Felix Salmon

Why Netflix is producing original content

Felix Salmon
Jun 13, 2013 06:02 UTC

Matthew Ball has a long examination of the economics of Netflix’s original content, looking at it on a show-by-show level. He starts with the cost of producing something like Arrested Development, and then works out how many extra subscribers Netflix would need to attract in order to justify that cost. (Or, how many extra months existing subscribers would have to keep their subscriptions for, compared to when they would unsubscribe otherwise.) He writes:

I’d argue that it is unlikely that Arrested Development will convince millions of users to stay an extra month in 2014 and 2015. If this is the case, the show would need to achieve its return in the immediate future. Therefore, if we don’t see Netflix adding four to five million new subscribers during the quarter, one of two things are true. One, the show was a poor investment whose draw was a fraction of those anticipated, or two, the show is instead intended to convince many of the million subscribers currently churning away each month to defer their cancellation. This would be telling.

While Wall Street analysts are assessing the success of original content in terms of new customers, I believe Netflix’s primary goal is on imminent service cancellations.

Ball lists three reasons why Netflix is making original content. There’s the way in which that content keeps people subscribing for longer; the way in which original content will allow Netflix to raise its prices in the future; and then there’s this:

Hedging against rising content licensing costs, which are up 700% over the past two years. While per-show licenses will never surpass the cost of original producing a series, their increases will make ongoing investments in House of Cards less expensive on a differential basis.

The ever-increasing cost of licensing is a huge issue for Netflix, and it’s the reason why its business model is a very tough one: any time that Netflix builds up a profit margin, the studios will simply raise their prices until that margin disappears. Netflix had to pay a whopping $1.355 billion in licensing costs just in the first quarter of this year; that number is only going to increase, unless Netflix can find some other way of finding content. Like producing it in-house. At the margin, the more material that Netflix produces on its own, the less it needs from third parties, and the easier that Netflix finds it to say no to ridiculous demands.

But what Ball misses, I think, is that Netflix is playing a very, very long game here — not one measured in months or quarters, and certainly not one where original content pays for itself within a year. Netflix doesn’t particularly want or need the content it produces in-house to make a profit on a short-term basis. Instead, it wants “to become HBO faster than HBO can become Netflix,” in the words of its chief content officer Ted Sarandos.

Most importantly, the thing that Netflix aspires to, and which HBO already has, is an exclusive library of shows. If everything goes according to plan, then the Netflix of the future will be something people feel that they have to subscribe to, on the grounds that it’s the only place where they can find shows A, B, C, and D. That’s what it means to become HBO — and Netflix is fully cognizant that this is a process which takes many years and billions of dollars.

If Netflix gets there, then it becomes a license to print money, just as HBO is today. Shows like Arrested Development and House of Cards may or may not pay for themselves over the short term — in fact, they almost certainly won’t. But that doesn’t matter. In the long term, they will become part of a library which has massive value on two fronts: the shows can be licensed out in jurisdictions where Netflix doesn’t want to compete, and they will also help make Netflix a service that can guarantee you a great show that you want to watch, whenever you want to watch it.

Ball says that “Arrested Development is an established brand that’s intended to be a one-off event to convince its fanatical (and tech-savvy) followers to give Netflix’s broader streaming service a try.” That’s true — narrowly. But the series is much more than that: it’s also a way for Netflix to signal to all its current and potential subscribers that it is home to high-quality exclusive content, if and when they ever feel like giving it a try. In a weird way, Arrested Development is worth more as the number of people who haven’t seen it goes up.

No one today is likely to subscribe to Netflix just on the grounds that they think they might like to watch Arrested Development at some point. But when there are dozens such shows — none of which are available anywhere else — that begins to add up. At that point, not only does Netflix provide something for everybody; it also becomes the only place to watch certain shows with cultural-touchstone status. And presto, the decision is no longer whether Netflix is worth the subscription price; rather, the question is whether you can afford not to have it.

There’s no guarantee that Netflix is going to succeed at this strategy: many have sailed into the treacherous waters of Hollywood video production, and few have thrived there. And in the first instance the strategy just means that it’s no longer just the content companies managing to extract enormous rents from Netflix; it’s the production industry and the talent as well. The old argument still applies, mutatis mutandis, to the new strategy: as high-quality original content becomes increasingly important to Netflix, Hollywood will find ever more ingenious ways of forcing Netflix to pay through the nose for it.

Still, for viewers, this can only be good. The viewing audience doesn’t care whether Netflix makes money: they just want great shows to be produced. If they like House of Cards and Arrested Development, they should be very heartened: there’s going to be a lot more new shows where those ones came from.


It’s less about building a catalog and more about becoming known for original content as a brand. Is there really a meaningful number of HBO subscribers that are watching The Sopranos or Six Feet Under in 2013? Probably not. Do people think of HBO as a leader in original programming? Yes but it didn’t happen overnight.

That brings the pressure for Netflix to constantly produce top-level shows. It also means they have to continue to grow their sub base in order to fund these programs and make it to that point at which they are known for original programming. I would argue it can happen a lot faster now than when HBO started out.

It will be interesting to watch the effect of allowing people to ‘binge’. Currently it plays as a pop and fade. But as @hypermark points out, once they have enough series, they can stagger them rather than draw out episodes.

Another issue is whether Netflix continues to spend gobs of cash on series but don’t secure the long-term, exclusive rights (e.g. House of Cards). But that may have been a deal done to jump start originals.

