Opinion

Felix Salmon

The non-scandal of Scott Irwin and Craig Pirrong

Felix Salmon
Dec 29, 2013 22:01 UTC

Ostensibly Respectable Academic Is In Fact A Hack: it’s a hardy perennial, and an enjoyable one at that. The best example is Inside Job, where big names like Ric Mishkin and Glenn Hubbard got their well-deserved comeuppance. And it’s a genre I’ve indulged in myself: last year, for instance, I spent 4,500 words on a paper by Bob Litan, showing how he lies with numbers to arrive at his paymasters’ predetermined conclusion.

But here’s the thing: for this kind of article to carry any weight, it has to demonstrate the mendacity or venality of the academics in question — and, ideally, those academics should have a high-profile reputation which deserves to be tarnished.

Which is why David Kocieniewski’s article about Craig Pirrong and Scott Irwin this weekend is such a disappointment. It’s currently doing very well on the NYT’s most-emailed list, but it’s easy to guess who’s doing the emailing: people who love to hate Wall Street, and who will use just about any possible excuse for doing so. Because in this case Kocieniewski has missed the mark. Neither Pirrong or Irwin is mendacious or venal, and indeed it’s the NYT which seems to be stretching the facts well past their natural breaking point.

Let’s start, for instance, with the one part of the article almost everybody will read: the big picture at the top of the article, showing the gleaming and extremely expensive University of Illinois business school. “The Chicago Mercantile Exchange has given more than $1.4 million to the University of Illinois since 2008,” says the caption, “with most of the money going to the business school.”

That number — a very big sum, which is more than enough to buy research from for-sale economists — gets repeated further down the article:

One of the most widely quoted defenders of speculation in agricultural markets, Mr. Irwin of the University of Illinois, Champaign-Urbana, consults for a business that serves hedge funds, investment banks and other commodities speculators, according to information received by The Times under the Freedom of Information Act. The business school at the University of Illinois has received more than a million dollars in donations from the Chicago Mercantile Exchange and several major commodities traders, to pay for scholarships and classes and to build a laboratory that resembles a trading floor at the commodities market.

Mr. Irwin, the University of Illinois and the Chicago exchange all say that his research is not related to the financial support.

This is carefully written to be as damning as possible. Yes, it makes perfect sense that the CME would fund a major business school right in its own backyard — and that it would fund activities related to its own business of commodities trading. But surely Kocieniewski is about to show us how the grants are linked in some way to Irwin’s research: no NYT reporter would write such a thing unless he had reason to believe that there was some kind of quid pro quo, or that the grants to the business school were written in gratitude to Irwin.

Except, if you keep on reading to the point at which you’re 2,500 words into the piece — and pretty much nobody reads that far — you’ll find this:

While the C.M.E. has given more than $1.4 million to the University of Illinois since 2008, most has gone to the business school and none to the School of Agriculture and Consumer Economics, where Mr. Irwin teaches. And when Mr. Irwin asked the exchange’s foundation for $25,000 several years ago to sponsor a website he runs to inform farmers about agricultural conditions and regulations, his request was denied.

This is real jaw-on-the-floor stuff. The NYT has published an article about how academics who write nice things about Wall Street “reap rewards”, in the words of the headline — and its main illustration is donations to a business school where the academic in question doesn’t even work! Anybody trying to hold academics to standards of intellectual honesty has to be intellectually honest themselves. And the fact is that there’s zero reason to believe that there’s any connection between the business-school donations and Irwin’s research.

Or maybe Kocieniewski thinks that consulting contract is enough to demonstrate that all money in the general vicinity of Irwin is tainted by venality. Except, if you get to the very end of the article, you’ll find out a bit more about what this consulting contract comprises:

Mr. Irwin also works for a business called Yieldcast that caters to agricultural producers, investments banks and other speculators, selling them predictions of corn and soybean yields. Mr. Irwin has said he does not consider it a conflict because he works only with the mathematical forecasting models and never consults with clients.

This is pretty blameless stuff. If you’re a professor who puts together models of commodities prices, it’s fine to consult for a company which puts together models of commodities prices. Shouldn’t we be encouraging professors to work on real-world applications of their research, rather than implying that any such work is a dastardly conflict of interest?

Once you realize how much of an axe Kocieniewski is grinding, then the rest of his article rapidly starts to crumble. For starters, as Evan Soltas says, both of these men are “super-freshwater” academic economists, working at freshwater schools. (In econojargon, “freshwater” economics happens far from the coasts, and is generally laissez-faire and pretty right-wing; “saltwater” economics takes place in coastal universities and tends to be more Keynesian, interventionist, and leftist.) Neither is inclined to write anything which deviates from freshwater orthodoxy. Kocieniewski takes issue with these professors’ defense of financial speculation — but that’s a central tenet of freshwater economics, and “orthodox economist is orthodox” is never going to be much of a story.

What’s more, there’s clear evidence that Pirrong, in particular, does not simply churn out whatever his paymasters want him to write:

Commodity trading houses are not “too big to fail”, says a report commissioned by the banking industry’s top lobby group, which had hoped it would conclude the opposite.

That report was written by Pirrong, who is on the record as saying that the report was never officially published precisely because he refused to change its conclusions. (Kocieniewski quotes from Pirrong’s post, but doesn’t link to it.)

Indeed, you don’t need to spend very much time reading Pirrong’s excellent blog before you realize that he’s one of those economists who will always speak his mind. Pirrong is not a grandee who can be counted on to deliver a certain conclusion if you pay him enough money: there are many economists out there who I consider to be in the “bought and paid for” camp, but Pirrong is absolutely not one of them.

So, what’s going on here? Three things.

First, Kocieniewski has a bee in his bonnet about the effect of commodities speculation on commodities prices. He has not only convinced himself that speculative flows caused substantial increases in commodity prices; he has also seemingly convinced himself that anybody who disagrees with that position must be lying. So he’s taken aim at Pirrong and Irwin, not because they have made a lot of money from the financial-services industry, and not because they’re particularly conflicted, but just because they hold a position Kocieniewski doesn’t like. As Peter Klein acerbically puts it, “if you oppose the Times’s editorial position on regulation (or any other issue), you are compromised by financial or other ties. If you support the Times’s position, you are a scholar or public figure of great integrity.”

Secondly, Kocieniewski has picked on these two professors in particular because they both work at public universities, which can be FOIA’ed. Kocieniewski put in freedom-of-information requests for the two professors — requests that private universities like Harvard or Yale could happily ignore — and used the results as the basis for his story. Thanks, David — you’ve just made it even more difficult for public universities to attract top economic talent.

And finally, Kocieniewski seems to have bought into a much bigger conspiracy theory which he’s looking to illustrate — a theory summed up in the NYT’s “Professors as Pitchmen” subhed. It’s a theme which runs through Kocieniewski’s piece:

Underwriting researchers and academic institutions is one part of Wall Street’s efforts to fend off regulation…

Major financial companies have also funded magazines and websites to promote academics with friendly points of view…

Financial firms have been able to use the resources and credibility of academia to shape the political debate.

The Chicago Mercantile Exchange and the University of Illinois at Champaign-Urbana, for example, at times blur the line between research and public relations.

The exchange’s public relations staff has helped Mr. Irwin shop his pro-speculation essays to newspaper op-ed pages, according to emails reviewed by The Times. His studies, writings, videotaped speeches and interviews have been displayed on the exchange’s website and its online magazine.

Kocieniewski’s most explosive allegation, here — that major financial companies have paid magazines and websites to promote certain academics — is in desperate need of backing up: he needs to name the companies and the magazines in question, and explain exactly what he’s talking about. Is he just referring to advertorial content, or sites like the Financialist which are clearly sponsored by financial institutions? Or is he saying that financial-services companies have found a way to pay for certain content to find its way into the editorial pages of certain magazines? That’s certainly what he’s implying.

Then again, when Kocieniewski starts babbling about “the line between research and public relations”, the simplest explanation starts becoming clear: that he’s just gone a little bit off the reservation. There is no “line between research and public relations”; rather, as every financial journalist knows, there is research, and then there is a small army of PR people who try to get journalists to write about that research. Those PR people might work for sell-side banks, or for the Federal Reserve system, or for private universities, or for public universities, or for non-profit think-tanks, or for-profit corporations — but in any event, their job is just to get certain pieces of research noticed. If the CME finds a piece of research that it likes, it makes perfect sense that it will feature that research on its website and tell journalists about it. No line is being crossed there.

