Felix Salmon

Today’s jobs report is an unambiguously positive one: America had 236,000 more jobs in February than it had in January, and the unemployment rate is down to 7.7%, the lowest it’s been since 2008, before Barack Obama was even sworn in. (Although, it’s still nowhere near the 6.5% at which the Fed will start thinking about tightening monetary policy.) Things are getting better, US fiscal policy notwithstanding, and it’s great to see construction in particular, especially non-residential construction, finally making a substantial positive contribution to the numbers.

All is not entirely sweetness and light, though, as Brad DeLong and many others have noted. The number of multiple jobholders rose by 340,000 this month, to 7.26 million — a rise larger than the headline rise in payrolls. Which means that one way of looking at this report is to say that all of the new jobs created were second or third jobs, going to people who were already employed elsewhere. Meanwhile, the number of people unemployed for six months or longer went up by 89,000 people this month, to 4.8 million, and the average duration of unemployment also rose, to 36.9 weeks from 35.3 weeks.

In terms of the economy, it’s not good enough to simply increase employment and decrease unemployment, if the proportion of people with jobs isn’t actually going up. Which is why this chart, from Calculated Risk, is the most important one to look at right now:

Both the employment-to-population ratio ad the labor force participation rate are much lower than they ought to be: if this is a recovery, the former in particular ought to be going up, rather than going nowhere. Yes, it’s important to ensure that the unemployed get jobs. But in many ways it’s even more important to try to create jobs for people who simply aren’t working, rather than just for the people who are actively looking for work.

To turn these ratios into hard numbers: there are 89.3 million Americans who are not in the labor force, of whom just 6.8 million currently want a job. The economy ought to be able to find good, rewarding jobs not only for the 6.8 million, but for a large chunk of the other 82.5 million as well. Just imagine what that would do for tax revenues: all our fiscal problems would be solved at a stroke!

Back in October, Andy Zaky put out his sixth “buy” recommendation on Apple stock. The first five — in July 2006, November 2008, August 2010, June 2011, and May 2012 — all did spectacularly well, and all hit his price target within the time span he specified. Zaky was a first-rate Apple analyst, quoted by me and many, many others; as Philip Elmer-DeWitt says, he had “a series of spot-on predictions”, of everything from Apple’s earnings, to its iPhone sales, to — of course, its stock-price movements.

Smart and accurate Apple analysts are in high demand, and Zaky, quite sensibly, decided to monetize his gift. In June 2011 he put his blog behind a paywall, charging first $49 per month and then, in June 2012, $200 per month. With 700 subscribers, that meant a six-figure income per month, just by selling access to his detailed Apple analysis and trading recommendations.

Unlike most analysts, however, Zaky soon discovered* that his subscribers actually followed his recommendations — to the letter, in many cases. They weren’t using his analysis to inform their own decisions, they were outsourcing all of their decision-making to Zaky, simply placing the trades themselves. And so Zaky made a fateful decision: in that case, he might as well start his own hedge fund.

Bullish Cross Asset Management was launched in late 2011, and by November 2012 some 28 investors had invested a total of $10,607,815 with Zaky. And had lost it all. For Zaky, it turns out, was a truly dreadful fund manager: the kind of guy who not only put all his eggs in one basket, but the kind of guy who would also desperately double down upon incurring trading losses. With that kind of a trading strategy, even someone who’s right 85% of the time is going to blow up pretty quickly.

Zaky of course feels bad about this, and says he wants to make his partners whole, and “make things right”. But that would involve investing money, and investing money is clearly something Zaky is incredibly bad at. It’s easy and facile to sneer at analysts, saying that if they were actually any good at their jobs, they’d be making ten or a hundred times as much money by actually investing, instead of just putting out recommendations. But the fact is that analysis and investing are two very different skillsets, and while Zaky was very good at the former, he was very bad at the latter.

There’s no particular shame in that; sometimes you only learn your limitations by trying and failing. But the most astonishing part of the Andy Zaky story is not that he set up a tiny hedge fund which failed. Rather, it’s the lemming-like way in which the subscribers to his newsletter lost a mind-boggling sum of money — quite possibly well over $1 billion.

Elmer-DeWitt has heard from 36 former subscribers to Zaky’s newsletter; between them, they lost a whopping $92.5 million. Just one of them claims to have lost $50 million, or five times the total assets of Zaky’s hedge fund. If you ignore that one outlier, the rest of the subscribers have still lost an average of $1.2 million apiece — vastly more than the $380,000 or so invested by the average partner in Zaky’s hedge fund. And if you include the $50 million outlier, then the average loss rises to $2.6 million. Multiply either number by 700 subscribers, and it’s easy to see how total losses could reach the billion-dollar mark.

Reading Elmer-DeWitt’s original story, it’s clear that many of those investors were incredibly unsophisticated. And probably their self-reported loss estimates should be taken with a pinch of salt: they’re probably calculating their losses from their mark-to-market high point, rather than from the amount of cash they invested into trading Zaky’s recommendations. Still, this story is clear proof, in case any were needed, that you don’t need to qualify as a sophisticated or wealthy investor in order to engage in ridiculously risky trading strategies.

The Zaky story is depressing for another reason, too. The subtitle of his blog is “The Power of Compounded Returns in Holistic Quantitative Modeling” — it looks impressive, but it’s ultimately meaningless, and it naturally appeals to the ignorant. It can’t have taken Zaky very long to work out, on a subconscious if not a conscious level, that the best way to develop a reputation, and to build up his subscriber base, was to be as aggressive as possible in his calls, and to try to maximize both returns and risk. No one was going to pay him $2,400 a year to outperform Apple stock a little bit: these people were greedy, and wanted to shoot the moon. As such, they only have themselves, rather than Zaky, to blame for their losses. In fact, by creating a strong incentive for Zaky to ramp up the risk quotient in his calls, they probably helped turn a first-rate analyst into a busted investor: Zaky’s behavior, in some sense, was his subscribers’ fault.