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Counterparties: Government’s governance problem

Ben Walsh
Jun 12, 2013 22:21 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 US and UK have a unique sort of corporate governance mess on their hands. Both countries are trying to deal with the complications of owning a multi-billion dollar financial institution, and are having a hard time doing so.

Britain’s problem is RBS, which the government owns 81% of as a result of 2008 bailout that ended up costing $71 billion. In the US, it’s Fannie Mae and Freddie Mac, the mortgage giants that have been under federal conservatorship since 2008.

Hours after a senior official at the Bank of England called for a more certain timetable for RBS’s privatization, CEO Stephen Hester, who took over in November 2008, unexpectedly announced his departure.

Reuters’ Matt Scuffham reports that the RBS board decided Hester need to be replaced after he refused “to make an open-ended commitment to remain”. Analysts, the WSJ says, were “surprised and disappointed” by Hester’s departure just as the bank’s privatization process is getting underway. Faisal Islam thinks Hester’s exit may be a sign that the government wants to restructure how it manages the bank, something it has had trouble doing in the past.

The US government, meanwhile, is facing a lawsuit from Fannie and Freddie shareholders seeking $41 billion in damages for improperly seizing the companies in 2008. Fannie’s stock has been on a tear recently, based on the essentially speculative rationale that the government will decide to privatize the company. Matt Levine makes the great point that the bailout-related lawsuit could should cause the government to keep its hands on the mortgage companies:

Fannie and Freddie were designed to carry out a public purpose while also making money for private shareholders. When those goals conflicted, the public purpose won and the private shareholders were thrown into the abyss. If you’re the government: that’s perfect. Except now those shareholders are suing, as shareholders tend to do. If you’re the government: why would you set yourself up for more of that?

Jesse Eisinger argues that Congress continues to find new and interesting ways to bungle Fannie and Freddie’s rehabilitation. Neither of the two main proposals to reform Fannie and Freddie, Eisinger writes, reflect what we’ve learned about the housing market since the crisis. Not that Frannie were ever that sound to begin with. The companies were flawed all along, Eisinger says: “hybrids, privately held institutions with government charters – along with too much political influence and too little capital.” – Ben Walsh

On to today’s links:

Mysteries Explained
Don’t worry, credit cards are the reason you’re a bad person – Derek Thompson

Big Brother Inc.
About half a million private contractors have access to top-secret info – Brad Plumer

New Normal
The President’s report on the “Great Gatsby Curve” – White House

Foreign exchange rate benchmarks may have been manipulated daily for the last decade – Bloomberg
Maybe all that FX market manipulation was just standard trading – Felix Salmon
The term “market manipulation” used to mean something – Matt Levine
Dan Loeb is giving more money to charter schools to get back at the teachers’ union – Bloomberg

“The tectonic plates of the world economy are shifting” – David Wessel
Are central bankers finally losing control of long-term interest rates? – BI

Health Care
The overlooked driver of health care costs: lack of competition – Eduardo Porter

Why Pandora just bought a radio station in South Dakota – Bloomberg Businessweek

Ya Think
Large banks are still Too Big to Fail, and S&P is on it! – FT

JP Morgan
Jamie Dimon doesn’t agree with JP Morgan – Jonathan Weil

Niche Markets
The French film industry threatens to torpedo major US-EU trade talks – Reuters

Crisis Retro
Regulators say AIG Financial Products is having trouble managing risk again – Shahien Nasiripour

The JOBS Act has been a big missed opportunity to spur more small company IPOs – Steven Davidoff

That Kanye West interview everyone is talking about – NYT

A majority of Americans responded truthfully to a survey – WSJ

And, of course, there are many more links at Counterparties.


“The JOBS Act has been a big missed opportunity to spur more small company IPOs”

Who on earth other than Wall Street cares how many IPOs there are? It has nothing to do with anything that matters, other than a general sign of overall economic activity. Should we also waste time maximizing the number of ice cream cones?

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Annals of market manipulation, FX edition

Felix Salmon
Jun 12, 2013 16:49 UTC

First it was rates, now it’s FX: in the wake of the Libor scandal, Bloomberg has found anecdotal evidence of market manipulation in the FX world as well.

The problem here comes as little surprise. There are huge investors out there — largely ETFs and index funds — which invest internationally and which need to engage in a lot of large FX trades, especially at the end of the month. Their substantial FX trading notwithstanding, those funds don’t tend to employ dedicated FX traders. Instead, they do a deal with a big wirehouse — probably Deutsche, Citi, UBS, or Barclays — which promises them execution at whatever the spot FX rate is at the end of the day.

So at 3:30pm or so at the end of the month, the index fund tells the bank that it will need to (say) exchange 1 billion dollars into Swiss francs; the bank promises to do so, at whatever the official market rate is at 4pm. The official market rate is determined by WM/Reuters, which looks at all the trades taking place between 3:59:30pm and 4:00:30pm, and then takes the median rate of all those trades.

The bank’s trader now has both upside and downside risk. As Matt Levine explains, if the bank can’t manage to buy those Swiss francs at the WM/Reuters level, then it will lose money; if it can get a better price than the WM/Reuters official rate, then it will make money. When a trader buys a large amount of FX in a short amount of time, that can work in his favor or against him — if such a thing is done tactically, it’s called a concentration move. Here’s Izabella Kaminska:

“Concentration” tactics are normal practice for the industry. It’s the equivalent of creating economies of scale and then choosing the moment to transact so that the depth of the market, and its likely impact on the price, is most beneficial to you. It’s called skillful execution.