There’s no doubt that PR people can be infuriating at times, but Kocieniewski is taking this idea one step further: he’s saying that if an academic agrees with a certain corporate point of view, and allows the company in question to promulgate that view, then the academic has thereby basically become that company’s PR person.

Once you understand that deep assumption, then the rest of the article starts to make more sense. Kocieniewski sees Pirrong and Irwin as PR people for financial speculators, and feels that no PR people should ever receive the kind of respect that these two economists get, especially in Washington. If Kocieniewski presented that view in a blog post, maybe at Daily Kos or Zero Hedge, few people would bat an eyelid. It’s a little on the overheated side, but I know a lot of people who would basically agree with it.

The problem is that Kocieniewski isn’t presenting this view as opinion: instead, he’s presenting it as a fact, unearthed by his diligent use of freedom-of-information requests. Even though those requests revealed nothing surprising whatsoever. What Kocieniewski calls Pirrong’s “financial dealings with speculators”, for instance, Pirrong himself has another term for: “litigation consulting”. It makes sense that Pirrong would frequently be used as an expert witness: he explains things clearly, he’s well respected, and he’s entirely consistent in where he comes down on certain well-known questions. The causality here is abundantly clear: Pirrong’s views caused the commodities firms to hire him as a witness, not the other way around.

In presenting Pirrong and Irwin as doing something deeply unethical, Kocieniewski is actually making sensible ethics reform much more difficult. The AEA code of ethics is an important document, which goes a long way towards addressing the conflicts in the financial-economics industry. But Irwin, for one, was clearly entirely in line with the code all along. (Pirrong, I think, should have been more forthcoming about the identity of the companies paying him substantial expert-witness fees.) If Kocieniewski can take a blameless professor and turn him into a poster child for graft, then it’s easy to see how the rest of the academy might come to the conclusion that they were better off when everything was secret.

Update: Craig Pirrong has responded to the NYT’s story with a detailed and excellent post.

COMMENT

The non-scandal of Scott Irwin and Craig Pirrong
By Felix Salmon ~ DECEMBER 29, 2013 ~ Posted by Christofurio 

Ostensibly Respectable Academic Is In Fact A Hack: it’s a hardy perennial, and an enjoyable one at that. The best example is Inside Job, where big names like Ric Mishkin and Glenn Hubbard got their well-deserved comeuppance. And it’s a genre I’ve indulged in myself: last year, for instance, Ispent 4,500 words on a paper by Bob Litan, showing how he lies with numbers to arrive at his paymasters’ predetermined conclusion. RC: Pure Krugmanite of NYT/Princeton.
But here’s the thing: for this kind of article to carry any weight, it has to demonstrate the mendacity or venality of the academics in question, ideally, those academics should have a high-profile reputation which deserves to be tarnished.
Which is why David Kocieniewski’s article about Craig Pirrong and Scott Irwin this weekend is such a disappointment. It’s currently doing very well on the NYT’s most-emailed list, but it’s easy to guess who’s doing the emailing: people who love to hate Wall Street, and who will use just about any possible excuse for doing so. Because in this case Kocieniewski has missed the mark. Neither Pirrong or Irwin is mendacious or venal, and indeed it’s the NYT which seems to be stretching the facts well past their natural breaking point. RC: Pure Krugmanite of NYT/Princeton again.
Let’s start, for instance, with the one part of the article almost everybody will read: the big picture at the top of the article, showing the gleaming and extremely expensive University of Illinois business school. “The Chicago Mercantile Exchange has given more than $1.4 million to the University of Illinois since 2008,” says the caption, “with most of the money going to the business school.” RC: MMmmm…:POTUS former law practice area. Let’s also remember CME is in 20 Wacker drive, a common habit of 20′s aged students. In fact I see the entire case one for wacker’s.
That number — a very big sum, which is more than enough to buy research from for-sale economists — gets repeated further down the article: RC: Didn’t they know they can buy Krugman cheaper as NYT prove, but he isn’t crom the mob trained city, Albany NY is more the business end of the $.
One of the most widely quoted defenders of speculation in agricultural markets, Mr. Irwin of the University of Illinois, Champaign-Urbana, consults for a business that serves hedge funds, investment banks and other commodities speculators, according to information received by The Times under the Freedom of Information Act. The business school at the University of Illinois has received more than a million dollars in donations from the Chicago Mercantile Exchange and several major commodities traders, to pay for scholarships and classes and to build a laboratory that resembles a trading floor at the commodities market. RC: MMmm…POTUS taught UC rather than UI, but taught all the same Illinois & Chicago pretty much one? UC being private research based with great accolades & Lauriat’s than the State Research UI same city anyhow, so same thinking UICU follows, rather than leads. Mr. Irwin, the University of Illinois & Chicago exchange all say his research is not related to the financial support.
This is carefully written to be as damning as possible. Yes, it makes perfect sense that the CME would fund a major business school right in its own backyard — RC: MMmm… win POTUS support too perhaps??? & that it would fund activities related to its own business of commodities trading. But surely Kocieniewski is about to show us how the grants are linked in some way to Irwin’s research: no NYT reporter would write such a thing unless he had reason to believe that there was some kind of quid pro quo, or that the grants to the business school were written in gratitude to Irwin. RC: Can’t hurt to be at 20 Wacker drive either. Chicago has plenty of them. Always has since roaring 20′s. Anyhow now with POTUS former links entrenched, and On August 18, 2008, shareholders approved a merger with the New York Mercantile Exchange (NYMEX) and COMEX. The Merc, CBOT, NYMEX and COMEX are now markets owned by the CME Group, back in Krugman vested NYT’s area. That’s where NYT reporter might find a reasonable fear of being undermined by invading CME dudes into NYMEX. Or perhaps its just that Monsanto have vested interests in the subject research and a long hekld strong attachment to Illinois Viz., see Wikipedia “In1926 the company founded and incorporated a town called Monsanto in Illinois (now known as Sauget). It was formed to provide a liberal regulatory environment and low taxes for the Monsanto chemical plants at a time when local jurisdictions had most of the responsibility for environmental rules. It was renamed in honor of Leo Sauget, its first village president”.
Except, if you keep on reading to the point at which you’re 2,500 words into the piece — and pretty much nobody reads that far — you’ll find this:
While the C.M.E. has given more than $1.4 million to the University of Illinois since 2008, most has gone to the business school and none to the School of Agriculture and Consumer Economics, where Mr. Irwin teaches. And when Mr. Irwin asked the exchange’s foundation for $25,000 several years ago to sponsor a website he runs to inform farmers about agricultural conditions and regulations, his request was denied.
RC: Now lets see vested research & Monsanto interests perhaps CME’s main Ag-field :~ “Commodity futures and options ~ Agricultural Commodity Contracts include: Live Cattle, Lean Hogs,Feeder Cattle, Class IV Milk, Class III Milk, Frozen Pork Bellies, International Skimmed Milk Powder (ISM), Nonfat Dry Milk, Deliverable Nonfat Dry Milk, Dry Whey, Cash-Settled Butter, Butter, Random Length Lumber, Softwood Pulp, Hardwood Pulp.