Zaky, it’s clear, had much more value to the world of investing when he didn’t have skin in the game than when he did. That might be hard for a former trader like Nassim Taleb to understand, but the fact is that investing creates all manner of psychological feedback loops, which have to be managed with discipline. If you can’t manage those feedback loops, you’ll blow up — but at the same time, absent those feedback loops, you can still be a very perspicacious analyst.

Why did people take money they couldn’t afford to lose, and invest it in high-risk options strategies playing a single stock? Why did one person invest 50 million dollars in such strategies? And why did any of them trust a kid with no investing track record? It seems incomprehensible to me. But as Larry Summers famously said, “there are idiots. Look around.” You think a billion dollars is a lot to lose on Apple stock? Well, Macau’s casinos took in $3.4 billion of gambling revenues just last month. There will always be gamblers, and gamblers will always lose money. But it’s easy to see why Apple’s executives have historically paid as little attention as possible to the antics of the stock market.

*Update: Mick Weinstein points me to an unbelievably hubristic Zaky post from October 2011, which helps explain why people were following him so slavishly. There’s a whole section called “Bullish Cross Model Portfolios: The Importance of following our Models to the Letter”:

We’ve repeatedly mentioned over and over again that closely following the various Apple-based model portfolios to the letter is very key. That when we make a decision with regards to these portfolios, that decision is very carefully calculated and delicately executed to contemplate nearly every scenario that the market can throw at us. If you decide to deviate from the model, you’re likely to run into problems…

I could put out 10,000 pages of material and that wouldn’t even come close to scratching the surface of what goes into my decision making process. There is no way for me to practically reduce all of my knowledge, experience or reasoning abilities to the written word…

It is completely unreasonable to expect me to reduce every single thought or reason behind every decision we make to the written word. No one could do that… There is so much in terms of experience that there is simply no practical way I can teach people everything.

The equity markets is very much as complicated as the human body and it would be like asking a physician to teach you to practice medicine in a few months. When we make a decision, we try to do the best we can to give the core reasons behind that decision. But you should understand right now that (1) there’s very little that is lost on me, (2) there’s very little that you’ve thought of that isn’t already on my mind.

For 95% of people, this kind of thing is a huge red flag, saying “stay well away from this guy”. But for the other 1%, it’s weirdly comforting.

The main lesson I’ve learned from the sequester fustercluck, and from the failure of austerity programs in Europe, is that you can steer yourself very, very wrong indeed if you try to find fiscal solutions to fiscal problems.

The two phenomena are different: the stated aim of the sequester was to focus attention on long-term fiscal problems, while European austerity is generally targeted much more at the short term. But both resulted in the same thing: governments cutting their spending and hurting growth, when growth is the only real solution to the problem at hand.

In Europe, the key short-term problem is unemployment; in the US, the long-term problem is America’s ability to pay its scarily-rising healthcare costs. In neither case do government budget cuts do anything whatsoever to address the problem; instead, they exacerbate it.

Unemployment is the more obvious case: if the government lays off thousands of workers, and stops injecting money into the economy through other channels, that’s never going to help people find work in the short term. But the case against a fiscal solution to the healthcare-cost problem is also a pretty simple one. Here’s John Carney:

The main challenge we face on entitlements is not financial — it’s demographic. It’s not really even a question of “entitlements” at all. The challenge is just whether the economy in the future will be productive enough to produce all the medical care, food, and shelter required by the elderly when there are fewer people actually working. How we pay for this is secondary matter.

To put it differently, no matter what budget reforms we enact, we have a long-term care problem — not a long-term deficit problem. Even if we dramatically cut down on the long-term deficit by slashing entitlement spending, so that any care in excess of that has to be funded privately, we’ll still face the same challenge.

That challenge cannot really be solved through budgets. No matter how much we tax now, no matter how much we save now, in the future the economy will be limited to what it is able to produce. The challenge is to set that limit as high as possible, so there is as much as possible for the young and the old to divide it among themselves.

Put aside, for one minute, the question of whether marginal discretionary government spending is good or bad for economic growth; the point here is that the problem of healthcare costs isn’t fiscal. Indeed, it’s easy to go even further than that, and to say that the more money the government spends on healthcare, the smaller that the problem of healthcare costs becomes. After all, everywhere in the world, including in the US, the government gets by far the best price in the market when it spends money on healthcare. If you switch healthcare expenditures from the public sector to the private sector, all you do is make them more expensive.

And as Joe Weisenthal points out, quoting Richard Koo, the more that a government worries about long-term fiscal balance, the less effective it becomes in attempting to stimulate the economy to provide the kind of growth that everybody wants to maximize. Just look across the Pacific, says Koo: Japan has never once met its fiscal targets in the past 20 years, precisely because it has been consistently far too worried about meeting its medium-term fiscal targets.

The solution to all these problems has to be to maximize the number of people with jobs; to maximize the amount of money those jobs pay; and to maximize the number of years that people are earning money in those jobs. Eduardo Porter, today, makes the case for raising the retirement age, which of course would reduce the increase in Social Security costs. But he also makes the point that if people stay in well-paying jobs for longer, that benefits the entire economy — which in turn will improve our ability to provide America’s seniors with the healthcare they deserve.

Meanwhile, the rhetoric of the sequester is making everybody look in exactly the wrong place for solutions to America’s long-term fiscal problems. The amount that the government spends on national parks, or on FBI salaries, or even on mine-resistant, ambush-protected Army vehicles, is of course irrelevant to the question of how to create an economy which can afford medical care for all over the long term. But it also creates a framing problem — making it seem as though government expenditures are the nail, and that therefore budget cuts are the necessary hammer. Even as, all the while, the deep and real problems become that much more structural, embedded, and intractable.

Nate Thayer caused quite a stir in the Twittersphere this morning when he published the email correspondence between himself and Olga Khazan, an editor at the Atlantic. Khazan had seen Thayer’s 4,300-word piece for North Korea News about “basketball diplomacy”*, and decided that it would be great to have a shorter version of the story at the Atlantic. After a bit of back-and-forth, she proposed this to Thayer:

Maybe by the end of the week? 1,200 words? We unfortunately can’t pay you for it, but we do reach 13 million readers a month. I understand if that’s not a workable arrangement for you, I just wanted to see if you were interested.

