For everybody else, yes. As Treasury points out, if a company finances new investment with equity, the effective marginal tax rate on that investment is 37% — while if the investment is financed with debt, the tax rate is minus 60%. A difference of 97 percentage points.

Think about it this way: if you borrow money on your credit card, you pay off the interest with your after-tax income. That’s as it should be: no one’s seriously suggesting that you should be able to use pre-tax dollars to pay for the interest on the greetings card you bought last month. But for banks, as for all companies, the deductibility of debt makes a huge difference.

It’s worth spelling this out. To make it simple, let’s use an old-fashioned 3-6-3 banker: he takes money in at 3%, lends it out at 6%, and hits the golf course by 3 o’clock. And let’s say that the bank just acts as the intermediary between depositors and lenders.

So Fred has $1,000 on deposit, and Brenda has a $1,000 one-year loan. When that year is up, Fred’s deposit has grown to $1,030, while Brenda has repaid a total of $1,060. The difference — the profit to the bank, which the banker has to pay tax on — is $30.

Now let’s say the bank was financed 50% by debt, and 50% by equity. It still lends Brenda $1,000, but it takes just $500 from Fred, and uses its own money — prior years’ accumulated income, perhaps — to find the other $500 to lend to Brenda. At the end of the year, it has still earned $60 from Brenda, but this time it has paid Fred only $15 in interest. Which means that the bank’s profit has risen to $45.

And of course if the bank was financed wholly by equity — if it had no deposits or liabilities of any sort — then it would make a profit of the full $60 on Brenda’s loan.

So why don’t bankers use lots of equity and very little debt, if they like profit so much? Because of the power of leverage. Take that $1,000, lend it to Brenda, and you make $60. But what if you take that same $1,000 and make ten loans instead? Each loan would comprise $100 of your own money, and $900 which you’ve borrowed from Fred. On each of those loans, you take in $60 from Brenda, and pay out $27 to Fred in interest, for a total profit to yourself of $33.

And if you make $33 ten times over, that’s $330, which is a lot more attractive than a mere $60.

Right now, nothing in the tax code changes this fundamental mathematics at all. Let’s say the bank has a corporate income tax rate of 30%. Then the $60 of income on one loan becomes a post-tax income of $42, while the $330 of income on ten loans becomes a post-tax income of $231.

But what happens if you abolish the tax-deductibility of interest? Then things change dramatically. In the single-loan case, the bank doesn’t make any interest payments to depositors: Fred’s not in the picture at all. And so the pre-tax profit remains at $60, and the post-tax profit remains at $42.

But in the ten-loan case, the $330 is the difference between $600 in revenue and $270 in the cost of interest paid out to depositors. If you can’t deduct that $270 in interest, then you have to pay tax not on the $330, but rather on the $600. Which means your tax bill goes up to $180, and your post-tax income falls from $231 to $150.

Now $150 is still larger than $42. But the multiplier effect is shrinking. With tax-deductible interest, issuing ten loans got you 5.5 times the profit that you saw when you were making one loan. Without tax-deductible interest, you’re still taking ten times the risk, but your final profit is only 3.6 times what you would make by just issuing a single loan directly.

So, should we abolish or severely curtail the tax deductibility of interest even for banks? Would that be a good way of giving them a little bit of incentive, at the margin, to cut down on excessive leverage?

I’m not convinced. The way to cut down on leverage, it seems to me, is to cut down on leverage. That’s what Basel III is for, not the tax code. For banks, money is their raw material: it comes in, gets transformed, and goes out, every working day. And for any business, profit is what you’re left with after paying for your raw materials. I can absolutely get on board with making it more attractive for a widget maker to invest in its raw materials using equity rather than debt. But when debt is your raw material, I’m not sure.

Certainly any such move would make checking and savings accounts more expensive for consumers. Remember that while a bank account from the consumer’s perspective is a handy place to keep your money, from the bank’s perspective it’s a funding source — the depositor is lending money to the bank, which then turns around and lends it on to someone else. If the bank had to pay income tax on all of the interest paid to depositors, that would surely cause quite a lot of harm to the whole depository ecosystem.

That said, there are aspects of the idea that I like. It would encourage banks to make real loans to real people, at real margins, rather than engaging in clever financial shenanigans where the profit is a tiny sliver compared to the cost of funds. (Or, to put it another way, it would encourage JP Morgan to move less money to the Chief Investment Office rocket scientists in London, and move more money to its branches for personal and small-business loans.) And in general, as I’ve said many times, our entire society needs to deleverage and move to more of an equity-based funding model.

