Opinion

Felix Salmon

How to tell where CitiBike is working

Felix Salmon
Jun 7, 2013 17:29 UTC

Given the big problem with NYC’s bikeshare program, how can users get a good idea of whether or not any given station is working? The app won’t tell you. But over at Streetsblog, commenter ohhleary points to this site, which shows not only how many bikes are in a given dock right now, but also how many bikes have been in that dock over the past 24 hours. He (or she) explains:

Click on a station, and if you see the graph “flatlining” during peak hours, you can pretty much assume the station is down.

Here’s an example, using two stations on Washington Square:

washsq.jpg

The station on the left seems to be working OK, with activity during the day and less activity at night. But the one on the right has a tendency to flatline, whatever the hour — a good indication that it can neither dispense nor accept bikes.

If the problem with stations being out of order isn’t easily fixed, then, I’d suggest that CitiBike add this simple piece of functionality to their app: when you select a given station, it should show not only the number of bikes and spaces available, but also how those numbers have changed over the past few hours. If they haven’t changed at all, that’s a reasonably good indication that the station might not be working.

COMMENT

You’re right, I’m sure CitiBike will add a little flag showing WHERE THEY’RE FAILING. Happily.

Posted by PhilH | Report as abusive

When check-cashing goes mobile

Felix Salmon
Jun 7, 2013 16:05 UTC

I’m at a conference on the underbanked this week, where it’s basically impossible to swing a cat without running into someone talking about mRDC, which stands for mobile remote deposit capture. Or, in English, the ability to cash a check using your smartphone.

A lot of bigger banks have had this ability for a while now: take a photo of a check using your phone, and you don’t need to bring it into a branch in order to deposit it. (And some of the bigger banks can make that process quite frustrating.) This is just a mobile way of depositing your check — it then enters into the standard banking system, and it will clear when it clears.

People with prepaid debit cards, however, who live on a much tighter cashflow model, can’t afford to just sit around waiting for their checks to clear. If the check in question is a paycheck, then they want — they need — that money now. Virtually all prepaid debit cards do everything they can to persuade people to convert their paper paycheck into an electronic direct deposit, which appears on the card immediately, but habits are hard to break, and there’s still a very strong consumer preference for being paid in some kind of physical form. And in any case, checks can come from many different sources, many of which would find it difficult or inconvenient to try to transfer the money electronically.

In the real world, check-cashing stores have sprung up in tens of thousands of locations to scratch this particular itch: take a check into the store, which is conveniently located and open late, and convert it directly into cash. Supermarkets are generally happy to offer the service too. Walmart, for instance, will do it for a flat fee of $3.

When you’re cashing a check in person, there’s a natural fraud-detection device — the human who’s handing over the greenbacks — which is hard to replicate in a mobile setting where everything is done through OCR algorithms. The overwhelming majority of check fraud is perpetrated by the depositor: if I try to deposit a bad check, or a check I’ve already deposited elsewhere, then I’m almost certainly doing so knowingly. It takes a certain amount of chutzpah to attempt that in person — much more than it does to attempt it by trying to put money onto a prepaid debit card.

Still, as check-cashing services have grown, a company called FIS has built up a substantial business by offering a service which allows check-cashers to outsource all of their fraud detection, and taking all that risk onto its own balance sheet. Send a check off to FIS, and it will happily — for a modest fee — turn that check into ready cash, and it’s pretty much agnostic as to whether that check comes from a check-cashing storefront, or a supermarket, or a phone app. There might be slightly more fraud coming from phones than from storefronts, but FIS is big and experienced enough to be able to cope with that and weed that fraud out.

As a result, underbanked Americans who want to turn their checks into immediate spendable money can now do so more easily than ever, directly from their phones — something which is even easier than going to a storefront. Providers of prepaid debit cards can now contract with FIS to turn mobile-uploaded checks into cash, and then can put that cash irrevocably onto their customers’ cards. If the check ends up bouncing, or otherwise being bad, that’s FIS’s problem: neither the customer nor the card provider loses any money. Everything is done through the prepaid card’s mobile app, which simply makes calls on FIS’s API.

And what if your prepaid card provider hasn’t signed up with FIS? No worry: another company, called InGo, is here to help. If you have a prepaid Visa card, you can download the InGo app and use that to upload your check; you can then deposit cash immediately onto the prepaid card of your choice. If you’re willing to wait 7 days, the service is free, but most customers choose to receive immediate funds; the fees there are 1% for payroll and government checks, or 4% for all other checks. Those fees are highly competitive with check-cashers. Not only is InGo more convenient than a corner store, it’s also cheaper.