I spoke to Bob Cohn, the head of Atlantic Digital, today, and he said, echoing editor in chief James Bennet’s formal apology to Thayer, that this was a mistake. It would have been OK, probably, to ask Thayer if the Atlantic could cross-post, or syndicate, the original piece, with no more work involved on Thayer’s part. At that point, he could have said yes or he no (or, in this case, he could leave the decision to NK News, which owns the copyright on the piece) — but he wouldn’t have been asked to work for free.

The cross-posting model can be a very healthy one: once a piece has been written and published, it can reach a much wider audience if it appears on a few different sites. To take one high-profile recent example: “I am Adam Lanza’s Mother” did very well at its original location, getting 1,738 comments. But it did even better at HuffPo (15,220 comments, 1,269,516 Facebook Likes) and at Gawker (794,000 Likes, 3.8 million pageviews). That’s a special case, of course. But both professional and amateur writers tend to want their stuff to be read by as many people as possible, and (like me) normally say yes to people asking if they can cross-post.

I don’t think that Thayer would have been offended by a simple cross-posting request: that can be dealt with with an equally simple yes or no. Instead, however, he was asked by the Atlantic to cut 4,300 words down to 1,200 words — something which involves a substantial amount of work, and often a substantial amount of rewriting. For that, the Atlantic should have offered to pay him. Or, more realistically, they shouldn’t have asked him to do that in the first place: there is value to reprinting the original story, and there is value in quoting it and linking to it, but there’s not a huge amount of value in editing such a thing down — not when your medium has no space constraints.

Also, there’s something a little disingenuous about the “13 million readers” thing. I can say that Reuters has 40 million readers every month, but that tells you nothing about the number of people reading my blog. It’s OK to ask people to do things for free, but it’s not OK to oversell yourself in the process: when Khazan tells Thayer that “some journalists use our platform as a way to gain more exposure”, she should be honest about the number of readers that Thayer’s post is likely to get, rather than citing huge numbers with very little relevance to Thayer. What’s more, at the margin, a large readership should by rights increase a publication’s ability to pay freelance contributors, rather than merely increasing freelancers’ desire to appear in that publication.

The exchange has particular added poignancy because it’s not so many years since the Atlantic offered Thayer $125,000 to write six articles a year for the magazine. How can the Atlantic have fallen so far, so fast — to go from offering Thayer $21,000 per article a few years ago, to offering precisely zero now? The simple answer is just the size of the content hole: the Atlantic magazine only comes out ten times per year, which means it publishes roughly as many articles in one year as the Atlantic’s digital operations publish in a week. When the volume of pieces being published goes up by a factor of 50, the amount paid per piece is going to have to go down.

But there’s something bigger going on at the Atlantic, too. Cohn told me the Atlantic now employs some 50 journalists, just on the digital side of things: that’s more than the Atlantic magazine ever employed, and it’s emblematic of a deep difference between print journalism and digital journalism. In print magazines, the process of reporting and editing and drafting and rewriting and art directing and so on takes months: it’s a major operation. The journalist — the person doing most of the writing — often never even sees the magazine’s offices, where a large amount of work goes into putting the actual product together.

The job putting a website together, by contrast, is much faster and more integrated. Distinctions blur: if you work for theatlantic.com, you’re not going to find yourself in a narrow job like photo editor, or assignment editor, or stylist. Everybody does everything — including writing, and once you start working there, you realize pretty quickly that things go much more easily and much more quickly when pieces are entirely produced in-house than when you outsource the writing part to a freelancer. At a high-velocity shop like Atlantic Digital, freelancers just slow things down — as well as producing all manner of back-end headaches surrounding invoicing and the like.

The result is that Atlantic Digital’s freelancer budget is minuscule, and that any extra marginal money going into the editorial budget is overwhelmingly likely to be put into hiring new full-time staff, rather than beefing up the amount spent on freelancers. Cohn didn’t give me hard numbers, but some back-of-the-envelope math would indicate that more than 95% of his total editorial budget is spent on staffers, rather than freelancers.

Staffers come in, work hard at a multitude of jobs, and coordinate with each other surprisingly well; it also takes them very little time to understand how to create great web content quickly and internally, rather than relying on outsiders. Khazan had only just started her job when she tried to get Thayer to repurpose his article; my guess is that with a little bit more experience, she would have found it much easier to simply write a quick article of her own, linking to and blockquoting Thayer’s piece, driving traffic to him without having to negotiate with him at all. Look, for instance, at how David Trifunov of Global Post tackled the subject: he wrote a short but interesting post of his own, incorporating links to three outside stories, including Thayer’s, as well as another Global Post story. That’s the natural way of the web, and it doesn’t involve any freelancing.

The fact is that freelancing only really works in a medium where there’s a lot of clear distribution of labor: where writers write, and editors edit, and art directors art direct, and so on. Most websites don’t work like that, and are therefore difficult places to incorporate freelance content. The result is that it’s pretty much impossible to make a decent living on freelance digital-journalism income alone: I certainly don’t know of anybody who manages it. There’s still real money in magazine features, and there are a handful of websites which pay as much as $1,000 or $1,500 per article. But in general it’s much, much easier to get a job paying $60,000 a year working for a website than it is to cobble together $60,000 a year working freelance for a variety of different websites.

The lesson here, then, is not that digital journalism doesn’t pay. It does pay, and often it pays better than print journalism. Rather, the lesson is that if you want to earn money in digital journalism, you’re probably going to have to get a full-time job somewhere. Lots of people write content online; most of them aren’t even journalists, and as Arianna Huffington says, “self-expression is the new entertainment”. Digital journalism isn’t really about writing, any more — not in the manner that freelance print journalists understand it, anyway. Instead, it’s more about reading, and aggregating, and working in teams; doing all the work that used to happen in old print-magazine offices, but doing it on a vastly compressed timescale.