But let’s not start by engaging the banks in a thermonuclear regulator war when we don’t really have any idea what the unintended consequences might be. There’s an enormous amount of good to be done just by abolishing or reducing the tax-deductibility of debt in the commercial sphere; so let’s begin there. If that works well, then maybe we can think about moving on to banks in some way.


So, deposits/bonds are debt, debt is leverage, and leverage is way of creating financial assets out of thin air.

What happens when those financial assets stop growing, or actually decrease? Negative global financial effects; lower growth (vs. leverage-fueled 1990-2000s)

What would be the total required new equity if 30% of all bank leverage was replaced by equity?

Calamity (or at least so from the top of the developed world).

“So, you get what we had here this week, which is the way [we] wants it. Well, [we] gets it.”

I don’t have another solution, and agree with Felix’s goal and most of his thought process, but I don’t see how you could regulatorily de-preference debt and move towards more equity, unless over a timeframe that makes the Basel process look speedy.

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Counterparties: A hawk in dove’s clothing

Ben Walsh
Sep 20, 2012 20:49 UTC

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com

The QE3 press tour has begun. Yesterday, the president of the Dallas Fed blasted the central bank’s decision. Today, in separate speeches, the presidents of the Atlanta, Boston and Minneapolis Feds defended the monetary stimulus decision and gave us some insight into how QEternity will play out.

As part of QE3, the Fed promised to keep interest rates low till at least mid-2015. Minneapolis Fed President Narayana Kocherlakota argues that the FOMC should keeps rates “extraordinarily low until the unemployment rate has fallen below 5.5 percent”. For context, unemployment rates have not been below that level since April 2008. As Neil Irwin writes, Kocherlakota’s target is especially noteworthy because he is “generally viewed as one of the more hawkish, or inflation-phobic, members of the FOMC”. If he’s on board with QE3, Tim Duy’s conclusion that the hawks have been marginalized, or at least converted, appears true.

The Atlanta Fed’s Dennis Lockhart struck a less polemic tone in stressing the “far from satisfactory” state of the US job market. But he made a clear defense of QE3 by drawing a distinction between training America’s workforce and helping its workers in the short term: “Economic development is about jobs for people. Workforce development is about people for the jobs”. The implication: BAs and vocational training, while helpful, won’t be enough get us out of an employment crisis.

Eric Rosengren of the Boston Fed was far less subtle, delivering a speech entitled “Acting to Avoid a Great Stagnation”. In his view, the logic of QE3 is simple and emphatic: “improve economic conditions much more quickly – so the period of very slow recovery … does not persist”. — Ben Walsh

On to today’s links:

Must Read
The persistence of intergenerational poverty in rural America - Huffington Post

Tax Arcana
How the tax code encourages companies to gorge on debt - Jesse Eisinger

Long Reads
Taleb on Rubin: “Nobody on this planet represents more vividly the scam of the banking industry” - Bloomberg Businessweek

Bad News
The mega-merger that could turn the music industry into an effective monopoly - Huffington Post

The government is having a hard time prosecuting banks for Libor manipulation, shocking exactly no one - WSJ
Libor-like manipulation is possible in a whole slew of other markets - Bloomberg

Crisis Retro
Sheila Bair: Maybe we kinda overdid that whole massive financial system bailout - Fortune

Data Points
When it comes to central bank balance-sheet-to-GDP ratio, the euro zone is a world-beater - Also Sprach Analyst

Dubious Trends
The four histories of “the 47%” talking point - Mike Konczal

Growth Industries
The folks in HR are now letting you buy and sell your vacation days - WSJ

HUD may have paid more than $1 billion in false claims intended for struggling homeowners - WSJ

Financial Arcana
Dewey’s dragooned capital - Ben Walsh

Revolving Doors
Tim Pawlenty, bank lobbyist - Politico

Who’s had the better 10-year returns, Goldman’s shareholders or its employees? - Lauren Tara LaCapra

Obama and Romney have remarkably little to say about the housing crisis - Reuters

The Fed
QE3 has been “manna from heaven” for big bond firms like Pimco and TCW - Reuters
Mitt Romney also believes in monetary-policy urban myths - Paul Krugman
The Fed’s legitimacy problem – Simon Johnson

Useful Reminders
An open letter to Urban Outfitters regarding their Che Guevara T-shirts - Huffington Post

The strange beauty of patent drawings - FastCo