This is real jaw-on-the-floor stuff. The NYT has published an article about how academics who write nice things about Wall Street “reap rewards”, in the words of the headline — and its main illustration is donations to a business school where the academic in question doesn’t even work! Anybody trying to hold academics to standards of intellectual honesty has to be intellectually honest themselves. And the fact is that there’s zero reason to believe that there’s any connection between the business-school donations and Irwin’s research.
Or maybe Kocieniewski thinks that consulting contract is enough to demonstrate that all money in the general vicinity of Irwin is tainted by venality. Except, if you get to the very end of the article, you’ll find out a bit more about what this consulting contract comprises:
Mr. Irwin also works for a business called Yieldcast that caters to agricultural producers, investments banks and other speculators, selling them predictions of corn and soybean yields. RC: Oh! Goody Monsanto prime subject at this time “Corn & Soybean GMO Yield accelerators” Mr. Irwin has said he does not consider it a conflict because he works only with the mathematical forecasting models and never consults with clients.
This is pretty blameless stuff. If you’re a professor who puts together models of commodities prices, it’s fine to consult for a company which puts together models of commodities prices. Shouldn’t we be encouraging professors to work on real-world applications of their research, rather than implying that any such work is a dastardly conflict of interest? RC: Never fear Monsanto will practice those risks, and CME/NYMEX/NYT can also look & smell like roses.
Once you realize how much of an axe Kocieniewski is grinding, then the rest of his article rapidly starts to crumble. For starters, as Evan Soltas says, both of these men are “super-freshwater” academic economists, working at freshwater schools. (In econojargon, “freshwater” economics happens far from the coasts, and is generally laissez-faire and pretty right-wing; “saltwater” economics takes place in coastal universities and tends to be more Keynesian, interventionist, and leftist.) Neither is inclined to write anything which deviates from freshwater orthodoxy. Kocieniewski takes issue with these professors’ defense of financial speculation — but that’s a central tenet of freshwater economics, and “orthodox economist is orthodox” is never going to be much of a story.
What’s more, there’s clear evidence that Pirrong, in particular, does not simply churn out whatever his paymasters want him to write:
Commodity trading houses are not “too big to fail”, says a report commissioned by the banking industry’s top lobby group, which had hoped it would conclude the opposite.
That report was written by Pirrong, who is on the record as saying that the report was never officially published precisely because he refused to change its conclusions. (Kocieniewski quotes from Pirrong’s post, but doesn’t link to it.)
Indeed, you don’t need to spend very much time reading Pirrong’s excellent blog before you realize that he’s one of those economists who will always speak his mind. Pirrong is not a grandee who can be counted on to deliver a certain conclusion if you pay him enough money: there aremany economists out there who I consider to be in the “bought and paid for” camp, but Pirrong is absolutely not one of them.
So, what’s going on here? Three things.
First, Kocieniewski has a bee in his bonnet about the effect of commodities speculation on commodities prices. He has not only convinced himself that speculative flows caused substantial increases in commodity prices; he has also seemingly convinced himself that anybody who disagrees with that position must be lying. So he’s taken aim at Pirrong and Irwin, not because they have made a lot of money from the financial-services industry, and not because they’re particularly conflicted, but just because they hold a position Kocieniewski doesn’t like. As Peter Klein acerbically puts it, “if you oppose the Times’s editorial position on regulation (or any other issue), you are compromised by financial or other ties. If you support the Times’s position, you are a scholar or public figure of great integrity.”
Secondly, Kocieniewski has picked on these two professors in particular because they both work at public universities, which can be FOIA’ed. Kocieniewski put in freedom-of-information requests for the two professors — requests that private universities like Harvard or Yale could happily ignore — and used the results as the basis for his story. Thanks, David — you’ve just made it even more difficult for public universities to attract top economic talent.
And finally, Kocieniewski seems to have bought into a much bigger conspiracy theory which he’s looking to illustrate — a theory summed up in the NYT’s “Professors as Pitchmen” subhed. It’s a theme which runs through Kocieniewski’s piece:
Underwriting researchers and academic institutions is one part of Wall Street’s efforts to fend off regulation…
Major financial companies have also funded magazines and websites to promote academics with friendly points of view…
Financial firms have been able to use the resources and credibility of academia to shape the political debate.
The Chicago Mercantile Exchange and the University of Illinois at Champaign-Urbana, for example, at times blur the line between research and public relations.
The exchange’s public relations staff has helped Mr. Irwin shop his pro-speculation essays to newspaper op-ed pages, according to emails reviewed by The Times. His studies, writings, videotaped speeches and interviews have been displayed on the exchange’s website and its online magazine.
Kocieniewski’s most explosive allegation, here — that major financial companies have paid magazines and websites to promote certain academics — is in desperate need of backing up: he needs to name the companies and the magazines in question, and explain exactly what he’s talking about. Is he just referring to advertorial content, or sites like the Financialist which are clearly sponsored by financial institutions? Or is he saying that financial-services companies have found a way to pay for certain content to find its way into the editorial pages of certain magazines? That’s certainly what he’s implying. RC: I think if you read my yellow research comments you may agree with this conspiracy theory viz., POTUS Chicago U ties, CME now NYMEX tec. NYT always open to Krugmanlike flexible $$$ Professors, CME Group Ltd., commodity futures & Option trading in ag., Monsanto 1926 links, their main emphasis today both players “Corn & Soybean GMO’s”~ Is this a starting place?
Then again, when Kocieniewski starts babbling about “the line between research and public relations”, the simplest explanation starts becoming clear: that he’s just gone a little bit off the reservation. There is no “line between research and public relations”; rather, as every financial journalist knows, there is research, and then there is a small army of PR people who try to get journalists to write about that research. Those PR people might work for sell-side banks, or for the Federal Reserve system, or for private universities, or for public universities, or for non-profit think-tanks, or for-profit corporations — but in any event, their job is just to get certain pieces of research noticed. If the CME finds a piece of research that it likes, it makes perfect sense that it will feature that research on its website and tell journalists about it. No line is being crossed there. RC: Yep Monsanto lackies do that well.
There’s no doubt that PR people can be infuriating at times, but Kocieniewski is taking this idea one step further: he’s saying that if an academic agrees with a certain corporate point of view, and allows the company in question to promulgate that view, then the academic has thereby basically become that company’s PR person. RC: Probably as “Money speaks louder than words” always.
Once you understand that deep assumption, then the rest of the article starts to make more sense. Kocieniewski sees Pirrong and Irwin as PR people for financial speculators, and feels that no PR people should ever receive the kind of respect that these two economists get, especially in Washington. If Kocieniewski presented that view in a blog post, maybe at Daily Kos or Zero Hedge, few people would bat an eyelid. It’s a little on the overheated side, but I know a lot of people who would basically agree with it.
The problem is that Kocieniewski isn’t presenting this view as opinion: instead, he’s presenting it as a fact, unearthed by his diligent use of freedom-of-information requests. Even though those requests revealed nothing surprising whatsoever. What Kocieniewski calls Pirrong’s “financial dealings with speculators”, for instance, Pirrong himself has another term for: “litigation consulting”. It makes sense that Pirrong would frequently be used as an expert witness: he explains things clearly, he’s well respected, and he’s entirely consistent in where he comes down on certain well-known questions. The causality here is abundantly clear: Pirrong’s views caused the commodities firms to hire him as a witness, not the other way around.
In presenting Pirrong and Irwin as doing something deeply unethical, Kocieniewski is actually making sensible ethics reform much more difficult. The AEA code of ethics is an important document, which goes a long way towards addressing the conflicts in the financial-economics industry. But Irwin, for one, was clearly entirely in line with the code all along. (Pirrong, I think, should have been more forthcoming about the identity of the companies paying him substantial expert-witness fees.) If Kocieniewski can take a blameless professor and turn him into a poster child for graft, then it’s easy to see how the rest of the academy might come to the conclusion that they were better off when everything was secret.

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The new era of the New York skyscraper

Felix Salmon
Dec 24, 2013 06:12 UTC

The first time I ever visited New York, the bus from JFK dropped me off in front of Grand Central Terminal. I looked up, and up, and up, at the Chrysler Building towering above me, and I immediately fell in love with a city which so exuberantly celebrated its height and size and weight. Much as I love Chicago, New York will always be the home of the skyscraper for me; no other city has such spectacular examples from all eras, ranging from the Brooklyn Bridge and the Woolworth and Flatiron buildings, through Lever House and the Seagram building, all the way to the newest towers rising both downtown, at the World Trade Center site, as well as uptown, along 57th Street. One of the most awe-inspiring architectural experiences in the world is to visit the little-known but truly amazing top room of the art deco BNY Mellon building at 1 Wall Street, with its three-storey-high silver ceilings and its unrivaled views to the north, south, east, and west.

In a sign of the times, that room — along with the rest of the building — might be for sale; one broker told Bloomberg that it “could be spectacular resi”. For corporations looking to squeeze a large number of people into a single building, super-tall towers don’t make a lot of sense: they waste too much space on service shafts. But for trophy-hunting billionaires, it seems that views are everything, these days — especially if the views in question are of Central Park. Build a high-ceilinged, full-floor, ultra-luxe apartment a thousand feet in the sky and even closer to Central Park South, and it seems that there’s almost no limit to how much you can charge for it.

From the point of view of skyscraper lovers, this is good news. The richest corporate tenants — the ones in the financial-services industry — tend to want large uninterrupted floor plates for their trading rooms, which often results in dull, uninspired architecture. The world’s plutocrats, by contrast, demand architecture of landmark status, something befitting any major new addition to the New York skyline. On top of that, the premium commanded by full-floor apartments means that the new towers tend to be very slender — and as a general rule, thinner towers tend to be more beautiful.

That said, the owners buying into these new towers are pretty unsympathetic. For all their riches, they tend to pay very little in the way of taxes, they don’t interact much with the rest of the city (if they did, they’d never want to live on 57th Street), and they generally leave their apartments empty for nearly all of the year.