There are exceptions to this rule, of course — websites which still pay freelance writers decent sums. The New Republic, for one, seems to be carving out an impressive niche as a place to find carefully-edited, print-quality freelance content even when the piece in question doesn’t appear in the magazine. And when the web slows down, as it does at places like Matter, it’s quite easy to find in-depth journalism and reporting from well-paid freelancers. But in general, it’s fair to say that the web is not a freelancer-friendly place. Just be careful about extrapolating: there are lots of very good digital-journalism jobs out there, no matter how badly some freelancers get treated.

*Update: In another layer of irony, it turns out that Thayer’s piece itself was deeply indebted to — and yet didn’t cite or link to — Mark Zeigler’s 2006 story on the same subject. (Although it does at one point mention “documents obtained by the San Diego Union Tribune in 2006″.)

On Friday, the Second Circuit court of appeals issued an order, aimed at Argentina. The order is worth quoting in full, because it helps to explain the reasoning by which the Second Circuit is going to end up pushing Argentina into default:

At oral argument on Wednesday, February 27, 2013, counsel for the Republic of Argentina appeared to propose that, in lieu of the ratable payment formula ordered by the district court in its injunction and accompanying opinion of November 21, 2012, Argentina was prepared to abide by a different formula for repaying debt owed on both the original and exchange bonds at issue in this litigation. Because neither the parameters of Argentina’s proposal nor its commitment to abide by it is clear from the record, it is hereby ordered that, on or before March 29, 2013, Argentina submit in writing to the court the precise terms of any alternative payment formula and schedule to which it is prepared to commit.

The court directs that, among the terms specified, Argentina indicate: (1) how and when it proposes to make current those debt obligations on the original bonds that have gone unpaid over the last 11 years; (2) the rate at which it proposes to repay debt obligations on the original bonds going forward; and (3) what assurances, if any, it can provide that the official government action necessary to implement its proposal will be taken, and the timetable for such action.

A bit of background here: at the big hearing last week, Argentina complained that it had never been given an opportunity to propose terms on which it might be willing to pay Elliott Associates, the plaintiff in the case. This is the first paragraph of the Second Circuit’s response: OK then, tell us what your proposed terms might be. And then the second paragraph contains the punch: those terms had better explain how you intend “to make current those debt obligations on the original bonds that have gone unpaid over the last 11 years”.

Argentina, of course, has no such intention. When it files its response at the end of this month, it will almost certainly propose what is essentially a second reopening of the 2005 bond exchange: it will allow Elliott to swap its old defaulted debt into new, performing bonds on more or less the same terms — including a 70% haircut — that everybody else got. In no event will it allow Elliott to be paid off in full — to be “made current” — on the original terms of its bonds.

The Second Circuit, on the other hand, clearly sees its job as being to enforce the original bond contract, which has been in default for 11 years. When Argentina proposes something roughly 4,000 days late and a billion dollars short, that’s all the provocation the Second Circuit will need to bring down the hammer and uphold the district court’s orders.

Those orders are tough indeed. Commenter “paripassuwatch”, on my original post, notes that the court’s injunctive remedy is “the most powerful enforcement mechanism in the realm of sovereign debt since the era of ‘gunboat diplomacy’. Blocking access both to the world payment system and world capital markets is as close one can get to blocking access to trade and customs duties”.

These days, as Don Henley famously said, a man with a briefcase can steal more money than any man with a gun — and the Second Circuit is going to hand over to Elliott Associates one of the most powerful briefcase-based weapons the world has ever seen. That doesn’t mean Elliott’s going to get paid, of course. But it does mean that that the hedge fund can essentially turn Argentina into a global economic outcast unless and until that happens.

The consequences for Argentina could well be very real and very painful. All governments need to fund themselves, and Argentina is no exception: what’s more, all governments borrow money from foreign investors, by issuing either foreign or domestic debt to those investors. Again, Argentina is no exception — foreign investors have long been a large part of the investor base for Argentine domestic debt. So in theory, losing access to US capital markets might be no big deal: Argentina could simply move all of its funding operations to Buenos Aires.

In practice, however, as DanielKoehler, another commenter, says, things are more complicated than that. Foreign investors tend to want dollar-denominated debt, and whenever you’re dealing in dollars, various intermediaries are going to be transferring those dollars into a US bank account. Similarly, Bank of New York, as the trustee for the bondholders who are receiving interest payments right now, would have to be involved somehow in any attempt to exchange those bonds for new domestic bonds. In both cases, US institutions could find themselves at risk of being found in contempt of court in New York, and might well refuse to cooperate with Argentina.

Just finding a bank willing to lead-manage any exchange offer would be difficult, for Argentina, given the legal and reputational risks associated with such a mandate. The New York courts are being very clear: if Argentina wants to be able to pay its current bondholders, it’s going to have to pay off its holdouts at the same time. (Or, conversely: if Argentina wants to remain in default on the holdouts, it’s going to have to default on everyone.) No one knows how this whole thing is going to play out, but New York’s jurists aren’t stupid, and are good at closing all the obvious loopholes. Argentina has very good and very expensive lawyers, but there’s no particular reason to believe that they’re going to be able to conjure up some clever mechanism which allows the country to continue paying the bondholders it wants to pay, while keeping Elliott out in the cold.

That said, the New York courts are playing a very risky game here. If Argentina does end up defaulting on everybody, it’s only going to be a matter of time before it unveils some kind of exchange offer, which would probably be open to holders of all defaulted bonds. Most likely the bondholders who are currently receiving interest payments — the exchange bondholders represented in court by David Boies — would be offered 100 cents, or maybe even slightly more than that, on the dollar, while the holdouts, like Elliott, would be offered maybe 70 cents on the face value of their claims. (Elliott is asking the court for roughly 300 cents on the dollar, thanks to the wonders of past-due compound interest.)