If you’re an investor rather than a trader, you generally hate the concentration issue. A big trade will move the market in and of itself, and you’ll end up getting a worse price than a small investor would. On the other hand, if you’re a sell-side trader rather than an investor, and you’re gifted with half an hour and a billion dollars of firepower, then you’re likely to be able to make quite a lot of money by being tactical about exactly how and where you do the transaction.

Essentially, the trader’s job is to procure a billion dollars’ worth of Swiss francs as cheaply as possible. The amount that the client will pay for the Swiss francs is set, and the trader will pocket the difference.

But here’s where the market manipulation comes in: what happens if you “bang the close”, and drive up the price of Swiss francs in the crucial 60 seconds between 3:59:30pm and 4:00:30pm? Then you’re not just trading to get the best execution for your own end of the deal; you’re also trading to get the worst possible price for your client.

Does this happen? Undoubtedly, yes. But as Kaminska says, it probably happens less now than it used to in the past, thanks to what she calls “a tech-related platform revolution”. And remember that no one is putting a gun to the index funds’ heads and forcing them to negotiate deals based on the WM/Reuters market close. If they want to just go into the market and buy the FX themselves, they’re more than welcome to do so. While the funds are surely concerned about traders trying to manipulate closing prices in the FX market — just as traders also try to manipulate closing prices in the stock market on days when options expire — they will have made an internal determination that it’s cheaper to live with that, compared to the cost of hiring their own traders. Especially since implicit FX costs only turn up in infinitesimally smaller returns, while explicit payroll costs show up directly in all-important fund-management fees.

The bigger picture here is that trades move markets, that traders know that trades move markets, and that traders are always going to try to profit from their ability to move markets. As Kaminska says, that’s execution, more than it is manipulation. If traders are really manipulating the close in order to make easy money from index funds, that’s a bad thing: those index funds are meant to be their clients. But when you have an unregulated, Wild West market like FX — which, by its nature, is almost impossible for any national regulator to oversee — it’s simply naive to believe that such behavior is never going to happen. My advice to the index funds is that they renegotiate their contracts, and try to put in place a system which aligns incentives more. Because if the incentives are opposed, as they are here, then the client is never going to end up the winner in the deal.


felix –
I think an important point is that “civilians” tend to get upset about both the “frontrunning” aspect, and the “banging the close” aspect… as a commenter on Levine’s post noted (I quoted this commenter in my own post), you can’t have it both ways…

thanks for the heads up on Izzy’s post. i had missed it.

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Investing in bonds while rates are rising

Felix Salmon
Jun 12, 2013 01:03 UTC

James Stewart is worried about the bond market, which has plunged in recent weeks:

If there was an index for fixed income with the status of the Dow Jones industrial average or Standard & Poor’s 500 index for stocks, the carnage in fixed-income markets would have been a big story and we’d all be talking about a bear market in bonds…

Mr. Beinner said investors need to reconsider their traditional fixed-income allocations, nearly all of which carry interest rate risk. “It’s an asset class with a negative expected return without any other positive offsetting properties. So why have it as a part of your portfolio?”

Mr Beinner, here, is Jonathan Beinner, the chief investment officer for global fixed income at Goldman Sachs Asset Management — basically, a bond investor. And it’s not common to hear bond investors (or any investors, for that matter) tell you that if you give them your money, your expected return will be negative.

The weird thing, however, is that “the millions of Americans scraping by on paltry interest payments”, as Stewart characterizes them, probably want interest rates to go up. It’s the quandary of the millionaire: if you spend a pretty modest amount each year, you’ll run through your savings far too quickly, thanks to record-low interest rates. If those interest rates were higher, then your income would be higher too.

And it’s not just individuals with savings who are looking for higher rates. According to Jamie Dimon, if rates go up by 3 percentage points, JP Morgan would make an extra $5 billion per year. Stephen Gandel isn’t convinced — but clearly Dimon, who’s sitting on one of the largest fixed-income balance sheets in the world, is pretty sanguine about the prospect of interest rates rising sooner rather than later.

So, should we all be freaking out about the carnage of falling bond prices? Or should we welcome a normalized world of higher interest rates? And given that nearly all investors have some kind of fixed-income exposure, what are they meant to do?

The problem here is that bonds don’t behave like stocks: you can’t hold them in perpetuity, because they mature. And if you try to buy and hold individual bonds, you’ll rapidly discover that keeping track of them all is a lot of work. As a result, just about the only bonds that individuals buy are munis; at least those don’t come with massive tax headaches. (This is one of the main reasons TIPS haven’t taken off in a bigger way: their tax treatment is a nightmare.)

The result is that when people invest in bonds, what they actually do, most of the time, is invest in bond funds. And bond funds, like most funds, tend to do well in good times, while underperforming in bad times. Theoretically, no one ever needs to lose money on any Treasury bond bought at a positive yield — you just hold it to maturity and you’ll end up receiving more than you paid. But if you buy a Treasury bond fund, you can lose a lot of money in a very short amount of time: 6.8% in May alone, according to Morningstar. As Stewart says, that’s “years of interest payments”.