This is a dynamic which has proved particularly damaging in the case of my native London, where street life in many central residential neighborhoods has diminished almost to the point of nonexistence: fewer and fewer people actually live in those places any more. It’s much less of a worry in New York: no one’s concerned about residential density on 57th Street being too low, and in any case the caprices of US Customs and Border Protection tend to scare away a lot of what the English call the non-doms.

Still, the critics are out. Jim Windolf spent 3,000 words and a very chilly day in Central Park bellyaching about the shadows these towers might cast in late fall; and now Michael Kimmelman has weighed in, saying that New York should not “consign its silhouette to private builders” and should instead force all new skyscrapers to run a gantlet of community groups and public review.

The fact is, of course, that all the best skyscrapers were built by private builders, often in the face of substantial public opposition. And public skyscrapers are generally worse, not better: just look at the original World Trade Center, built by the Port Authority of New York and New Jersey, with its destruction of Radio Row and Greenwich Street, its forbidding windswept plaza, and its inability to attract tenants for decades after it was built. In general, if the public is asked whether they want any new skyscraper, the answer will always be “no” — even as they love the iconic tall buildings they’ve lived with for years. (There was a general consensus that something should restore the skyline after the World Trade Center was demolished, but that’s the exception that proves the rule.)

Kimmelman, in particular, seems to think — with no real evidence to support him — that public review would improve the quality of architecture built — that it would allow the towers he likes (111 West 57th Street, 432 Park Avenue) while disallowing the towers he doesn’t like. The Nordstrom Tower, for example, features a cantilever which, Kimmeleman says, turns it into “a giant with one foot raised, poised to squash a poodle”). That’s certainly not the way I would describe the renderings we’ve seen so far. But no one likes a massive new building project going ahead in their neighborhood, especially not when they can turn the whole thing into a zero-sum game of proles versus plutocrats, as Windolf does. (“It struck me as unfair that, sometime next year, someone who paid $90 million for a glass-walled, floor-through residence will lounge in full sunshine while the old man will have less light of his own.”)

Skyscrapers are a perfect emblem of capitalism — they destroy what came before, in order to create something new. Sometimes the change is for the better, and sometimes it’s for the worse — but a city where nothing new gets built is a dead city, which might have nostalgic value to tourists, but which is never going to be a driver of global commerce.

New York is a mature city, where it’s already extremely expensive to build — the barriers to constructing new buildings are high enough, especially considering all the (entirely reasonable) preservation rules. Kimmelman and Windolf would add further hurdles still, concerning such things as shadows and view corridors. But neither makes much sense, in New York — a city which has been building long canyons of tall buildings for the best part of a century now. The only view corridors which make any sense, in Manhattan, are the big avenues — and ever since the Pan Am building went up, no one’s going to build in the middle of an avenue. And the official statement from the Central Park Conservancy, on the subject of shadows, seems exactly right to me:

Since the Park’s 1857 creation, numerous buildings have been established on its perimeter. Depending on the time and day of season, those buildings sometimes cast shadows. In the Conservancy’s 33-year experience of Park restoration and maintenance, these shadows have not significantly affected either the Park’s horticulture, which we are responsible for maintaining, or significantly impacted the experience of more than 40 million people who visit the Park annually.

Yes, the Conservancy is conflicted, here — its board includes major property developers. Still, the views of the New York skyline from Central Park are a large part of its perennial appeal — the varied street walls along the four perimeters, as well as the range of buildings visible beyond them. New York is and must be a living city, and right now it happens to have encountered a combination of special factors (an exuberant market, the rise of the billionaire class, the Central Park views, New York’s idiosyncratic zoning laws). These factors, says Carol Willis of Columbia University, have conspired to create special entities similar, in a way, to “rare flowers that can grow only in the Galapagos Islands” — specific architectural creatures native to Manhattan.

In a globalizing and homogenizing world, any kind of new architectural vernacular, unique to a certain city and a certain time, should in general be given the benefit of the doubt. I’m no great fan myself of Christian de Portzamparc’s One57 myself. But I do think that New York City is a city of skyscrapers; that it’s self-defeating for any city of skyscrapers to stop building such things; and that if you’re going to be building new skyscrapers, you’re never going to bat 1000. Better we have a living city with a couple of less-than-perfect buildings, than a stifled one governed by nostalgists and Nimbys.

COMMENT

The Old World Trade and the New World Trade are being built by the Port Authority in a relatively non-residential part of the city. Recently Extell put up One57 and a dangling crane created fear, inconvenience, a public hazard etc. As future residential skyscrapers would need to be even higher to extract the money from those oligarchs needing the ego boost the cons would surely outweigh the pros in allowing future record setting towers in densely populated places such as Central Park South, etc

I think this trend burns itself out in the worst way.

Posted by Sechel | Report as abusive

How companies should take advantage of markets

Felix Salmon
Dec 20, 2013 14:08 UTC

I like Matt Levine’s dry take on Facebook’s secondary offering: “Whatever else you think of Facebook,” he writes, “it is unusual among public companies in its desire and ability to sell stock at local maximums.” And really, he’s right: it makes perfect sense for a company (and its controlling shareholder) to sell stock when demand is greatest and the price is at its highest. After all, share sales are a simple transaction: you give me a one-off slug of cash today, and in return I’ll give you ownership rights in perpetuity. Anybody engaging in such a deal should at least want to maximize the amount of cash they’re getting, which is another way of saying that you should only sell stock if you think it’s overvalued.

On the other hand, I don’t buy Cyrus Sanati’s criticism of the deal, which is that Facebook shouldn’t be diluting its shareholders like this when it already has more than enough cash on hand — and is profitable, to boot. But let’s put this “dilution” into perspective, here. For one thing, the 27 million shares that Facebook is selling to the broad public constitute less than half of the 60 million new shares that Facebook is issuing to Mark Zuckerberg personally, as part of its most recent options grant. If you want to complain about dilution, then complain about the options, not the secondary. And in any case, before this deal (and before the options grant), Facebook had 2,458,051,029 shares of stock outstanding. Which means that the new stock being issued by Facebook is dilutive to the tune of just under 1.1%. In a world where Facebook stock has doubled in the past five months, that’s really nothing.

The real news here is that Zuckerberg has finally started cashing out in a very big way. While he did sell some stock in the IPO he only really sold enough to cover his personal tax bill; in this deal, however, he’s selling 41,350,000 shares — which is significantly more than the amount he would need to sell to cover the taxes on his latest options grant. And by “significantly” I mean one billion dollars net after taxes. That billion dollars in cash is over and above the other billion dollars he’s giving to charity in the form of Facebook stock, which will have the pleasant side effect of reducing his annual taxable income by exactly the same amount.

Interestingly, for all that Zuckerberg is selling $3.3 billion of stock as part of this offering, his control of the company is greater now than it was before the IPO: back then he controlled 56.9% of the total voting power in Facebook, while after this deal he’s going to control 62.8%.

It seems to me, then, that the real way to look at this deal is to remember that Facebook is Zuckerberg’s company, and that drawing distinctions between the two is not very helpful. Zuckerberg wants to diversify his wealth out of Facebook, and he’s doing that now. He also knows — almost better than anybody else on the planet — just how quickly large technology companies can get disrupted. After all, he did that himself. So he wants Facebook to have a very large warchest of cash, which he can then use to acquire the kind of fast-growing, mobile-native products which threaten to make him obsolete. And right now is a great time to amass such a warchest: Facebook is being added to the S&P 500, which means that lots of index funds want to buy his stock. That kind of permanent step-change in demand for Facebook stock can easily justify a small step-change in the number of Facebook shares outstanding.

Or, to put it another way: three years ago, Facebook could entice talented engineers away from Google by promising them lots of Facebook stock, on the grounds that one day, Facebook would be a $100 billion company and they would be rich. Now, however, Facebook is a $100 billion company. (To be precise, it’s a $135 billion company.) As a result, its stock is much less attractive to someone looking for massive appreciation in the next few years: you’re much more likely to go from $30 billion to $120 billion than you are to go from $125 billion to $500 billion. Which in turn means that Mark Zuckerberg has moved on, and is now offering cash, rather than stock, to the companies and individuals he really covets. (The $3 billion he offered for Snapchat is an enormous amount of money, but it’s a lot less than the $10 billion of cash that Facebook currently has on its books, gathering dust.)

Zuckerberg has made a determination that he wants a lot of cash, both for himself and for Facebook, and that it’s worth selling a few shares in the company in order to get it. That doesn’t, pace Sanati, mean that Zuckerberg thinks Facebook is overvalued. It just means that there’s a cycle to these things. Facebook already has a large market capitalization; having a large market capitalization and billions of dollars in cash gives you more power and more optionality.