Such an exchange offer could easily be presented by Argentina as a good-faith effort to cure a default which was forced on it by hostile American courts. And David Boies would certainly be arguing vociferously for the right of bondholders to decide whether they wanted to accept Argentina’s offer or not. At that point, what would Judge Griesa, and/or the Second Circuit, do? They could stand firm, and essentially block the entire exchange offer — thereby keeping Argentina in default against its own will. But while they’re sworn to uphold the sanctity of contracts, they also have to have at least one eye on the ability of New York’s financial markets to function effectively. And it’s hard to see how they can do that if they’re preventing a sovereign nation’s best attempt to extricate itself from default.

So while the current situation is certainly very bad for Argentina, it could wind up being just as bad for the Southern District, and for New York’s status as an international financial capital. Which is why the Second Circuit is going to have to think very hard indeed before handing down any particularly draconian decision.

Apologies for the delay between part 1 and this: I wanted to wait until Amanda Palmer’s TED talk appeared online, because it’s an important part of the other big aspect of content economics. Part 1 was about the ability of publishers to sell readers to advertisers; part 2 is about the ability of publishers to persuade readers to pay the publisher directly.

There are basically three ways to go about this. You can put up a paywall; you can ask for donations; or you can sell non-digital things to your digital audience.

On its face, Palmer’s talk is about the second strategy, but in fact it’s about all three. (And yes, I’m the “financial blogger” referred to in the talk.) For instance, when it comes to online publishing, why are paywalls more common than tip jars, despite the fact that they’re much more difficult to implement? Palmer does a great job of walking us through the answer to that question: there’s something shameful, there’s a whiff of the panhandler, in asking strangers for money.

At the beginning of the talk, Palmer talks about her early career as a living statue, and the people who would drive by, shouting “get a job!” as she waited for people to drop money into her hat. The implication, of course, was that being a living statue is not a job (its surprisingly consistent revenue stream notwithstanding), and that a living statue’s income represents an entirely one-way transmission of value: spectators give money, and receive nothing in return. The rest of Palmer’s talk is an attempt to explain that the value goes both ways, and that there is (or should be) nothing shameful about creators asking for money. But the attitude she’s pushing against is deeply ingrained.

A couple of weeks ago, for instance, I asked Andrew Sullivan why he chose to put up a paywall rather than putting up a tip jar. His answer (at about 23:00) was unambiguous:

This is not a tip jar. And it is not a pledge drive. It is a subscription. And that makes it a different proposition. It’s telling people I’m not an amateur, and I’m not a charity. I’m doing work that I’m asking people to pay for. And it seems to me that at some point, we have to say that, in new media. Or else it is not going to continue to exist…

I had two pledge drives early on, in 2002 and 2003, which netted a certain amount of money. But this is a different model. This is trying to make it sustainable, long term: don’t give it money just because you like me. We are trying to create an actual site that is news and opinion that people value and pay for, and become associated with in the long run. We could have done a tip jar. We decided no. We wanted to be a business. And do it the right way.

The distinctions here are subtle ones: Sullivan still nags his readers, just as public radio does during its pledge drives, but in his mind those nags aren’t part of a pledge drive, because he’s a business, rather than an amateur, or a charity. And similarly, although he raised $500,000 from readers before his paywall even existed, those dollars weren’t donations, for much the same reason. There’s something shameful, on this view, about working for tips; there’s an unpleasant neediness about asking for charity. And it was those reasons, as much as any simply financial considerations, which resulted in Sullivan plumping for a paywall model.

Truth be told, Sullivan’s paywall is not much of a wall at all. 70% of his readers don’t click on the read-on links at all; they just stay on the home page, which is always free. And of the 30% who do click on read-on links, 91% are still within their allocation of seven free stories. Which means that overall, just 2.7% of his readers are reaching the point at which it gets a little bit harder to read what they want to read. And the actual number is lower even than that: many of his readers use RSS readers to consume his content, or else they disable cookies, or otherwise don’t get counted among the people visiting his website.

But as Sullivan would probably agree, the choice between a paywall or a tip jar is not as clear-cut as it sounds: realistically, it’s more of a spectrum. Some paywalls are forbiddingly high “Berliners“: if you don’t cough up, you have no access. Most, however, are porous to a greater or lesser extent. The Times and Sunday Times of London will give you the first 75 words or so of any story; the New York Times will allow you a certain number of free articles per month, plus all articles arrived at from external sites; the WSJ will let you in if you’re coming from Google, or from a link which has been emailed to you by a subscriber. At other sites, the wall is drawn around some content but not all: the New Yorker, for instance, puts only some of its magazine content online for free, while the Boston Globe hides all of its content behind a Berliner paywall but then allows a subset of that content onto Boston.com for free.

None of these models is obviously better than any of the others. No paywall lasts untouched for long: all publishers are making decisions to put up or take down paywalls every day, and it can be hard to keep track of which publications have which model. (Right now, for instance, without looking, I genuinely can’t remember whether the Economist is paywalling any of its content or not.) Just in the past few days, we’ve seen one high paywall demolished, at Variety; there, the new proprietor, Jay Penske, called it the “end of an error“. Meanwhile, another paywall has been erected, at Fortune: for the time being, for now, most Fortune magazine content is now behind a wall, while online-only content is free.

In an editor’s letter which isn’t online, Fortune’s Andy Serwer says that “we consider Fortune’s content valuable enough that we have decided not to give it all away online”. The unfortunate implication is that the online-only content, including the excellent Term Sheet blog, is not valuable enough to be worth charging for. On the other hand, if you look at the pricing, you’ll see that the cost of a digital subscription — $19.99 per year — is exactly the same as the cost of a digital subscription plus home delivery of the magazine. And the unfortunate implication of that is that all the extra value one finds in a magazine — the art direction, the layouts, the ability to read it while waiting for your airplane to take off — is also worthless. (Contrast that with the NYT paywall, which doesn’t really charge for the content at all, but rather for the online ability to navigate from one story to another.)