Most encouragingly, the use of mRDC, because it keeps people out of check-cashing stores, might well cut down on the amount of payday lending. Check cashing per se is not a massive drain of funds for the underbanked, although it can add up over time. But when you regularly go to a store to cash your paycheck, and you know that store is willing to advance you money against that paycheck when it’s coming to you in a week’s time, then it becomes very tempting to get your money not immediately, as soon as you receive it, but rather in advance. And that’s where check cashing can become usurious payday lending.

It’s a depressing yet undeniable fact that paper checks aren’t going anywhere, in the US. Even as they’ve become obsolescent everywhere else, they’re still ubiquitous here — and that fact has been a serious obstacle to helping banking go fully mobile. But now that FIS and InGo are cashing checks straight onto prepaid debit cards, what used to be an obstacle can now become a competitive advantage. Prepaid can go overnight from being the place where you can’t deposit a check into your account, to being the easiest place to deposit a check into your account.

I’m hopeful that as part of this trend, check cashing will stop being a significant expense for the underbanked, and will instead be a way for mobile banking operators and the prepaid industry to compete with each other in terms of convenience. Already, if you’re a Gobank customer, and you deposit a check into your account, the money will arrive immediately — and Gobank won’t charge you a penny, at the margin. (Although they will surely hope that you will pay for it in another way, through your voluntary monthly fee.)

Most of the unbanked have smartphones, now — which means that smartphones should be able to disrupt check-cashing stores long before checks themselves become obsolete. That’s going to help take financial services for the underbanked out of the control of the payday-loan industry, and into the control of nimbler and more competitive mobile-native companies who are more interested in scale than they are in extracting rents from the poor. Which should be good for everybody.

COMMENT

My bank lets you immediately deposit a check into your account by taking it to a UPS store. No fee, and the check can be personal. You need to use your debit card, and the money goes directly to that account.

Posted by ccdiane | Report as abusive

Counterparties: International Monetary Fail

Ben Walsh
Jun 6, 2013 21:56 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 International Monetary Fund is now on record saying what everyone realizes about the Greek bailout: it didn’t work very well.

Market confidence was not restored, the banking system lost 30% of its deposits and the economy encountered a much deeper than expected recession with exceptionally high unemployment.

The full report, which for unknown reasons was originally internal and marked “strictly confidential”, is now public; Joseph Cotterill has the best roundup of the key findings.

The report is interesting not only because of its authorship. It’s a well-written and informative read, and Pawel Morski points out that stands to reason: self-flagellation is “turning into a bit of a habit” at the IMF. (See the Argentine and Asian editions.)

The European Commission is defending policies that have become plainly indefensible. Choosing to restructure Greece’s debt earlier would have led to a “systemic contagion”, a commission spokesman said, failing to note the impact of delaying a restructuring. Mario Draghi offered an odd dismissal that simply characterized the report in Rumsfeldian terms: “These mea culpas are a mistake of historical projection. You judge things that happen yesterday with today’s eyes”.

The IMF has gone through policy course corrections before. It was a long-time supporter of austerity and anti-inflation measures. In April, the IMF published its World Economic Outlook, and became, as Neil Irwin puts it, “among the strongest voices against excessive fiscal austerity and tight money”. (Although the Fund is still asking France to cut government spending.) It supported the initial Cyprus rescue plan, and then, in the face of widespread domestic and international criticism, worked to create a small depositor-friendly plan. Additionally, despite producing top-notch research on the negative effects of income inequality, the Fund doesn’t really take them to heart in terms of policy.