Who’s at the other end of the cycle? Which firm is currently most similar to Facebook circa 2010, looking to attract talent by giving out equity? The answer is Square, where Jack Dorsey has given back 10% of his shares, just so that the company can attract the very best talent going forwards. That’s smart. Dorsey doesn’t need the money: what he’s looking for is growth. If Dorsey needs cash, he can always sell some of his Twitter shares, which are currently valued at well over a billion dollars. But if he wants to attract Silicon Valley engineers who dream of becoming dynastically wealthy on the day of an IPO, then right now he needs to be able to hand out significant chunks of stock.

What Zuckerberg and Dorsey have in common is that they’re taking full advantage of the astonishing valuations which can be bestowed on companies — and their shareholding employees — by public markets. Zuckerberg is tapping those markets for cash; Dorsey is pointing to their potential. This is a really good thing: this is what markets are for. Markets provide incentives, and the owners of companies take advantage of those incentives. Shareholders shouldn’t want to have it any other way. Even if certain index-fund managers feel a bit as though they’re being dragooned into shipping billions of dollars over to Mark Zuckerberg, right at the point at which the stock hits an all-time high.

COMMENT

Does Zuckerberg use 10b5 plan to sell his stock? If so, how does he time his sales based on stick price? If not, how is it not insider trading?

Posted by AngryInCali | Report as abusive

Why companies are raising their dividends

Felix Salmon
Dec 18, 2013 03:36 UTC


Matt Yglesias presents the case against dividends today — and it’s a case I’m sympathetic to. But before you can determine whether stocks should be paying dividends, it’s important to understand why stocks are paying these dividends. And the answer is in the chart above.

The blue line, in this chart, US after-tax corporate profits as a share of GDP — and it shows that they’re at an all-time high of around 11%, when they’re normally closer to 6%. This is the chart which should worry anybody invested in the stock market: while the market’s price-to-earnings ratio still seems pretty sane, that’s only because corporate earnings are much higher than they’ve ever been in the past. If this number starts reverting back towards its historical mean, then stock prices are certain to fall, possibly quite sharply.

What investors are looking for, then, is reassurance that the impressive profits they’re seeing today are here to stay, rather than being some kind of historical anomaly. And so that’s also the message that CEOs are seeking to send to their shareholders.

It’s here that dividends start being a lot more attractive than stock buybacks. It’s exactly the same reason that you’d much rather get a thousand-dollar raise than a thousand-dollar bonus. Dividends aren’t bond coupons: they can go down, if they have to — and, in hard times, you can be sure that they will go down. But in general, no company will set a dividend this year which it doesn’t think it can meet next year, and the year after that, and the year after that. A dividend is a company telling the market that the cash it’s throwing off today isn’t some kind of exceptional good fortune, but is rather something that shareholders should get used to, year in and year out for as far as the eye can see.

And that is a message which is much more supportive of a stock price than any stock buyback. (Especially since buybacks are easy to announce, and very few people bother to check whether the companies which announced them actually followed through on their promise.)

If you’re going to return a certain amount of cash to shareholders, then there are lots of reasons why it makes sense to do that with a buyback rather than through a dividend payment. But once a buyback is over, it’s over. A dividend is much more predictable than a buyback program; what’s more, it’s often something which grows predictably, as well. (AT&T has been raising its dividends every year for 30 years.) In a low interest rate environment, a permanently-increasing income stream, even if it only increases in line with inflation, is worth a small fortune.

When a company earns profits, there are lots of things it can do with the money. It can hold on to the profits as a cash balance; it can spend that cash buying back its own stock; it can pay that cash out as a dividend; it can give its employees raises, or bonuses; it can reinvest the money in R&D or other capital expenditure; it can acquire other companies; and so on and so forth. But if you invest your money in employees or capex instead of using it for dividends or buybacks, then that reduces your profits — which in general is bad for your share price.

There are exceptions to the rule, or course — Amazon is a great example of a company with a stratospheric share price, and p/e ratio, despite (or because of) its lack of visible profits. But then again, it was none other than Matt Yglesias who described Amazon as “a charitable organization being run by elements of the investment community for the benefit of consumers”. He can’t really have it both ways. And in any event, if you want to keep your profits high, and send a message to the market that they’re going to stay that way, then it makes a certain amount of sense to boost your dividend.

COMMENT

What helps the most, honestly, is not to focus on the shareholders, but to focus on the people who drive economic activity; their employees. Rather than engaging in buybacks and increasing dividends, they SHOULD be raising wages and letting money flow into the economy rather than hoarding it.

Yes, it’s important to ‘reward’ investors by giving them a return on their loan. But it should never EVER be the primary focus of any company. The primary focus of every company should be to provide goods and or services at a reasonable cost.

Posted by Burns0011 | Report as abusive

Art market chart of the day, auction gross edition

Felix Salmon
Dec 16, 2013 05:58 UTC

gross.png

I had lunch with Artnet’s Thierry Dumoulin last week, and we talked a bit about the classic interactive NYT chart of box-office grosses. (It’s getting on for six years old, now, but it’s still top-notch.) I wondered if it might be possible to do something similar for artists — to show how different artists have their auction peaks at different times, and how some artists fade away while others become newly fashionable.

This chart is not exactly that, for a number of reasons — but it’s interesting all the same. Artnet’s Katharine Markley put together a list of 25 artists, split between Impressionist (the ones I’ve colored greenish); Modern (yellowish); and Contemporary (purplish). They’re not necessarily representative of the art market as a whole, but they certainly weren’t cherry-picked in any way: this is all the data I got. The chart above shows how much money each artist grossed at auction in each year from 1998 to 2013 (with the 2013 data going up to the end of November); I’ve also adjusted all the data for inflation, so it’s all in 2013 dollars.

The first thing I noted is that my priors were wrong: while Monet was big in 1989 and Warhol has had a more recent resurgence, in general you don’t see artists having particular peaks at particular times. I’m sure it would be possible to construct a dataset which does show that, but overall it’s impressive just how consistent the relative strength of various artists is, over time.

The second thing to note is that although the market is looking extremely strong today, and had an equally big peak before the crisis in 2007, neither peak is actually higher than the last big bubble, in 1989-90. Indeed, if you look just at the artists who were selling strongly back then — the Modern and Impressionist crew — today’s sales figures are still significantly lower than they were. It’s only the recent surge in Contemporary sales (and, specifically, in Warhol) which is driving the overall figure towards the old record.

What the chart tells me, then, is that the Impressionist market has been very consistent since the 1990 bubble burst, and is showing no new signs of frothiness. The Modern market is getting back to its 1990 levels, and is utterly dominated by Picasso. And the Contemporary market has come rocketing out of nowhere to its current position of dominance; even ten years ago it was basically nothing.

None of this is particularly scientific, but it does help to put today’s record-setting auction prices in perspective. Once you adjust for inflation, they’re basically back at 1990 levels, as is underscored by the fact that the most expensive work of art ever sold at auction remains Vincent Van Gogh’s portrait of Dr Gachet. If the rule of bubbles is that each successive bubble is larger than the last, then that might mean we have a little ways yet to go, before this one bursts.

COMMENT

“They’re not necessarily representative of the art market as a whole,”

Given that there are many thousands of artists living and dead, and presumably most of their work isn’t sold at auction, that would seem to be something of an understatement.

Posted by Moopheus | Report as abusive

T-Mobile’s self-defeating resurgence

Felix Salmon
Dec 15, 2013 05:04 UTC

It’s a standard part of flying, these days: the minute you touch down, you pull out your phone and get back up to speed with the world — especially if you’ve been on a long flight without wifi. And then there’s the standard exception: when you’re flying internationally, you don’t. Not unless you’re very rich, or very reckless, or someone else is paying your phone bill.

Which is what made my arrival in Auckland this morning so special: I touched down after a long flight, pulled out my phone, cycled through Twitter and email and Foursquare, and didn’t stress at all about being charged $20.48 per megabyte (or whatever) in a world where I have no idea how many megabytes are involved in any of those activities.

But I just switched to T-Mobile, which has free international data. I’ve been using it for about 12 hours now, in Auckland and Wellington, and it’s been fantastic. I’d heard complaints about how slow it was, and I haven’t been trying to stream video, or anything like that, but basic things like maps and Google searches work fine.

I was already a fan of T-Mobile in any case: its LTE network is blazingly fast, its pricing is astonishingly simple and transparent, I’ve had very few dropped calls, and, the one time I did have a serious issue which required non-trivial customer service, their T-Force social customer support team came through with flying colors. It’s a big company, and there are still rough patches. But the “uncarrier” campaign is more than just a slogan, and makes it much easier to give T-Mobile the benefit of the doubt when things go wrong.