The real reason why Fortune put up a paywall, of course, has nothing to do with how valuable Andy Serwer thinks the magazine’s content is. Instead, the paywall is just another way for the Time Inc brass to try to make money and keep the magazine’s rate base high, the idea being that people will be less likely to cancel their magazine subscriptions if they know that they won’t be able to read that content online for free.

Which brings up a fundamental rule of online subscriptions: there is zero correlation between value and price. There are lots of incredibly expensive stock-tipping newsletters which have a negative value: you’d be much better off if you didn’t subscribe to any of them at all. And of course there’s an almost infinite amount of wonderfully valuable content available online for free, starting with Wikipedia and moving on through the sites of organizations like Reuters, Bloomberg, the Guardian, and the BBC.

Or look what happened when Newsweek and Sullivan parted ways: both of them started subscription products, at almost identical prices. (Sullivan wants $20 per year; Newsweek wants $25.) That doesn’t mean the two products have almost-equal value; it just means that both Newsweek and Sullivan — just like Marco Arment, for that matter — came to the conclusion that the $20-a-year range was more or less the point on the supply-and-demand curve where they would maximize their income. They might be right about that; it’s hard to tell. Paywalls are put together in so many different ways, at so many different price points, that trying to work out their relative merits, in terms of income generated, is almost impossible.

But there’s another consideration, too: the more formidable the paywall, the more money you might generate in the short term, but the less likely it is that new readers are going to discover your content and want to subscribe to you in the future. Amazing offline resources like the Oxford English Dictionary and the Encylopedia Britannica are facing existential threats not only because their paywalls are too high for people to feel that they’re worth subscribing to, but also because their audiences are not being replaced at nearly the rate at which they’re dying off. The FT, for instance, has discovered that its current subscriber base is pretty price-insensitive, and has taken the opportunity to raise its subscription prices aggressively. That makes perfect sense if Pearson, the FT’s parent, is looking to maximize short term cashflows, especially if it’s going to sell off the FT sooner rather than later anyway. But if you’re trying to build a brand which will flourish over the long term, it’s important to make that brand as discoverable as possible.

And the lesson of very porous paywalls, like Sullivan’s, or even of pure tip jars, like Maria Popova’s, is that on the internet, people prefer carrots to sticks. That’s one of the lessons of Kickstarter, too. To put it in Palmer’s terms: if you want to give money, you’re likely to give more, and to give more happily, than if you feel that you’re being forced to spend money. If you look at the $611,000 that Sullivan has raised to date, essentially none of it has come from people who feel forced to cough up $20 per year in order to be able to read his website. To a first approximation, all of that money has come from supporters: people who want Sullivan, and the Dish, to continue.

Palmer concludes her talk by saying that “people have been obsessed with the wrong question: how do we make people pay for music. What if we started asking: how do we let people pay for music?” The same question can and should be asked about other forms of online content, too. Tomorrow Magazine raised $45,452 — more than three times its goal — from 1,779 people, none of whom felt in the slightest bit grudging about the money they were spending. A mere 296 people clubbed together to raise $24,624 for Baltimore Brew. 99% Invisible, a radio show, raised $170,477 from 5,661 people. And that’s just a few of the Kickstarter journalism projects which were funded in 2012. There are lots of other models, too, like membership of Longreads, or Spot.us, which helps to fund all manner of interesting and amazing journalism. What all of these projects have in common is that they’re free online even as they’re asking for money: they’re not going to punish anybody for not supporting them by throwing up a paywall and saying “well, in that case, we won’t give you access”.

As Palmer says, this kind of model involves something quite rare in the journalism community: the ability to trust that people will support you, even if they don’t have to do so. And the stronger the relationship you have with your readers, the more you’ll be able to trust them. This is why Palmer’s Kickstarter campaign was so successful: not because she had a lot of fans (that, in itself, doesn’t work), but because the connection she has with her fans was so strong. As Paul Smalera says, “digital media needs to reconnect to readers”:

For all of the hype around interactivity, big media is still primarily a one-way street. And the rise of programmatic ad-buying will only reinforce that trend. Most old media revenue officers aren’t going to care about connecting to their online audience, beyond understanding their aggregate profile and average value to an ad network. Yet cultivating those reader relationships on an editorial level can unlock all sorts of value, understanding, and yes, even revenue.

Twitter is great at this: readers are quite right when they feel that they know the people they follow on Twitter, in a way they never do just by reading polished content. But there’s more to connecting with your audience than Twitter. Indeed, the best way of all to do it is to venture out into the real world.

Events are one obvious way of doing that, and can be significant profit drivers in their own right. Atlantic Media is fantastic at monetizing its brand by putting on conferences, as are other franchises: the tech world is a particularly good place for such things, as All Things D or Wired or TechCrunch will attest. The NYT has its Dealbook conference, the New Yorker has its festival, and of course the business press has branched out into things like the Economist’s gatherings or the WSJ’s whole suite of events.

Big formal expensive events like these aren’t easy to put on, of course — they require large dedicated staffs, and a huge amount of effort. But non-sponsored events like Radiolab Live are a bit cheaper and easier, and anyone can cobble together a Meetup, or even just tell his readers to meet him at the Oyster Bar for an impromptu celebration.

And events are just one tiny part of the non-digital world which digital creators can put their brand on and sell. The whole Kickstarter phenomenon, for instance, is based on the idea that if you give enough money, you’ll get stuff in return. Palmer was offering glossy books and LPs and CDs and even (if you ponied up $10,000) promised to come and paint your picture and have dinner with you. Tomorrow offered a phone message from a porn star. 99% Invisible offered books and shirts and all manner of other stuff. Kickstarter is no tip jar: make no mistake, it has a very large element of e-commerce to it as well. Meanwhile, Monocle has seven stores around the world, plus an elaborate e-commerce site, and Mental Floss magazine makes a good third of its revenue from selling things.

Think of this as the flipside of content marketing: if brands can bypass publishers and create their own content in order to sell the stuff they produce, then publishers can bypass advertisers and sell their own stuff — be it a $40 chemistry cocktail set or a £415 cashmere scarf — to their readers directly.