The real problem with today’s low interest rate environment, then, is not that interest rates are bound to go up sooner or later. That’s a good sign: it’s what happens when an economy goes back to normal. Rather, it’s how we get there from here: as Goldman COO Gary Cohn told Stewart, “we have an entire generation of investors who have never experienced a rising rate environment.” Most of those investors are looking after the money of individuals who consider bond funds to be low-risk investments, and a lot of them are going to end up doing very stupid things as interest rates start to rise, losing a lot of their investors’ money.

If you’re invested in a bond fund, then now — just when prices have plunged — is not a particularly auspicious time to sell; doing so just locks in losses. But if your bond funds are falling while your stock funds are rising, then at some point you might start thinking about rebalancing — which would involve selling stocks while buying the very bonds which seem to have entered a secular bear market. That’s going to be a very hard decision to make. Generally speaking, second-guessing rebalancing decisions is a bad idea: the whole point is to set up rules in advance, and then stick to them in a disciplined manner. But when interest rates are rising and bond funds are losing value, pouring even more money into them feels very much like throwing good money after bad — especially when it’s money you can’t afford to lose.

And to make matters even harder, there will certainly be a select group of bond investors out there which makes the right decisions rather than the wrong ones, and which manages to make good returns even in a rising interest-rate environment. It’s not easy, but it can be done. The problem, of course, is that it’s impossible to know ex ante who’s going to be the new bond star. My gut feeling is that it’s going to be someone who remembers 1994, the last time that we had a bear market in bonds.

I might be wrong about picking an old-timer. But what I do know, for people who have blindly put a substantial part of their life savings into bond funds without paying too much attention to exactly who’s managing those funds or what they’re investing in, is that the risk of doing nothing is substantial. The problem, as ever, is that it’s far from clear that doing something is better.


@solotar: Suppose other owners of the bond fund do panic, but you stay put. Are you negatively impacted by redemptions regardless? I mean aside from the immediate dip?

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Counterparties: The skills that pay fewer bills

Jun 11, 2013 21:48 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.

Nancy Folbre declared this week that the “golden age of human capital” behind us. As evidence, she points to the falling rate of return on a college degree, thanks to “declining state support, higher tuition and fees, increased inequality of access and the growing burden of debt.” Further, she says, technology is making many relatively well-paying jobs obsolete as complex tasks are increasingly done by computers. But maybe that’s okay, Folbre writes. Education has an intrinsic value: it’s good for society even if it isn’t making us richer.

Paul Krugman notes the “skill” involved in being a skilled worker — what we now think of as a job needing a college degree — has evolved with each epoch of technological innovation. Five centuries ago, monks were highly skilled workers who copied books line by line. (Then the printing press happened). “The role of higher education as a creator of human capital came along quite late. And maybe, as Nancy Folbre says, this role is already waning,” says Krugman.

But a lower return on investment doesn’t mean college is worthless. Adam Looney, a fellow at the Brookings Institution and the director of the Hamilton Project, came up with this graph last year showing the increasing difference in the employment rate and average incomes for those with and without college degrees:

The benefits of college even extend to those who don’t graduate. Dylan Matthews recaps Looney’s most recent study, which finds that, on average, college dropouts makes $8,000 more per year than high-school graduates who never started college. The change in the employment rate for those with some college is also flat since the start of the recession; for those with no college at all employment rates have fallen 9%, notes Josh Brown. As Felix wrote last year, “the fact is that while this economy is undoubtedly tough for recent graduates, especially those with liberal-arts degrees, it’s much, much tougher for people who don’t have any degree at all.” — Shane Ferro

On to today’s links:

Long Reads
Modern Warfare: The legal battle over the future of the billion-dollar Call of Duty franchise – Max Chafkin

EU Mess
Today he ECB’s day of reckoning in German court – Reuters
A brief is thistory of politicians and bankers declaring the worst of the euro zone crisis over – MacroScope

Yelp for Wall Street brokers is about as accurate as Yelp – Dealbook

New Normal
Goldman will now let special clients borrow against the Bordeaux in their cellar – Bloomberg

Financial Arcana
How “financialization” can hurt the economy – Bruce Bartlett

On Facebook: “When everything is a potential vessel for advertising, everyone is annoying” – Tom Scocca

Anthony Scaramucci wants to build an alternative to bars that are “not fun” and have unattractive staff – Bloomberg

We already tried libertarianism — it was called feudalism – Mike Konczal
The soaring number of $100 Bills – Timothy Taylor

Dole’s 90-year-old CEO makes unsolicited $1.5 billion offer for the company – Dealbook

A German bank employee accidentally transferred millions while napping on his keyboard – AFP

And, of course, there are many more links at Counterparties.


Absolutely, QCIC. This is why employers value college grads.

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Counterparties: Living longer with less

Ben Walsh
Jun 10, 2013 22:31 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.

Americans with $1 million in savings may be in for a dispiriting surprise — they still haven’t saved nearly enough. The problem, reports the NYT’s Jeff Somer, is that bond yields have fallen and life expectancies have risen.

A  65-year old couple with a $1 million nest egg of tax-free municipal bonds that withdraws 4% per year, Somer says, has a 72% chance of running through their retirement savings before they die. The even larger problem is that the millionaire 65-year old couple is far from typical. The median household retirement account balance for Americans aged 55-64 is just $120,000.

“The bottom line,” Somer quotes NYU professor Edward Wolff saying, “is that people at nearly all levels of the income distribution have undersaved”. The result, according to Wolff, is that Social Security will be the primary income source for most retirees, even for retirees who are relatively well off.