Mohamed El-Erian concludes a fault line lies between the Fund’s respected analysis, on the one hand, and policy execution that bows “to pressure from its political masters in advanced economies”. — Ben Walsh

On to today’s links:

Tax Arcana
The IRS slaps HP’s former chairman Ray Lane with $100 million tax bill – Bloomberg

New Normal
The “anti-intellectual moment”: college students shun the humanities – WSJ

Remuneration
Thanks to a booming stock market, CEO pay keeps rising – AP

Big Brother
The NSA can hear you now – Glenn Greenwald
The full court order authorizing collection of “metadata” from millions of Verizon users – Guardian

Financial Arcana
For the first time since its inception, high-frequency trading is in retreat – Bloomberg Businessweek

Central Banking
“It is almost as if the Fed is trying to force a fire hose of policy through a garden hose” – Tim Duy

Even more TBTF
John Thain says the Too Big to Fail problem is worse today than it was before the crisis – WSJ

Servicey
Investment tips from Elizabeth Warren: don’t buy gold, collectibles, or prepaid funerals – Mother Jones

Welcome to Adulthood
Discouragement for young writers – Freddie deBoer

Alpha
A tour of the zany, probably useless world of hedge fund index ETFs – Bloomberg

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

COMMENT

The piece was frankly terrible. It doesn’t show anything it is preporting to show, and I generally agree with the authors on policy.

Posted by QCIC | Report as abusive

from Shane Ferro:

The dark side of homeownership

Jun 6, 2013 17:06 UTC

Owning your home, long a pillar of the American dream, could actually be bad for the economy. In a new paper, economists Andrew Oswald, of the University of Warwick, and David Blanchflower, at Dartmouth, found that rates of high homeownership lead to higher rates of unemployment in both the United States and Europe.

Not only do high rates of homeownership keep people from moving to areas with good jobs, it also turns out that they tend to stunt job creation where the people live. What’s more, because suburbanites are unlikely to have a jobs in the same place that they live, they often spend a lot more time in traffic than they need to  -- time that could surely be used more productively.

This is not a new idea for Oswald and Blanchflower. They’ve been working on this area of research for the better part of two decades, although this is the first time they’ve had the hard data to show how the labor market in the US is affected when homeownership rates increase. Even though individual homeowners aren’t necessarily more likely to be unemployed than their renter counterparts, a doubling of the homeownership rate leads to more than doubling of the unemployment rate, the researchers find.

High rates of homeownership lead to fewer businesses being formed, says Blanchflower. The authors aren’t fully able to explain this correlation, though they hypothesize in the paper that it could be a result of zoning restrictions in residential areas and/or a NIMBY (not in my backyard) attitude from homeowners. Fewer businesses in the area mean fewer jobs, which lowers the employment rate. People who cannot find a job near their home, but are tied down by a mortgage, then end up commuting long distances for work.

Switzerland is a prime example of low homeownership and low unemployment. Only about 30% of the Swiss own their homes, and unemployment in the country hovers just above 3%. Spain is at the opposite end of the spectrum, with 80% homeownership and more than 25% unemployment. The paper shows that OECD countries and every state in the US fall somewhere in between Spain and Sweden. Here’s the scatter chart: the higher the homeownership rate, the higher the unemployment rate, generally.


As the subprime crisis hit, Oswald’s ideas became somewhat popular, as various people began to argue that perhaps homeownership shouldn’t be the bedrock of our economy. Clive Crook argued back in December 2007 that the focus on housing could be holding our economy back. “If investment in housing goes up, investment in things that would expand the economy and improve future living standards—such as commercial building and business equipment—goes down”.

As Free Exchange added, putting people to work efficiently means having a labor force that can move around to where the jobs are. “Roots are for vegetables”, as the article puts it.

In a panel discussion on the Canadian television show The Agenda back in 2010, both Yale economist Robert Shiller (of the Case-Shiller home price index) and urban studies theorist Richard Florida argued that homeownership should be less idealized, and the government shouldn’t promote homeownership through tax breaks. As Crook notes in his piece, the UK abolished mortgage tax breaks and saw no change in housing prices. “In the US, labor mobility and residential mobility tend to go hand-in-hand, and it’s really put a crimp in the US ability to adjust to this time of economic restructuring”, said Florida.

There are reasons to argue for homeownership, of course. Not only is it a leveraged investment that can pay off handsomely (if prices go up), it’s a commitment device, “which forces people to build wealth rather than fritter away their income on consumer products”, as Felix Salmon pointed out, also back in 2007. Shiller responds that if you have the discipline and self-control to put that money in the stock market, you’d likely get a better return.

In 2007, as the economy was spiraling downward, no one really wanted to talk about taking action that might further collapse the housing market. But perhaps now that the economy is slowly marching towards recovery, it’s time to bring it up again and ask ourselves whether being a nation of homeowners is worth the price we pay in stunted economic growth. It may be time to do away with the mortgage-interest tax deduction, rezone the suburbs, or simply embrace Blackstone’s quest to own as many single-family homes as possible.