The bigger lesson here is that when it comes to persuading your readers to pay you money, it actually helps to be small. There’s an exception for finance, of course, and also for the NYT, which is unique in many ways. But the lesson of Palmer’s talk is that while 25,000 supporters aren’t nearly enough to support a band on a record label, they’re more than enough to support a band on Kickstarter — or, for that matter, to keep an iPad magazine going strong. What’s more, while consumers can be very loyal to brands and to publications, in many ways it’s easier to become loyal to an individual, especially when she has an idiosyncratic and unique voice.

If you want to read The Dish, you can’t get there by going to thedish.com or to thedailydish.com or anything like that: you get there by going to andrewsullivan.com. The person is the site, and when that happens, the readership becomes much more willing to hand over money. Do I want to give Fortune $20 a year so that I can read its magazine articles online? No, I do not — especially when we live in a social world, where if I find a story I love, the first thing I want to do is be able to share it. On the other hand, I’m much more willing to spend $20 a year to support Andrew Sullivan, even if I rarely visit his site, precisely because I don’t particularly have to do so, and can read any of his stuff whether I pay him or not.

We’re not talking about micropayments here: those have never taken off, and I doubt they will, at this point. For a long time, people thought that the sheer size of the internet would enable enormous numbers of people to pay negligible sums of money, which would add up to substantial amounts in aggregate. The problem with that was that it’s just too hard to spend money online: the effort involved just isn’t worth it, for sums of a dollar or less.

Instead, the sheer size of the internet enabled the opposite to happen: it enabled smallish numbers of people to pay modest amounts of money, which can add up to just as much in total.

So if you’re a huge publicly-listed corporation, by all means create an elaborate paywall in the hopes that people will decide that they need your content and will just have to pay for it. Every so often, that can work, as it has at the FT and the NYT. But frankly I don’t think those examples are particularly replicable: they’re both sui generis in many ways. Instead, it seems to me, the most promising aspect of content payments is at the other end of the spectrum. Build up a relationship with your readers, in large part by giving your content away for free; ask for money with pride and shamelessness; and place no cap on how much you let your readers spend. Give them the opportunity, and you might be very surprised at what they’re willing to buy.

I first heard about the Sustainable Preservation Initiative back in 2009. Back then, it was little more than an idea attached to a tollgate. The problem at hand is the large number of antiquities and important archaeological sites which exist in poor areas of poor countries. Historically, that has been a recipe for looting; more recently, those sites have been more at risk of simply being bulldozed as urban areas sprawl. As SPI’s Larry Coben and Rebekah Junkermeier write, the way that archaeologists have historically attempted to address those problems — conservation, education and museums — simply didn’t work. So, they came up with another idea — one which would give locals a sustainable financial incentive to maintain and preserve their patrimony.

Four years on, SPI is a well established organization. The bare-bones original concept was simply to put up a fence in front of an archaeological site, and let locals charge for admission. When tourists would arrive to see the ruins, they would pay the locals, creating a brand new income stream. Today, SPI’s ambitions — and the incomes, and the number of people that a single site can support — are much bigger. The organization’s first big project was in San Jose de Moro, in Peru, a region where incomes average $9.50 per day. SPI came in with a $48,000 one-time grant, which paid for a visitors center, a snack bar, toilets, a crafts workshop — standard touristic infrastructure, which is now providing good incomes to a dozen local residents. The local crafts, based on local antiquities, are even available now on Novica.

SPI has now launched its first crowdfunding campaign, to bring the model to two more sites in Peru, and already it has raised more than $25,000 of its $49,000 goal. I really like this model: it uses poverty alleviation as a tool with which to save priceless artifacts, and in many ways the means are more important and impressive than the end.

The trick here, of course, is to empower the locals as much as possible, rather than to parachute in and tell them how to run a business. But the fact is that even if the locals aren’t particularly well educated, and have very little financial capital, they are rich in what you might call cultural capital. And a single up-front investment in touristic infrastructure can create a sustainable, profitable enterprise which can not only last for decades but can even grow over time.

This kind of thing doesn’t scale very easily: it needs to be implemented by sensitive experts who know what they’re doing. But there are lots of opportunities to build these kind of projects all over the world, from Bolivia to Albania. Those countries might not be among the world’s top tourist destinations, but that’s OK — you really don’t need many tourists to make these projects work. And it turns out, as you might expect, that archeologically-minded tourists in far-flung destinations are actually very keen to spend their money at these sites, given half a chance. Let’s help them do so, rather than forcing them to spend their money only in the big tourist cities and long-established sites.

Some countries default on their performing debt because they no longer have the ability to pay it. Other countries default on their performing debt because they no longer have the willingness to pay it. Argentina has been in both situations: something of a serial defaulter, it defaulted on or restructured its obligations in 1828, 1890, 1982, 1989, 2001, and 2005.

And it’s going to default once again in 2013.

This time, however, is a little bit different. Argentina has both the willingness and the ability to pay its performing debt. It’s adamant, however, that it’s not going to pay $1.4 billion to Elliott Associates, a hedge fund which has been prosecuting a highly-aggressive litigation strategy against the country, based on the fact that it holds defaulted debt and refused to exchange that debt for performing bonds. Depending on where you sit, Argentina’s refusal to pay off Elliott is either noble or foolish. But after two and a half hours of highly contentious oral testimony in federal appeals court today, it’s pretty clear that the US courts aren’t going to allow Argentina to stay current on its performing debt — not unless the country also writes a ten-figure check to Elliott. Which means that we’re headed straight for default, with almost no realistic chance of avoiding it.

You didn’t really need me to tell you that: one look at Argentina’s 12-month credit default swap (current spread: 5,266bp) will tell you everything you need to know. But this is a pretty big deal all the same — not least because the Second Circuit seems certain to hand down a judgment which is pretty bad law.