Mutual fund managers’ solution to the problem is mandatory savings. BlackRock’s Larry Fink is one of the most visible champions of mandatory investment plans like Australia’s, which have the benefits of removing the market-timing itch and the problem of employers who have no retirement plan at all. Under the Australian model, employers must contribute 9% of pay (rising to 12% in 2020) for their workers. This, Dan Kadlec writes, “increasingly is being held up as a model for the US”.

But all defined-contribution schemes are reliant on the market going up. And no such plan, Tadas Viskanta writes, can treat the market like an “ATM machine from which one can extract guaranteed returns”. — Ben Walsh

On to today’s links:

Unintended Consequences
Gazprom’s demise could topple the Putin regime – Anders Aslund

The Fed
The history of the Fed’s balance sheet, visualized – Sober Look

Big Brother Inc.
There’s never been a more important leak in American history than Edward Snowden’s – Daniel Ellsberg
“The national security apparatus has been more and more privatized and turned over to contractors” – NYT
A look at the VC firm that helps the NSA find startup investments - TechCrunch

Google is (finally) close to acquiring Waze for more than $1 billion – AllThingsD

New Normal
5 maps that show how divided America really is – Atlantic Cities
Low-paying jobs in retail, hospitality and temp-help accounted for 55% of May’s job gains – Bloomberg

Sheila Bair’s financial regulation listicle – VoxEU

Facebook is maybe, possibly gonna be included in the S&P 500 within the next year – Bloomberg

At CNN, longform reporting loses out to B-roll footage of a guy on a beach every time – Zocalo Public Square

In the fight for survival, funds of funds go bespoke – FT

Primary Sources
S&P raises its outlook on US debt to stable – S&P

The Singularity
A Kickstarter for the world’s first remote-controlled cyborg – Christopher Mims

Fannie and Freddie are worried that mortgage servicing companies are getting too big – Reuters

And, of course, there are many more links at Counterparties.


“Let the government offer a default option and allow people to opt into a qualified private provider if they so chose.”

What kind of fee structure do you envision, y2kurtus? Will Wall Street be skimming 1%+ per year for the hard work of punching a few buttons to tell computers to execute pre-programmed strategies or will they settle for “just” 0.1% of the wealth of the country each year?

Besides, we already have mandatory Social Security contributions of 12%+ annually (half from employee, half from employer). You want to layer another 10% on top of that?

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Adventures with quantitative philanthropy

Felix Salmon
Jun 10, 2013 20:56 UTC

Quantitative philanthropy definitely seems to be a Thing these days. In the Washington Post, Dylan Matthews is writing about GiveWell and about people who are taking high-earning jobs just so that they can give more money away; in the WSJ, Brad Reagan is writing about John Arnold and his determination “to solve some of the country’s biggest problems through data analysis and science”. (Free version here.) And Columbia University Press recently published The Robin Hood Rules for Smart Giving, a guide to the way in which philanthropies should use a framework called “relentless monetization” to guide where and how they spend their money.

Given how much I dislike philanthropy which is mainly designed to make the giver feel important, I ought to be happy about all these developments. But in fact, I’m quite conflicted.

Part of the reason is that philanthropy can not simply be reduced to dollar amounts. You can make a stab at doing so — and if you work for the Robin Hood Foundation, you will do just that. But Robin Hood is very clear that all it’s trying to do is create a way in which to compare apples with oranges, so that there’s a bit of structure under which to answer the “apple or orange?” question. If the Robin Hood quants decide that funding apples causes $4 of benefit while putting the same amount of money into oranges causes $5 of benefit, then they’ll chose the oranges over the apples. But they’re not saying that the apples actually create $4 of benefit: they’re just saying that given their mission, and the way in which they put numbers on such things, they prefer oranges to apples.

The Robin Hood people are very open about the fact that some other foundation with a different mission, or even a different set of quants at the same foundation making slightly different assumptions, could come to a very different conclusion. The quantification framework isn’t a way of replacing judgment with numbers; instead, it’s a way of helping people to be more explicit about exactly what assumptions they’re making when they choose one action over another.

This is my problem with the kind of philosophy Matthews is talking about; call it the GiveWell view. Here’s Matthews, explaining why a well-intentioned chap name Jason Trigg is working at a high-frequency trading shop:

Trigg makes money just to give it away. His logic is simple: The more he makes, the more good he can do.

He’s figured out just how to take measure of his contribution. His outlet of choice is the Against Malaria Foundation, considered one of the world’s most effective charities. It estimates that a $2,500 donation can save one life. A quantitative analyst at Trigg’s hedge fund can earn well more than $100,000 a year. By giving away half of a high finance salary, Trigg says, he can save many more lives than he could on an academic’s salary.

David Brooks does a good job of explaining how there can be something dehumanizing about such logic: there are good reasons to be suspicious of anybody who thinks that philanthropy can or should be reduced to dollar amounts or preset decision matrices. But there’s more going on here, and it’s worth unteasing the various different components of Trigg’s implicit syllogism.

First, there’s what you might call the Peter Singer imperative: “If it is within our power to prevent something bad from happening, without thereby sacrificing anything of comparable moral importance, we ought, morally, to do it.”

Second, we have the ability to turn money into saved lives. “Remember,” writes Matthews, “that giving about $2,500 can save one life from malaria.” Maybe the number is a little fuzzy: it might be $2,000 or $3,000 or even $4,000. But it is fair to say that if I spend tens of thousands of dollars a year on discretionary consumption, then there’s an opportunity cost to that spending — and the opportunity cost is dead people. They died of malaria, and if only I had given that money to the Against Malaria Foundation instead of spending it on booze and taxicabs and theater tickets, then those dead Africans would be alive today.