All of which explains why I got a horrible sinking feeling in my stomach when I saw the news that Sprint is working on a bid for T-Mobile. The first thing I thought of, when I saw the headline, was the documentary “Who Killed the Electric Car?“, about the General Motors EV1 of the mid-1990s. Electric cars could have had their start back then; instead, we had to wait almost 20 years. When you’re developing a new product which is a serious threat to the biggest players in the market, it makes sense for those players to shut you down.

The resurgence of T-Mobile was in no sense a predictable thing. Suffering from neglect and underinvestment, it agreed to be bought by AT&T in March 2011 for $39 billion. But when that deal got scuppered by the Justice Department, T-Mobile took its $4 billion break-up fee and started shaking up the industry in a very welcome and unexpected manner.

If Sprint does buy T-Mobile, it certainly won’t be because the two companies are any kind of natural fit. As Sascha Segan explains, there are a lot of reasons not to do this deal, including the fact that the combination of the two is a “technological nightmare”:

Sprint works with CDMA, some FD-LTE and increasingly TD-LTE. T-Mobile works with GSM, HSPA+ and FD-LTE. Sprint is trying to aggregate the 800, 1900, and 2600 bands; T-Mobile has some 1900, but does a lot of its work on 1700. This merger would result in a horrible technology alphabet soup; there’s very little compatible here, which means lots of time and energy will have to be wasted aligning these networks somehow. That means a combined Sprint/T-Mobile will fall even farther behind AT&T and Verizon.

That said, it’s easy to see why Softbank, Sprint’s new owner, would want to buy and neutralize T-Mobile. Softbank does have deep pockets. What it doesn’t have is any desire to get involved in the telecommunications equivalent of a land war in Asia, attacking two huge entrenched incumbents while needing to expend extra energy fighting off a nimble smaller competitor at the same time.

In other words, this bid, if it ever materializes, is an anti-trust no-brainer — and the T-Mobile board could be forgiven for regretting that they ever hired John Legere in the first place. Ironically, a weak and feeble T-Mobile might actually be worth substantially more than a seriously competitive T-Mobile, since the latter will have a much harder time passing anti-trust scrutiny.

Still, the die has been cast, at this point, and T-Mobile is on a roll. There’s something very refreshing about actually paying full price for the phone you use, either up front or on an installment plan, instead of signing up for an overpriced two-year contract and kidding yourself that you’re getting the phone for “free” or cheap. Segan calls T-Mobile’s Equipment Installment Plan its “one true innovation”, because it manages to “bridge the perception gap between the subsidized world and the no-contract world” — if you’re on the plan, you still end up paying less per month than you would on Verizon or AT&T, even with the extra cost of (say) an iPhone 5s added on a separate line item.

True innovations are rare in industry, and the US consumer has undoubtedly benefitted from this one. It’s just a little bit depressing that T-Mobile might have ended up being worth more if it had simply withered slowly away instead.

COMMENT

I switched to T-Mobile for the new international coverage, and having just returned from So. America I can say it’s really a great advance. No more long “how to reach me” memos, easy access to email without camping out in hotel lobbies, and $0.20 calls back home. Speed was adequate for all but video. Let’s hope this is the start of an industry wide trend.

Posted by 78RL | Report as abusive

Why cab drivers should love Uber

Felix Salmon
Dec 12, 2013 01:18 UTC

Last month the city of New York raised more than $200 million by auctioning off 200 new taxi medallions — essentially, the right to operate a yellow cab in the city. Some 2,000 such medallions are likely to be sold in all, which means $2 billion of much-needed revenue for New York, if prices remain high. But will they? It’s surprisingly easy to justify a million-dollar price tag for a medallion — but in order to do so, you need to assume that medallion owners’ income will remain constant, in real terms, over time.

Historically, the impressive political power of the medallion owners has helped to keep their income steady. They’re good at keeping the total number of medallions relatively low, and they’re also good at pushing through periodic increases in metered fees. The combination of the two allows them to rent out their medallions to drivers for about $75,000 per year.

That’s a very good deal for the medallion owners, and a much less good deal for the taxi drivers, whose income, says taxi commissioner David Yassky, is “grindingly low” — something less than $150 per day, for a 12-hour shift.

Essentially, every time you take a cab, your money gets split roughly evenly between the driver and the medallion owner. Which means that when a company like Uber comes along, it can offer lower fares to riders and substantially higher income to drivers — a win for everybody except the medallion owners.

The key datapoint came in October, when Uber said in a blog post that when it lowered fares for its UberX product, its drivers’ income actually went up rather than down: in Boston, it rose by 22% per hour, which is a lot of money. The result has been that UberX is now priced near or below prevailing taxi rates in most cities: in Washington DC, for instance, UberX costs 18% less than a taxi. And the drivers of those cars are making significantly more money than they would make if they were driving a cab.

Details on driver income are a bit sketchy, but at least one driver seems to be grossing over $1,000 per day, on good days, while Uber’s own advertising talks about an income of $70,000 per year. If you’re tactically smart as an UberX driver — driving towards hotels when empty, or waiting for a while after dropping a passenger off at the airport in the hope of picking up a fare back — then a six-figure income does not seem to be uncommon. And demand for UberX cars continue to exceed supply: the only reason they’re not even cheaper than they are, in cities like New York, is just that the cheaper they get, the more people want to use them, and Uber just doesn’t have enough cars and drivers right now to meet such demand.

We’ve already reached the point, then, at which it makes sense for almost any taxi driver who doesn’t own his own medallion to give up the rickety old yellow cab, with all of its onerous regulations, and just drive an UberX instead. I’m sure that many have already done so, and that more will follow suit over the course of 2014. And while for the time being there’s probably a big enough pool of cab drivers that new ones can be found to replace the people who have started driving for Uber instead, eventually the medallion owners are going to have to start cutting their drivers a sweeter deal, to prevent them from defecting to the competition.

Back in 1999, Jim Surowiecki proposed that we should deregulate cab fares in New York. That was a bonkers suggestion back then, because in an era of street hails, you need to know how much a cab costs before you hail it. But with the arrival of apps like Uber, we’re getting much the same effect. When you e-hail an Uber, you have just as much of an idea how much it’s going to cost as you do when you hail a cab. And so then the various services can effectively start competing with each other on price and service.

Intuitively, that sounds like a bad thing for drivers, and I understand why cabbies in San Francisco might consider Uber and its ilk to be the enemy. After all, more competition means lower prices, right? And if passenger start using taxi alternatives rather than taxis, that means less income, overall, for the taxi industry.

But in this case, the cab drivers — at least the ones who lease their cabs on a per-shift basis — should think of themselves less as small business owners, selling their services to passengers, and more as valuable employees, selling their services to either taxi-fleet owners or to companies like Uber. Looked at that way, more competition means higher wages, not lower income.

Precisely because taxi fares are highly regulated, cab drivers have historically had almost no bargaining power when it comes to their own income. The fares are set, and even if fares rise, the fleet owners will waste no time in taking advantage of that rise in fares to simply raise the cost of leasing a cab. Especially in New York, where there’s a limited number of medallions, anybody who wants to drive a taxi basically has to just accept whatever deal is offered.

But now they have a choice, which is excellent news — for them, and also for the public as a whole, which clearly loves the ability to easily order cabs from indoors, rather than having to take their chances on the street or on the phone with a dispatch service of dubious reliability and punctuality.

On the other hand, it’s not good news for the owners of the fleets. If they have to pay more to retain their drivers, that’s going to eat into their profits. And in turn, that will mean that they’re in turn willing to pay less for medallions.

That’s fine by me. So long as the price of a medallion stays above zero, the number of taxis on the street will remain constant, and the arguments against Uber — which are based on the idea that taxis will become scarcer — won’t apply. What’s more, the continued existence of all those taxis will ensure that Uber will find it difficult to raise its rates. After all, it has already discovered that demand is much greater when prices are taxi-like than when they’re significantly more expensive than taxis.

But I do think that as UberX catches on, along with its various competitors, the price of a taxi medallion is sure to fall. And that’s especially true in a world of rising interest rates, where medallions are valued on a discounted cash-flow basis. So while both drivers and passengers should embrace the arrival of UberX, if I was a medallion owner, I’d be worried. And I certainly wouldn’t be looking to buy new medallions, at a million bucks a pop.

COMMENT

So cabbies know how to copy and paste the same comment over and over at least.

http://goo.gl/VCCB3R

Posted by indifferents | Report as abusive

Can you fact-check a twerking video?