Counterparties: Obama’s off-message patent police

Jun 5, 2013 22:17 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 if on cue, the US International Trade Commission (ITC) has stepped into the larger debate on patents. Yesterday, the very day that President Obama announced plans to tackle the growing ranks of patent trolls, the ITC ruled against Apple in its protracted patent dispute with Samsung.

The result, which could be vetoed by President Obama or overturned on appeal, is that Apple will be barred from bringing certain older products sold by AT&T into the country. These include: iPhone 4, iPhone 3GS, iPad 3G and iPad 2 3G. The timing was appropriate: one of the Obama administration’s seven legislative recommendations on patent reform was to make it harder for the ITC to issue bans on imports because of patent issues.

The ITC has been a popular destination for high-profile patent cases in the last few years. That’s because, Timothy Lee writes, it is more “patent-friendly than district courts”. Florian Mueller calls the decision a “major surprise” and suggests the ITC is betraying  its “original mission to protect domestic industry against unfair imports.”

Lee has more background on the ITC’s expanded role in the consumer electronic sector:

The ITC is officially part of the executive branch, but it plays a quasi-judicial role in enforcing the nation’s trade laws. If the ITC determines that an importer has engaged in “unfair trade practices,” it can issue an “exclusion order” banning its products from the market.

That law has been on the books since 1922, but more recently the phrase “unfair trade practices” has increasingly been construed to include patent infringement. And because modern consumer electronics products are manufactured overseas, virtually all of those products are vulnerable to ITC exclusion orders.

Part of the reason that this case was so surprising, says patent lawyer Christopher Carani, is that the patent in question is a FRAND patent, which means it involves technology that helps a device conform to industry standards for connecting devices. Carani thinks that there’s a good chance Obama might veto the ruling, rare occurrence though that is. One IP lawyer told the WSJ that a presidential patent veto hasn’t happened since the Carter administration.

Apple has said that until the ban goes into effect, it won’t affect the availability of devices in the US. If the ruling does hold up, however, Piper Jaffray’s Gene Munster says it could cost Apple $800 million.  – Shane Ferro and Ryan McCarthy

On to today’s links:

Ugh
Why the Farm Bill is welfare for the wealthy – Mark Bittman

McMansions
America’s new houses are bigger than ever – Catherine Rampell

JPMorgan
JPMorgan’s debacle of a deal with Alabama may end up costing it $1.6 billion – Bloomberg

Crisis Retro
Synthetic CDOs are back — in a trend story kind of way – WSJ

Ouch
Did the SEC have an informal policy of not going after investment managers like Bernie Madoff? – Matt Taibbi

Wonks
“The best economists are well aware of their ignorance” – Noah Smith
The economic value of killer surf waves – Fortune

The Fed
A Fed official discovered America’s income inequality problem by visiting a job fair – Shahien Nasiripour

Alpha
Bernie Madoff’s new investment tips: buy index funds – MarketWatch
Quant hedge funds missed out on the predictably irrational reaction to Bernanke’s comments – FT

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

The one big problem with NYC’s bikeshare

Felix Salmon
Jun 5, 2013 20:17 UTC

New York’s bikeshare program has gotten off to a successful start — finally. It’s worth remembering that before it was delayed by Hurricane Sandy, it was delayed by something else: the failure of its operator to have the requisite software lined up. Cody Lyon has a good overview of the chaos behind the scenes. The company with the NYC contract, Alta Bicycle Share, won the contract on the strength of software developed by a company called 8D Technologies. But then Alta and its Canadian partner, PBSC, abruptly fired 8D and decided they could develop their own software in-house.

That decision was massively overoptimistic, and resulted in the original delay to the NYC rollout — as well as resulting in 8D suing Alta and PBSC for $26 million.

Big software projects almost never work very well, especially projects where there are as many different things which can go wrong as we have in the NYC bike-share program. And so when the CitiBike program launched, there was a certain amount of trepidation: would it actually work?

The answer, it seems, is that it does work; it just doesn’t work very well. Or, to be a bit more precise, when it works, it works fabulously. But when it doesn’t work — which is all too often — it doesn’t work at all.

I’m a massive fan of bikeshare plans in theory, and I warmly welcomed NYC’s CitiBike system in particular, after it launched. I ran into a couple of problems with stations not being able to dispense bikes, but I put that down to teething troubles, and didn’t think them worth mentioning.