Third, there is no moral difference between directly saving someone’s life, on the one hand, and, on the other hand, spending an amount of money such that at the margin one extra life will have been saved. The moral worthiness of donating $2,500 to a malaria charity is exactly the same as the moral worthiness of jumping into a shallow pond to save a child from drowning. Both save one life.

Fourth, if you were walking past a shallow pond where a child was drowning, you would surely jump in to save that child.

Fifth, moral mathematics scales: if donating $2,500 and saving one life is good, then donating $5,000 and saving two lives is twice as good, and so on and so forth. If there are diminishing marginal returns on your donated dollar, then they’re small.

If you accept those five premises, then the conclusions rapidly and easily follow: not only should you donate the overwhelming majority of your disposable income to the Against Malaria Foundation, but you also have a moral imperative to maximize the amount of disposable income you have, just so that you can maximize the amount of money you donate and thereby the number of lives you can save.

But the fact is that when you disaggregate the logic in this way, you’ll find very few people willing to accept all five of the premises. I don’t want to wade into the realm of moral philosophy here, so let’s just concentrate on premise number two: the idea that there’s some kind of easy fungibility between dollars and saved lives. This is great as a marketing technique, and if you go through an elaborate quantitative exercise, you can end up at GiveWell’s “cost per life saved” conclusion:

Using the 2012-2013 cost per LLIN, we estimate the cost per child life saved through an AMF LLIN distribution at just under $2,300 using the marginal cost ($5.15 per LLIN) and just under $2,500 using the total cost ($5.54 per LLIN).

The Robin Hood Foundation is far from modest when it comes to its quantitative techniques, but never goes nearly as far as this. At Robin Hood, everything is based on conditionals: if you’re giving away a certain amount of money anyway, and if you have a certain mission statement, and if you make certain clearly-delineated but far-from-certain assumptions, then you will end up preferring this course of action to that one.

GiveWell, by contrast, makes a vastly bolder claim: that if you donate $2,500 to the Against Malaria Foundation, you will save a child’s life. It is entirely transparent in how it arrives at that conclusion, and is perfectly happy for people to quibble with its methodology. But by the time the claim makes it into the pages of the Washington Post, any minor caveats have fallen away, and the conclusion is taken as a simple statement of fact.

I believe that humility is of paramount importance in all philanthropy, and I worry that there’s not nearly enough of it at GiveWell. Malaria is a sexy disease: it’s probably second only to HIV/AIDS in terms of the amount of not-for-profit resources being thrown at it. Zoom out, for a minute, and look at national governments in Africa; at universities and other research institutions around the world; at national and international development banks; at huge philanthropies like the Gates Foundation or the Global Fund; at the philanthropic arms of the big pharmaceutical companies; and, yes, at smaller charities like the Against Malaria Foundation. Add it all up, and you’ll find thousands of people marshaling billions of dollars in resources. These people have been working for many years on trying to build effective strategies to minimize malaria’s footprint and, ultimately, to eradicate it altogether. Some of those strategies have been more effective than others, and the broad distribution of long-lasting insecticide-treated bed nets is undoubtedly one of the better ones. Still, here’s the thesis that GiveWell would have you believe: you can be reasonably certain that every time someone donates another $2,500 to the Against Malaria Foundation, another child’s life will be saved.

I don’t buy it. It’s not that the Against Malaria Foundation isn’t an excellent, well-run charity doing an excellent job at distributing bed nets. In and of itself, distributing bed nets is a good thing to do, and it should, on balance, be helpful the fight against malaria. The Against Malaria Foundation is a worthy cause, and if you write them a check, you’re not going to be committing any of the sins I railed against in December. What’s more, the amount of time that the Against Malaria Foundation has spent with GiveWell has surely paid huge dividends for them: thanks to the GiveWell seal of approval, they have received millions of dollars they would not have gotten otherwise.

But there’s something far too facile about putting a dollar amount on marginal lives saved. Even GiveWell says so: look at the blog post they put up in December, in which they tried to quantify the relative cost-effectiveness of their top three charities. Malaria is a lethal disease, which makes it almost too easy to try to put a dollar amount on lives saved. But attempting the same exercise for deworming is much harder, and they didn’t even bother trying for their third charity, which simply gives cash lump sums, unconditionally, to the poor. Basically, if you want to use GiveWell to help you find a charity where you can buy a saved life with a known number of dollars, you’re going to end up with a shortlist of one.

The Trigg syllogism, then, rests on an assumption which rarely obtains in the real world: that giving money to charity is something which can and will predictably save lives. Charities tend to do little to disabuse this assumption, because people who believe it are likely as a result to donate more money. But talk to anybody who actually works in development or for a nonprofit, and they’ll tell you the world is a lot messier than that. Most of the time, when we give money to charity, we can realistically only hope that our donation will make a positive difference at all; all too often, a marginal extra dollar, even when it’s given to an unambiguously good cause can cause more harm than good.

The purpose of GiveWell is to try to identify the charities where that doesn’t happen — the charities where your donation will do the most good and the least harm. Certain quantitatively-minded types consider that a very worthy cause, and I’d be one of them too, if I believed that GiveWell could really do that.