Felix Salmon
Dec 10, 2013 23:09 UTC

 

Josh Benton of the Nieman Journalism Lab writes in, asking for a 2014 prediction for the world of news. My answer: 2014 is going to be the year of a big debate about what news is —and especially about whether and how news organizations can ethically report on activity in the virtual world.

The first time I saw this debate take place in public was in October, on Nick Denton’s Kinja commenting platform, where a fascinating conversation broke out between Denton, the founder of Gawker Media; John Cook, the editor of Gawker; and Neetzan Zimmerman, the viral wunderkind who singlehandedly generates most of Gawker’s traffic. Zimmerman had put up yet another of his dozen posts a day, all of which feature (which is to say, recycle) various pieces of content found on the internet. This post was headlined “Grandpa Writes Letter Disowning Daughter After She Disowns Gay Son”, and featured a letter which Zimmerman found on a gay-friendly t-shirt site named FCKH8.

Denton quickly jumped into the comments, saying there was something fishy about the way in which FCKH8 kept on finding such heartwarming letters; he also pointed out that the company’s founder, Luke Montgomery, has a long history of “stunts”.

Cook replied to Denton:

Part of our job is to make sure we’re writing about things that people are talking about on the internet, and the incentive structure of this company is organized to make sure that we are on top of things that are going viral. Neetzan is explicitly tasked with doing so. Unfortunately, that involves covering charlatans and bullshit artists, whether it’s Montgomery or Jimmy Kimmel

I’d rather be calling bullshit on stuff like this than calling attention to it… But we are tasked both with extending the legacy of what Gawker has always been—ruthless honesty—and be reliably and speedily on top of internet culture all while getting a shit-ton of traffic. Those goals are sometimes in tension.

Zimmerman, who’s surely one of the world’s greatest experts on viral content, then replied to them both, pointing out that the tension was even bigger than that:

Most viral content demands from its audience a certain suspension of disbelief.

The fact is that viral content warehouses like BuzzFeed trade in unverifiable schmaltz exactly because that is the kind of content that goes viral.

People don’t look to these stories for hard facts and shoe-leather reporting. They look to them for fleeting instances of joy or comfort. That is the part they play in the Internet news hole.

In other words, there’s things which are true on the internet — like that letter from a disappointed grandpa, or a video of a failed twerk. The internet is getting increasingly good at generating such content — so good, indeed, that the bar is getting raised, and the chances of successfully-viral content simply emerging naturally from the world are getting ever slimmer. There’s now so much fake content out there, much of it expertly engineered to go viral, that the probability of any given piece of viral content being fake has now become pretty high.

The result is stories like this one, in the NYT, headlined “If a Story Is Viral, Truth May Be Taking a Beating”, which says that “digital news sites are increasingly blurring the line between fact and fiction”:

When the tales turned out to be phony, the modest hand-wringing that ensued was accompanied by an admission that viral trumps verified — and that little will be done about it as long as the clicks keep coming…

Gawker, BuzzFeed, The Huffington Post and Mashable among them — do not see invented viral tales as being completely at odds with the serious new content they publish alongside them.

The NYT story even quotes Elan Gale, who hoaxed the internet with his Thanksgiving plane-ride tweets, saying that the people who embedded and Storified his tweets were “deceiving their audience” by doing so. The appeal of the moral high horse appears to be irresistible: look at Dave Weigel, for instance, tearing into BuzzFeed for their rebroadcast of the Gale tweets, calling it “the sort of shoddy reporting that would get a reporter at a small newspaper fired”.

What Weigel misses — and even Gale too, it would seem — is that the BuzzFeed story is not a journalist reporting about happenings on a plane. “Someone is rude on a plane” is not a news story. The BuzzFeed story is rather a journalist reporting about happenings on the internet — specifically, on Twitter. Here’s how BuzzFeed CEO Jonah Peretti sees his publication:

I think of BuzzFeed as this platform that enables us to understand how people are sharing and distributing things like entertainment content, journalism, branded content, all these various types of content that we distribute on this platform that we built…

What we’ve found is that content spreads on different networks for different reasons. There are underlying human dynamics for social content. There are reasons why people share.

This is where the tensions come in: the reasons that people share basically have nothing to do with whether or not the thing being shared is true. If your company was built from day one to produce stuff which people want to share, then that will always end up including certain things which aren’t true. That’s not a problem if you’re ViralNova, whose About page says “We aren’t a news source, we aren’t professional journalists, and we don’t care.” But it becomes a problem if you put yourself forward as practitioners of responsible journalism, as BuzzFeed does.

It has become abundantly clear over the course of 2013 that if you want to keep up in the traffic wars, you need to have viral content. News organizations want to keep up in the traffic wars, and so it behooves them to create viral content — Know More is a really good example. But the easiest and most infectious way to get enormous amounts of traffic is to simply share the stuff which is going to get shared anyway by other sites. Some of that content will bear close relation to real facts in the world; other posts won’t. And there are going to be strong financial pressures not to let that fact bother you very much.

Indeed, that fact doesn’t bother me very much. I very much love Analee Newitz’s “valley of ambiguity”:

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It seems to me that if a site has a bunch of viral content, and some of it is on the left hand side of the valley and some of it is on the right hand side of the valley, then it’s entirely reasonable to apply journalistic strictures to the right hand side but not to the left hand side.

It’s also possible, if Facebook really does start cracking down on the left hand side of this valley, that the incentive to create fake viral memes will naturally dissipate. But that’s not going to happen in 2014. So expect, over the course of the coming year, a large quantity of debate about questions like whether it even makes sense to fact-check a twerking video.

My undergraduate philosophy thesis was about the semantics of belief ascription, and the way in which “Lois Lane believes Superman can fly” is true, and “Lois Lane believes Clark Kent can fly” is false, even though Superman is Clark Kent. I think this debate is similar: when you point to a twerking video, are you pointing to the video, or are you pointing to the actions which take place in the video? BuzzFeed says it’s doing the first kind of pointing, which means that it’s true, while the likes of Dave Weigel see instead the second kind of pointing, which means that it’s false. To a large degree, this is a discussion which only journalists, and maybe the occasional underemployed philosopher, could ever care about. But it’s going to be hard to avoid in 2014.

Update: In fact, you can fact-check a twerking video.

COMMENT

I am fascinated and interested in the internal Gawker debates. In the “old” world, we have tabloids and we have “real” newspapers. It is very clear which is which. This becomes difficult on the Internet because of the business model constraints, especially the fight over traffic. Part of the problem lies with us readers – clearly lots of people don’t care for the truth and just want to be entertained – somewhat delusionally believing they are reading news. This is analogous to the idea of reading Playboy for the articles.
I encounter this problem especially in science reporting. There are way too many sensationalist headlines and mis-reported results which are then passed around confidently. And then you mix in Big Data and we have one big mess.

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How online investment advisers add value

Felix Salmon
Dec 10, 2013 15:40 UTC

A year ago, I wondered whether there was an easy personal investment strategy which is better than Vanguard, and looked at two intriguing products — the RealRetirement funds from Pimco, and an online asset manager called Wealthfront.

Then, last month, I saw a headline about Betterment, which is a competitor to Wealthfront. “Betterment’s Jon Stein talks human-RIA coopetition but breathes fire about fellow online RIAs”, it said. An RIA is a registered investment adviser, and the “fellow online RIA” that Betterment’s Jon Stein was “breathing fire about” turned out to be none other than Wealthfront.

Now I’m familiar with Betterment: I wrote about the company a couple of years ago, calling it overpriced at 0.90% per year. Since then, its fees have dropped dramatically, starting at 0.35% for balances of less than $10,000, and falling to 0.15% for balances of more than $100,000. Those fees are assessed on top of the fees charged by the ETFs that Betterment puts you into, which will cost you an extra 0.13% to 0.16%. That’s a much more reasonable sum to pay for Betterment’s service, and it’s similar to what Wealthfront charges, which is nothing for the first $10,000 and then 0.25% for the rest — plus about 0.17% in embedded ETF charges. (A Vanguard target-date fund, then, is still significantly cheaper than both, generally charging 0.17% or 0.18% per year in fees.)

So, what was Betterment’s beef with Wealthfront? Here’s Jon Stein, breathing fire:

Our platform is far more sophisticated. Our asset allocation is better because we don’t have commodities, which are a poor asset to have in there. Our algorithm is better, because it invests all of your money down to fractional shares, because the tax optimization is actually better. I don’t want to sort of pull it apart point by point but things like their tax-loss harvesting algorithm I think is a joke and not the way that it should be done.