Now, however, I’m worried that the problem of stations being able to neither receive nor dispense bikes is a big one, and that it’s not going to be fixed any time soon. I sent some detailed questions on this issue to both CitiBike and NYC’s department of transportation, and I’ll let you know if and when I hear back from them, but so far they seem to be suspiciously close-mouthed about what’s going on — which in turn makes me think that this is no easy-to-fix glitch.

There’s a set of interrelated problems here. On a hardware level, the docking stations don’t seem to be nearly as beautifully designed as the bikes themselves. The bikes ride smoothly and easily; by contrast, you need to give them a real shove to return them properly, and it’s hard to tell whether you’ve actually returned your bike or not. (You need to be paying attention to a small series of three LED lights, which aren’t always easy to see in direct sunlight; sometimes they’ll turn yellow, in which case the bike has been returned; sometimes they’ll turn green, in which case you need to wait for the light to turn off before the bike has been properly returned; and sometimes they won’t turn on at all, in which case the bike has not been returned.)

Anecdotally, a lot of people seem to be encountering “open rides”, where they think that they returned their bike, but the return isn’t registered in the system. That’s financially dangerous, of course: if you don’t return your bike, you’re liable for as much as $1,000. But I fear it’s also creating broader problems with the bikeshare stations. These can look fine on the official app, and on the website, showing plenty of open slots and bikes for rent. But when you get there, you find that you can’t successfully return a bike to any of the open slots, and you can’t successfully remove any of the bikes for rent.

This is not a vandalism issue — there is no indication, at any of these stations, that they have been deliberately crippled, and the NYC DOT’s Seth Solomonow tells me that “a quick inspection can address” the problem. Basically, if a technician goes out there and resets the station, the problem is solved. But there doesn’t seem to be a way to reset the station remotely, and it’s not at all clear whether CitiBike HQ even knows when a station isn’t working, unless and until someone calls them to report the issue.

But the issue does seem to be widespread. I’ve managed 15 successful trips so far, plus one trip where I had to return a bike to the same station I rented it from, since I only wanted to bike a couple of blocks and all the stations I tried to return it to, closer to my destination, weren’t working. (CitiBike should in theory be great at turning a 15-minute walk into a 5-minute bike ride, but that doesn’t work if you can’t be sure that you’ll be able to return the bike at the other end.) I’d say that roughly half the trips so far have been trouble-free at both the beginning and the end, while on the worst one I encountered four different broken stations (two at the beginning, and two at the end) before finding stations which were working.

I’m certain that this is not me doing it wrong, or some idiosyncratic issue with my keyfob: it works fine when it works, and when it doesn’t work no one else can remove or return bikes either.

I’m not certain, however, that Alta and PBSC are on top of this problem and know how they’re going to fix it. They’ve had an extra year to get this right, but if the app doesn’t know when a station isn’t working, my guess is that the system as a whole doesn’t know that either. And that’s going to be hard to fix. What’s more, if there’s some kind of failsafe mechanism which shuts down an entire station when some reasonably common thing happens, that mechanism is likely baked into the system and will also be hard to patch with some kind of simple software update.

I’ve been using the CitiBike system a lot, since it launched, because right now I don’t have a bike of my own: mine was stolen despite being locked securely to an official bike rack. I’ve been thinking that maybe what I should do is just use my bike for trips which don’t involve parking it on the street, and use CitiBike instead for all other trips. But in order to do that, I’ll need a reasonable amount of predictability to the system: if the app tells me that there are bikes nearby, I’ll need to be sure that I can use one — and also that I’ll be able to return it to a station near my destination. If I have to build in an extra 15 minutes or so just in case the bike stations aren’t working, that makes the entire system much less convenient.

I have a theory that one of the reasons for the bonkers opposition to NYC’s bikeshare is precisely that it is so convenient. The Driven Elite used to be able to feel superior to everybody else just because being driven around the city was easier and quicker than than any other form of transportation. Their ability to ignore the subway is really quite impressive: one of the themes running through Too Big To Fail was senior bankers turning up late to emergency meetings at the NY Fed because they had been stuck in traffic when taking the subway would have been much quicker. But it’s harder to ignore bikers who are happily riding past your car and getting to where they want to be so much faster than you are. And because the likes of Dorothy Rabinowitz would never be seen dead on a bike, they’re railing against the evolution of their city into something great which they feel excluded from.