Instead, however, I think that GiveWell faces three very big problems. The first is model risk: although GiveWell is very open about the models that it’s using, there’s no particular reason to believe that they are robust; obviously, their recommendations are no better than the models used to generate them. The second is that GiveWell imposes a substantial burden on the large number of charities it investigates and doesn’t recommend; that burden carries a real cost.

Finally, and most importantly, there’s GiveWell’s built-in bias towards relatively small-scale, replicable and quantifiable interventions. (Robin Hood has the same bias, for the same reasons.) Such actions are an important part of the philanthropic universe, but the Robin Hood and GiveWell types have a tendency to become evangelical about the way in which virtually all charities should adopt such a framework, and that, I think, is a very bad idea, for reasons that Rob Reich explored in his Boston Review essay about foundations.

Reich explains that things like bed nets are public goods, best provided by the state. And that philanthropies are best placed to do something else entirely: they “can operate on a longer time horizon than can businesses in the marketplace and elected officials in public institutions,” he says, “taking risks in social policy experimentation and innovation that we should not routinely expect to see in the commercial or state sector.” He continues:

When it comes to the ongoing work of experimentation, foundations have a structural advantage over market and state institutions: a longer time horizon. Once more, the lack of accountability may be a surprising advantage. Commercial entities in the marketplace do not have an incentive structure that systematically rewards high-risk, long time horizon experimentation; they need to show quarterly results. Similarly, public officials in a democracy do not have an incentive structure that rewards high-risk, long time horizon experimentation; they need to show results quickly from the expenditure of public dollars in order to get re-elected. In contrast, foundations are not subject to earnings reports, impatient investors or stockholders, or short-term election cycles.

Foundations, answerable only to the diverse preferences and ideas of their donors, with a protected endowment permitted to exist in perpetuity, may be uniquely situated to engage in the sort of high-risk, long-run policy innovation and experimentation that is healthy in a democratic society.

It seems to me that the philosophy of GiveWell and Robin Hood runs directly counter to this philosophy: they require precisely the short-term results which are required also by the marketplace and by the state. As such, they are deliberately disarming philanthropies of one of their key structural advantages.

Both GiveWell and Robin Hood were founded by marketplace-friendly hedge-fund types — but then again, so was the Laura and John Arnold Foundation which falls squarely into Reich’s sweet spot, funding the kind of ambitious, risky, long-term projects with none of the predictability that GiveWell and Robin Hood require. The Arnolds — like the Gateses — take a scientific, quantitative view of the world. But that doesn’t mean they take a narrowly quantitative approach to philanthropy itself. Bill Gates has more than enough money to give a bed net to every living child in Malawi — but his ambition is greater than that. And while I have my quibbles with the way the Gates Foundation is run, I do applaud its ambition and the way in which it tries to do the kind of things that only a monster-size philanthropy could ever even attempt.

Jason Trigg, in this light, is not a moral hero equivalent to a man who has saved dozens of children from drowning; instead, he starts to look more like someone contracting a third party to provide a service which is probably best provided at the state level in the first place. There’s nothing bad about what he’s doing — far from it. But I do think that what he does is limited along a number of axes, and that if he spent less time working at high-frequency trading, and more time out in the field learning about the way that non-profit develop organizations work in practice, then he might develop a richer, more nuanced, and probably humbler view of what his financial contributions can and can’t achieve in reality.

Update: GiveWell responds, pointing to a 2011 post in which they made most of the points I’m making here, and in which they said that they were going to move away from narrowly quantitative estimates and towards a more holistic view of where money can be best spent.


Doing a search for Wall Street or ‘derivatives’ I don’t see that anyone has questioned Trigg’s choice of career if his goal is to ‘save lives’. Walls Street’s risky derivatives (CDOs) were at least partially at fault for the 2008 financial collapse, leading to millions of unemployed, and including an increased suicide rate.

By participating in this system is Trigg enabling a system that will harm possibly more people than he will save? Especially given that he will be devising the algorithms that might increase the risks. The big pool of money that Trigg will be drawing his salary / bonuses/ etc. from is the same pool that is right now lobbying Congress to eviscerate Dodd-Frank and other attempts to restore the regulations that kept the banks in check for the last 80 years.

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Why payday loans won’t get cheaper

Felix Salmon
Jun 10, 2013 16:21 UTC

Raj Date, the former deputy director of the Consumer Financial Protection Bureau, tells American Banker’s Maria Aspan that, in the words of her headline, “Banks Can Develop a Better, Cheaper Payday Loan”. Well, yes, they can. But they won’t.

Date gave a speech at a conference in Miami last week where he was very bullish on big data and sophisticated analytics and all that kind of stuff. Can it all work to the benefit of poorer bank customers with cashflow issues, who need to borrow money against their next paycheck?

Date sees what he calls “the small-dollar credit problem” as one that can be largely solved by better data, which can then give lenders an incentive to lower their prices…

“The credit costs are much higher than what they need to be. I think that through the application of more and different data sources, you can actually make fraud and credit decisions much better than has been possible in the past, and that, with the right competitive dynamic, can therefore start bringing pricing in,” he says.

There is a parallel universe where such thinking makes sense. In this universe, if I have a job, and bad credit, and short-term cashflow issues, and a bank account, and my paycheck gets directly deposited into that account, then my bank knows with a high degree of certainty exactly when I’ll be able to repay what Date calls a “deposit advance”. Indeed, it can take the money it’s owed directly out of my paycheck before I get any access to it at all. This product is as low-risk as an unsecured loan to a person with bad credit can ever be. Since it’s low risk, banks ought in theory to be able to make such loans at relatively low interest rates. And because everybody loves being able to borrow at a low interest rate, a “competitive dynamic” could then drive rates down.