Them’s fighting words, and so I started looking into the two offerings. And, frankly, they’re both good. Betterment is sleeker than Wealthfront; it’s put more effort into design and user-friendliness, especially for people just starting out on a savings path. It has mobile apps, and it’s easier to move your money in and out of Betterment, or to change your asset allocation once you’re invested. (Although to be honest I’m not entirely sure that’s a good thing.) If you ask Stein what makes Betterment better than Vanguard, he’ll basically tell you that it’s just much easier to use, and is designed from the ground up as an intuitive, web-native savings vehicle. Betterment has five times as many customers as Wealthfront, partly for these exact reasons. If you want to see what the future of investing looks like, then look to Betterment, not Wealthfront.

Wealthfront, on the other hand, just like Vanguard, feels more old-fashioned. It’s not nearly as sleek, and in fact it’s quite nerdy. Its investors have significantly more money than Betterment’s: while they’re significantly outnumbered, they have invested 50% more money overall. The two companies seem to have a very different conception of what their product is: while Betterment concentrates on the how of investing, Wealthfront concentrates on the what.

The result is that Wealthfront has become something of a masterclass in how to squeeze extra basis points of return out of the basic stick-all-your-money-in-index-funds model. Just like Betterment, the Wealthfront team embraces the gospel of passive investing: they’re not stock-pickers. But that’s just their starting point. They then start geeking out, adding as many tweaks as possible to maximize total returns. The model is a bit like Amazon Prime: for your flat 0.25% fee, Wealthfront will provide an ever-expanding suite of services which in aggregate are worth much more than that.

This is where Stein’s criticisms of Wealthfront come in, and I think fall short. In terms of the sophistication of the investment product, Wealthfront beats Betterment. Wealthfront is built on the kinds of investment strategies which are normally available only to investors with well over $5 million, and which even then tend to be extremely expensive; it’s managed to democratize those strategies through software (and through more than $30 million in VC funding).

For instance, on asset allocation, Wealthfront uses no fewer than 11 different asset classes in its attempt to maximize risk-adjusted returns. (Most target-date funds toggle between just two: stocks and bonds.) Stein doesn’t like the fact that one of those asset classes is commodities — but the point is that it’s important to look at the overall picture. Wealthfront isn’t required to have much or even any exposure to commodities, but if it makes sense to do so, because of what’s happening with correlations elsewhere in the portfolio, it can. (One of the big investment risks right now is that bonds alone might not give you much extra diversification: it’s very easy for both stocks and bonds to fall quite far at the same time, if and when rates start to rise.)

Wealthfront also does rebalancing the smart way — by using inflows to buy the asset classes which have dropped in value, rather than selling the assets which have risen in value and thereby generating capital gains. If you save a certain amount monthly, then that money doesn’t simply get distributed evenly across your portfolio: it goes to rebalance your portfolio as necessary. And even if you’re not regularly putting extra cash into your account, Wealthfront will do the same thing with your dividend checks. Which seems obvious, until you realize that even highly-sophisticated passive investment shops like Dimensional don’t do that.

Then there’s the way that Wealthfront constructs different portfolios depending on whether the money is in a taxable account or in a tax-sheltered account like a 401(k). Initially, Wealthfront just did this the simple way: it would put the highest-income products, like REITs and taxable bonds, into the tax-sheltered accounts, and the rest of the portfolio into the taxable accounts. But then they ran some mean variance optimization analysis, and found a better way: what they call “differentiated” rather than “segregated” asset allocation. It isn’t for everybody: it works best for younger investors with most of their wealth in taxable accounts. (That’s the investor base Wealthfront is starting with; as the company expands, I’m sure that they will find a way to give you segregated allocations if that makes sense for you.) Again, the differences might seem small, but in the world of index investing, all differences are small. Which doesn’t make them any less important.

Finally, there’s Wealthfront’s tax-loss harvesting. Here, Stein is wrong: it’s not a joke, it’s a very sophisticated way to boost returns by a noticeable amount, especially in down years. Wealthfront has published a very detailed white paper explaining how it works, but at heart what happens is that the company’s algorithms are constantly scanning your portfolio, looking for positions which have declined substantially in value. When that happens, those positions get sold, generating a loss which you can claim against your income when you do your taxes. And the proceeds get put into a similar investment, with similar risk characteristics, for at least 31 days. After that time, the second-choice investment can be sold, the first-choice investment bought again, and you’re back to your optimal allocation.

Again, tax-loss harvesting isn’t some amazing rocket fuel for your portfolio. It works best for long-term investments, since in reality all it does is defer your taxes until the point at which you liquidate your portfolio. But it can give you a nice extra slug of cash to play with until you do liquidate — and that adds up. In the Wealthfront analysis, tax loss harvesting produced an annual “tax alpha” of 1.14%, on average, between 2000 and 2013 — and was over 5% in both 2000 and 2001. Especially when markets are falling, it can give you significant outperformance. And because Wealthfront does its tax-loss harvesting continuously and opportunistically, rather than just once at year-end like most financial advisors, it can make more money from it. This year, for example, nearly all of the 0.71% Wealthfront generated in tax alpha came in the single month of June.

Still, if you only have 11 ETFs in your portfolio, that means you only have 11 securities which give you the opportunity to sell at a loss. What if, instead, you had hundreds of such securities, all moving in different directions? That’s what Wealthfront has announced today: for investors with more than $500,000 in taxable accounts, Wealthfront will stop investing in a broad stock-market ETF, and instead will buy each of the 500 components of the S&P 500, plus one more ETF which represents smaller-capitalization companies. That gives Wealthfront the ability to do tax-loss harvesting at the level of individual stocks, rather than just broad index ETFs.

Being able to use hundreds of different securities in a tax-loss harvesting system can make a big difference: it would have generated tax alpha of more than 10% in 2000, and almost 8% in 2008. Of course, if you’re selling some stocks and buying others, you’re not going to track the S&P 500 perfectly: on average, the performance of the Wealthfront portfolio in any given year is going to differ from the performance of the S&P 500 by about 0.72%. (That tracking error might be in your favor or against you; over time, it will probably work out to be zero.) But in return for that tracking error, Wealthfront says that it can deliver extra tax alpha of more than 3% per year.

These kind of iterative improvements in the way that Wealthfront invests do add up, and I’m sure that Wealthfront hasn’t stopped yet. It could take a leaf from Betterment’s book, for instance, and offer fractional shares for investors with lower dollar amounts of savings. It could tweak its tax-loss harvesting algorithm so that rather than automatically switching back to the original allocation after 31 days, it waits for the perfect time to do so. It could try to lend out its stocks into the repo market, and get a bit of extra income that way. And I’m sure there are other tweaks I haven’t thought of.

It will even, at some point, start putting more effort into user-friendliness, much as Betterment has done. (I’m less convinced that Betterment is going to start adopting all of Wealthfront’s investment tweaks, just because its CEO is so rude about them.) Betterment, I think, has a superior understanding that while people might tend to say that they’re investing for the long term and have the stomach to withstand large market gyrations along the way, in reality life happens and there’s a good chance that the money is going to be withdrawn sooner rather than later. That diminishes the value of things like tax-loss harvesting, while increasing the value of more behavioral approaches, which make use of smart defaults, segregated goal-based accounts, positive feedback about whether you’re meeting those goals, and even observed behavior. The Wealthfront approach, by contrast, relies much more heavily on old-fashioned risk questionnaires, and does much less to automate the kind of hand-holding where human investment advisers add most of their value.

The big picture here is that none of these products are bad. Vanguard is the elephant in the room: it has massive economies of scale, it is certainly going to be around for decades to come, and it’s the gold standard which any other investment product should be judged against. It’s never a bad choice. Betterment and Wealthfront both have higher fees than Vanguard, but give you real value in return for those fees. Wealthfront’s value is more quantifiable, and the company makes an extremely strong case that it delivers more than 25bp in value for the money that it’s charging. But Betterment’s value is also important. There’s a large and distressing difference between investment returns and investor returns: investment returns assume a perfectly rational buy-and-hold investor, but humans don’t behave that way. That’s one reason why Pimco spends a lot of money hedging tail risk in its RealRetirement products. If Betterment’s behavioral-finance based user focus can substantially narrow the gap between investment returns and investor returns, that could be just as valuable as all of Wealthfront’s bells and whistles.

COMMENT

Betterment just announced that now offer TLH. Has anyone heard about this? What are your initial thoughts? They seem to do this better than their main competitor Wealthfront (they say 2x better), and with a lower minimum.

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