Bikeshare is all about being convenient at the margin: being able to leave your house that much later, and arrive at your destination that much earlier, because the bikes are just sitting there waiting for you to use them. If you can’t be sure that you’re going to be able to rent one of the bikes, because the system is glitchy and often entire stations just don’t work, or if you’re worried that the stations near your destination won’t accept returns, then all that convenience simply disappears. So this is a very important issue. I hope it gets fixed soon, but I have to admit I’m a little bit pessimistic.

COMMENT

A hard shove is NOT needed to dock the bike; trying to apply brute force will likely only frustrate. The locking plate on the bike just needs to be correctly aligned with the receptacle on the dock, which often requires the front of the bike to be lifted slightly off the ground. The same principle applied for docking in the Taipei bike share system; only there, the physical parts were more clearly visible.

Posted by HappyBiker | Report as abusive

Why capital gains should be taxed as income

Felix Salmon
Jun 5, 2013 15:14 UTC

Last week’s Munk debate featured one of those strange-bedfellow moments, when Paul Krugman agreed with Art Laffer that the tax rate on capital gains should be the same as the tax rate on income. (In fact, Laffer went one step further than that, saying that even unrealized capital gains should be taxed at the same rate.) Normalizing the capital-gains tax rate so that it’s the same as the income-tax rate is an easy way to bring a lot of money into the public fisc — some $161 billion per year, according to the CBO. So why aren’t we doing it?

Evan Soltas does his best to answer that question with his “Defense of the Capital-Gains Loophole”. Here’s the meat of his argument:

Most tax breaks create distortions. The tax break for capital gains does the opposite: It reduces a distortion. Investment is really deferred consumption. Taxing consumption tomorrow at a higher rate than consumption today — which is what a tax on investment income does — encourages people to shift consumption forward in time, and that’s inefficient.

This doesn’t make a lot of sense. Firstly, investment really isn’t deferred consumption. The amount of money invested, in the world, is going up over the long term, not down — which means that once you look past the natural tidal movements of money in and out of various investment vehicles, it’s reasonable to say that money, once it gets invested, stays invested. Pretty much forever. The amount of money being saved, plus the amount that the investments have grown, is nearly always going to be greater, in aggregate, than the amount of money being withdrawn for the purposes of consumption. That’s the inefficient thing: money that could be cycling through the economy at high velocity is instead tied up in investment vehicles, and might not be spent for decades, if at all.

Soltas comes up with an example to show that if I invest my money today and then spend it in ten years’ time, then I’m going to end up being taxed at 50% — a higher rate than the 40% income tax. This example is a subset of the annoying dual-taxation meme. But in any case it ignores the much bigger amount of dual taxation which goes on with regard to spent money.

If I earn money and spend it today, my spending is going to become someone else’s income. If that person then pays tax on that income and spends the remainder, we’ll get yet another round of income tax out of it. And so on and so forth. It’s a constant high-velocity money-go-round, which is driving tax revenues all the way. By contrast, if my money is tied up in savings for a decade, it’s not generating any tax revenues at all. As a result, saved money generates much lower tax revenues than spent money. At the very least, then, it should be taxed at the same rate as spent money.

That said, savings do have an important role to play in the economy. Do we want to endanger that? Here’s Soltas again:

In theory, this is a strong disincentive for saving and investment, leading to less accumulation of capital and lower incomes over time. The empirical evidence is admittedly less impressive. Still, this reasoning explains why economists leant towards a preferential rate of capital-gains tax in a recent survey.

My theory is that economists lean towards a preferential rate of capital-gains tax for two reasons: they like theory over reality, and they tend to be rich people with capital gains income. The fact is that there’s really no empirical evidence to suggest that raising the capital gains tax to the income-tax rate would actually reduce savings; neither is there any good evidence to suggest that if savings were reduced, then incomes would trend lower over time. In order for the capital-gains loophole to be justified, we would need to be reasonably certain on both counts. We’re not even close to certain on either: my feeling, indeed, is that both are downright false.

Soltas does have a good point that capital-gains taxes become particularly onerous when inflation rises — an asset with zero real growth can still be subject to large capital gains if it’s held over an inflationary period. As a result, I’m open to persuasion on the idea that capital gains should be adjusted for inflation before being taxed. But the bigger picture is clear: as Soltas himself explains, “the capital-gains tax ignores investments in human capital and thereby creates a disincentive for that particular form of investment”. Unless and until Soltas can come up with what he calls “an equivalent subsidy for human capital”, we should treat all income equally for tax purposes — whether it comes from income or whether it comes from capital gains.