But that’s not the world we live in. In this world, banks have no interest in banking the kind of people who need payday loans — unless they can extract a large amount of fee income from them. Indeed, Chase launched its Liquid prepaid debit card in large part because it no longer wanted to offer checking accounts to these customers at all, and wanted some other product to move them into. The last thing that banks want to do is to create a new product which will in any way incentivize low-income customers to open new checking accounts, which are likely to always hover around the zero balance level.

The only way this product could ever work, after all, is when the person asking for the loan is also directly depositing their paycheck into their checking account. As such, it’s not a product where there’s much of a “competitive dynamic” — the number of banks which can offer me one of these loans is exactly one. And the number of people willing to change their primary bank just so that they’ll have access to a lower-cost payday loan is extremely close to zero. Very few people ever change their primary bank at all, and when they do it’s not because of low loan rates — especially when the loan in question is something you’ve promised yourself you’ll never need.

Date’s vision, then, involves three highly improbable things all working together: banks which want to attract low-income customers; low-income customers willing to change banks to get lower payday loan rates; and the promise that “better data” can magically improve credit underwriting. Even more simply, there’s one big reason why we’re never going to see this product: you can’t get an is from an ought. Date’s heart is in the right place, but he’s not going to get very far trying to sell this idea.


Payday cash loans are a very good way to get money in a big hurry. Payday loan is not affordable if payback period increases. Customers are required to pay only as much as they borrow. The APR depends on the time period for which the money is borrowed. So, the APR varies depending on whether a customer extends the borrowing period or not. 1stratelenders.com is the good company, their interest rates and financial fee is very low.

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Counterparties: America’s consistently dissatisfying jobs market

Ben Walsh
Jun 7, 2013 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.

America’s jobs market seems to have found its boring, dissatisfying comfort zone.

The Labor Department announced today that the US economy added 175,000 thousand jobs in May. (Unemployment ticked up a notch to 7.6%.) Matthew O’Brien writes that this is basically the same thing that’s been happening for the past two and a half years. “There were 175,000 new jobs a month in 2011, 183,000 in 2012, and 189,000 so far in 2013.” Kevin Roose thinks “there’s something to be said for this kind of quiet, steady progress”.

For all its consistency, the labor market has been subpar. The percentage of Americans participating in the workforce has fallen steadily over the last four years. The government continues to cut jobs, putting increasing importance on private sector job growth. (Annie Lowrey has the details of how government cuts are becoming much deeper thanks to sequestration.) The scariest US jobs chart is still terrifying.

At the current rate of job creation, employment, on an absolute level, won’t reach pre-crisis levels until late 2014, a full 8 years since the recession began. The Chicago Fed estimates that the economy needs to create 80,000 jobs per month to have a chance at making a dent in unemployment. Multiples of that may actually be needed to bring down unemployment, as more Americans return to the workforce. The Chicago Fed also projects that a return to full employment (where the unemployed are workers between jobs but still in the workforce) could take another five years, a timetable that, Matthew Klein writes, “puts the US on track for a lost decade”.

Wall Street is rooting for things to get ever so slightly worse, hoping to stave off any decrease in the Fed’s bond buying programs. Fed-whisperer Jon Hilsenrath reports that if the economy continues to grow at its current pace, the Fed will slow bond purchasing later this year.

Ryan Avent concludes that the Fed is perfectly happy for the US outlook to be consistently gloomy with rays of hope:

178,000 jobs per month seems to be the Fed’s good-enough-rate… It is hard to see the logic in that; there are few things more damaging to an economy than a prolonged period of high unemployment. But there is no sign that policymakers are interested in any other path.

Ben Walsh

On to today’s links:

Tax Arcana
“POPS” — the illegal tax shelter that may cost HP’s former chairman $100 million – Bloomberg

MF Doom
MF Global’s auditor at PwC had a history of missing financial problems — including Madoff’s – Francine McKenna

New Normal
Labor’s share of income is falling everywhere (not just in the US) – Timothy Taylor

Health Care
The culprit behind high US health care prices? Blame employers – NYT

Libel Tourism
Saudi prince takes Forbes to court in England for allegedly understating his fortune – Reuters

American Idol stars dominate the celebrity list at Wal-Mart’s shareholder meeting – NYT

Canada posts its biggest employment gain in 11 years – Reuters
“Bad is not good. Good is good, unless your timeframe is the lifespan of fly.” – Josh Brown

Lloyd Blankfein’s advice to new college graduates: “appreciate that life is unpredictable” – Politico

Facebook is killing “sponsored stories” – Ad Age

Mary Meeker’s State of the Internet is maybe not the factual State of the Internet – SF Chronicle
Mark Meeker’s reply: “We stand by the report”- KPCB

The Fed
Goldman: This is when the Fed will pull back – Finansakrobat

And, of course, there are many more links at Counterparties.


The labor market is very not subpar. The BLS is flat wrong on the U-3. They are not counting full time temp jobs in the U-3. Notice the U-6 has begun to drop faster than the U-3. Hence the real U-3 rate is more likely 6.6-6.8%.

Luckily, the Federal Reserve has their own private internals and they are far better which they are seeing some overheating going on.

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