COMMENT

Debating the merits of aligning the Capital Gain tax with the income tax rates misses the point. What is really needed is comprehensive tax reform where capital gains and income taxes are part of the debate. Only then can we create a tax regimen that will address our country’s needs and be fair and balanced.

Posted by ponder | Report as abusive

Counterparties: The unbearable lightness of silicon beings

Ben Walsh
Jun 4, 2013 22:04 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.

If you build a company on something lighter-than-air, will it inevitably float back to earth? Kara Swisher reported yesterday that Zynga is laying off 520 employees and closing its LA and New York offices. The company’s core business — selling desktop games for Facebook — is declining, and the company says it is focusing on the faster-growing but less profitable mobile market. Zynga’s stock is now down 70% since it went public in December 2011.

Two years ago, Zynga was declared the winner of the “great social game Gold Rush”. Better than anyone, it figured how to make money out of the inordinate amount of time wasted on Facebook. It never was, and won’t ever be, a “frighteningly ambitious startup”. Despite being a big financial success, Zynga always had limited ambition.

Nick Bilton worries that too many startups are tackling small problems, aimed at the founders’ “technophile friends rather than the public”. His example: Twist, an app that uses geolocation technology to tell people exactly how late you are running. It’s just one product among many of companies started to find “solutions for mundane problems”.

Many of these companies are the product of the new Silicon Valley that George Packer recently cataloged in the New Yorker. Examining Sean Parker’s $10 million eco-unfriendly wedding, Alexis Madrigal summarizes this ethos as “dream big, privatize the previously public, pay no attention to the rules, build recklessly, enjoy shamelessly, invoke magic, and then pay everybody off”.

The short seller Carson Block, the founder of research firm Muddy Waters, has decided now is the time to switch some of his focus from fraudulent Chinese firms to technology “pretenders.” — Ben Walsh

On to today’s links:

Facebook
The myriad reasons why Wall Street generally hates Facebook – Wired

World’s Smallest Violins
Wall Street frets over losing SAC’s “golden little crumbs” - Peter Lattman

Regulators
US financial regulators vote to give themselves the power to regulate financial companies – WSJ

Wonks
The state of the US economy, in four data points – Jared Bernstein

Felix
Prosecute the patent trolls! – Reuters
The full White House fact sheet on patent trolls – White House

New Normal
Why Americans work so much: single mothers face an huge economic burden – Derek Thompson

Progress
Three years later, only 38% of Dodd-Frank’s 398 rules have been finalized - USA Today

Pivots
Anonymous is about to get into the news business – Bloomberg Businessweek

Cartography
The geographic distribution of Starbucks vs Dunkin Donuts – Boston Globe

Comebacks
AIG and GM are back! (in the S&P 500) – Reuters

Healthcare
Reminder: The Cadillac tax is a great idea – Charles Lane

It’s Academic
Study suggests partisans might not believe partisan lies – Dylan Matthews

Literary
“A Wall Street bildungsroman” – Peter Lattman

Data Points
“So, are nearly a quarter of European young people unemployed? No. Fewer than 10% are” – FT
GM’s Cadillac posts biggest 5-month gain since disco era – Bloomberg

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

Prosecute the patent trolls!

Felix Salmon
Jun 4, 2013 18:01 UTC

Here’s an idea: take the resources that the SEC is currently using to prosecute insider trading, and give them instead to the FTC, so that they can be used to aggressively prosecute patent trolls instead. The cost would be the same (by definition), and the benefit would surely be much greater, as today’s wonderful report from the White House underscores.

Patent trolls are known by various names — one is “non-practicing entities”, or NPEs. Another term is “Patent Assertion Entities”, or PAEs. But whatever they’re called, the most important research into the costs of trolls is this paper from researchers at Boston University:

We find that NPE lawsuits are associated with half a trillion dollars of lost wealth to defendants from 1990 through 2010. During the last four years the lost wealth has averaged over $80 billion per year.

And we’re not talking about a steady loss of $80 billion per year, either. If the PAEs were costing $80 billion per year from 2007-2010, they’re probably making three or four times as much today, given how quickly their business is growing. Here’s a chart showing PAE activity, in red, versus all other patent cases, in blue:

trolls.tiff

The patent trolls are harming the nation in all manner of unquantifiable ways as well. This American Life just aired a fantastic episode on the subject of patent trolls, which features a man called Nick Desaulniers who wanted to build a low-cost heart monitor. But he was quickly dissuaded: after doing a patent search, he came away “horrified at how generic some of the patents were”,  and persuaded that there was no way he could possibly build a business. “However many jobs I could have created or however many lives I could have saved,” he concluded, “that’s it.”

Patent trolls are surely contributing to the decline in new-company formation:

Fewer Americans are choosing that path. In 1982, new companies—those in business less than five years—made up roughly half of all U.S. businesses, according to census data. By 2011, they accounted for just over a third. Over the same period, the share of the labor force working at new companies fell to 11% from more than 20%.

Both trends predate the recession and have continued in the recovery…

For the first time since such records have been kept, the Census found in 2008 that more Americans worked for big businesses—those with at least 500 workers—than small ones. The trend has continued since.

Go to any technology conference these days, and you’re likely to find VCs who say that there are entire sectors they refuse to invest in, just because the waters are so troll-infested. Google and Apple might be able to do interesting things in wearable computing, for instance, but a single lawsuit could easily wipe out a startup in the same space — even if it was entirely frivolous. Even the 3D printing industry seems to have boiled down to a handful of companies, despite the fact that most of the patents in the space have expired, because it seems to be all to easy to get patents on tiny improvements to established technology. Technological innovation is increasingly a game that only the largest technology players can indulge in; every VC has a story of a portfolio company which gets sued for patent infringement and then gets a lowball acquisition offer from the plaintiff. Either sell out to us, is the message, or we’ll destroy you with legal fees.

Clearly, something must be done. But I’m not convinced that the White House’s wish list is really adequate to the task at hand. None of it would prevent the kind of trollery detailed in the This American Life episode; at best it might just force Intellectual Ventures, the biggest and worst of the trolls, to be marginally more transparent about what it was doing. Instead, the government should start going after patent trolls in much the same way as Preet Bharara is going after inside traders. Tim Wu explains that the ammunition already exists:

There are good laws in place that could fight trolls, but they sit largely unused. First are the consumer-protection laws, which bar “unfair or deceptive acts and practices.” Some patent trolls, to better coerce settlement, purposely misrepresent matters such as the strength of their patents, the extent of other settlements, and their actual willingness to litigate. Second, there are plenty of remedies available under the unfair-competition laws. Some trolls work by aggregating an enormous number of patents, and then present the threat that one of their thousands of patents might actually be valid. The creation of these portfolios for trolling may be “agreements in restraint of trade” under Section 1 of the Sherman Antitrust Act, or they may “substantially lessen competition” under the Clayton Antitrust Act. More generally, the methods of the trolls are hardly what you would call ordinary methods of competition; they should be considered, rather, what the Federal Trade Commission calls “unfair methods of competition” under Section 5 of the F.T.C. Act. The Commission has the power to define and punish methods of business that are inherently harmful with few or no redeeming benefits, and that’s what trolling is. Finally, it is possible that the criminal laws barring larceny and schemes to defraud may cover the conduct of some trolls.

I would love to see some zealous prosecutors, armed with subpoena power, taking on Intellectual Ventures as aggressively as possible — as well as any other trolls they could find. Nathan Myhrvold is just as rich as Stevie Cohen, and causes much more harm to the economy. Rather than announcing the creation of “an accessible, plain-English web site offering answers to common questions by those facing demands from a possible troll”, let’s see the full weight of the government brought to bear in the form of civil and criminal cases against all patent trolls, up to and including including the biggest. That would surely be much more effective, and requires no legislative action at all.

Update: In the NYT, some highly respected jurists — Randall Rader, Colleen Chien, and David Hricik — have much the same idea. Don’t worry, I won’t sue them for infringing my intellectual property.

COMMENT

This is surreal – an open season on american inventors, almost like Ayn Rand novel

Large multinational corps pay huge $$$ to crooked DC politicians to kill invention in this country once and for all

Obama reading from the script written in Silicon Valley’s boardrooms… Nothing can be more disgusting

Well, OK guys, enough is enough

As a holder of one valid tecnnical patent I am going on strike – no more public patent disclosures of new tech from me

Who is Johnn Galt ?

This country is quickly winding down

The Founding Fathers are rolling over in their graves

Shame

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