That’s nothing new: in its first decision, the Second Circuit happily ignored lots of settled law about sovereign immunity, among other things, and was downright wrong about pari passu. This time around, the law preventing the Second Circuit from upholding the lower court’s orders is much weaker, and mainly comprises something called Rule 65(d)(2)(C), which is even more obscure than pari passu. Essentially, the Second Circuit has proved itself more than capable of taking a steamroller to formidable legal obstacles; this one should present no real problems at all, by comparison.

The questioning was led, aggressively, by Judge Reena Raggi, who barely let a sentence get finished and who made it clear from the very beginning that she is if anything even more fed up with Argentina’s antics than the district court judge, Thomas Griesa, whose verdict was being appealed. The fact that Argentina’s vice president and economy minister were sitting right in front of her didn’t faze her for one second: this was her courtroom, she was in charge, and it took her no time at all to accuse Argentina of being “contumacious”. (Which is fair enough, even Argentina’s counsel didn’t really disagree on that front.) In Raggi’s eyes, clearly, there’s nothing worse than a contumacious defendant: it doesn’t matter how many footnotes you have or how much precedent you cite, if you’re thumbing your nose at her she’ll find against you.

What’s more, Raggi really doesn’t like being blackmailed. Both Argentina and David Boies, acting on behalf of the bondholders who are currently being paid by Argentina, made the point multiple times that if Griesa’s order was upheld, the certain result would be another Argentine default, a whole new set of cases on Griesa’s docket, and, essentially, a loss for everybody, including Elliott Associates, which still wouldn’t actually get paid. Raggi was unimpressed: “Is that really this court’s concern?” she asked Boies, saying that it was not her job to wonder about “whatever the market might do” as a result of her ruling.

Boies, in truth, was unimpressive: he never seemed entirely on top of his brief, and there was one excruciating episode where he had to go scurrying off to ask Bank of New York’s lawyer to find out the answer to a question which everybody else in the courtroom knew the answer to. Argentina’s tactic today was to spend less time arguing its own case, and to outsource the job of fighting Elliott to Bank of New York and to David Boies, in the hope that they would be more sympathetic and less contumacious. But Raggi made mincemeat both of BoNY’s lawyer — telling him in as many words at one point that he was giving very bad advice to his client — and of Boies, who was clearly out of his depth. Remarked one lawyer, observing the proceedings: “If you’re going to bring in a hired gun, at least make sure it’s fully loaded.”

Argentina’s own lawyer, Jonathan Blackman, started off rockily yet actually finished quite strongly, warning of the practical consequences of what everybody in the courtroom could quite clearly see coming at that point. “You’re making it worse!” he said. “Do no harm!” It was an argument with no legal weight, and it won’t change the final result. But he did give Argentina the use of a “don’t say we didn’t warn you” card at any time the US or anybody else criticizes it for defaulting yet again.

But the clear winner was Ted Olson, representing Elliott, who stayed calm and masterful throughout. In contrast to Boies, he knew exactly what he was talking about, was sure of the merits of his own case, and didn’t feel the need to appeal to Learned Hand precedent every few minutes. In front of more impartial judges, he might have had a harder time of it. But oral arguments aren’t the time or the place for jurisprudential nit-picking: that’s what detailed briefs are for. Rather, Olson’s job was to reassure the three appeals-court judges that they should feel perfectly comfortable upholding their colleague’s decision and standing up for legal rights enshrined in New York-law documentation. And he did that extremely well.

Or maybe the real winner was pretty much everybody in the courtroom, since the one thing that seems certain is that the amount of litigation and dealmaking surrounding Argentine sovereign debt — which has already been enormous — is going to become positively stratospheric. It’s hard to look too far into the future, here, but one likely scenario is that the appeals court will uphold Griesa’s decision at some point in April or May, forcing a big default in June. At that point, Argentina will probably launch an exchange offer under Argentine law, under which anybody holding currently-performing bonds would be able to swap them into bonds with substantially identical terms, just payable in Buenos Aires rather than New York. Given that Argentine-law bonds have been trading at tighter spreads then US-law bonds for some months now, one can assume that nearly all bondholders would jump at the opportunity to keep on getting their coupons.

Argentina might even take the opportunity to give its holdouts a third bite at the cherry, offering them some kind of option to take a haircut and get performing Argentine-law bonds in exchange for their defaulted debt. But many holdouts would still remain, and will surely continue to pester New York courts for the foreseeable future.

All of which helps explain why Argentina’s credit default swaps are trading so much wider than Argentina’s bonds. The bonds will probably default, but bondholders are unlikely to suffer huge losses if they just have a bit of patience for a couple of months — eventually, Argentina will surely give them the opportunity to swap their debt into a slightly different instrument, one which is less susceptible to New York jurists. That said, the credit default swaps will be triggered, and Argentina will probably drop out of key emerging-market indices like JP Morgan’s EMBI.

This is emphatically not what Argentina hoped for when it entered into its exchange offers in 2005 and 2010. Back then, the idea was that it could cure its default, mop up its holdouts somehow, or at least render them irrelevant, and ultimately make it back into the good graces of the international capital markets. Instead, Argentina remains a capital-markets pariah, it can’t really do business anywhere in the world without worrying that Elliott or someone like it is going to attach its property, and pretty soon it will probably have to give up on issuing any foreign debt at all, retreating instead to its own small South American world.

Argentina is a unique and special case on many levels: the failure of its 2005 and 2010 debt restructurings does not mean that debt restructurings in general don’t work, or that we need to resuscitate the idea of a sovereign bankruptcy regime. Still, the precedent being set here is not a happy one — not for international bondholders, probably not even for Elliott Associates, which is still a long way from getting paid, and definitely not for Argentina. This is looking very much like one of those court cases which absolutely everybody ends up losing.

Update: There is one way that Argentina can prevent a default in 2013: by prepaying all its 2013 coupons now, before the ruling comes down. Don’t rule it out: in this case, anything is possible.

Many thanks to the Kauffman foundation for crunching the numbers on a key part of Jerry Moran’s clumsily-named Startup Act 3.0 — the new visa for immigrant entrepreneurs. I don’t have an opinion on the rest of the bill, but it does have two sections which are something of a no-brainer when it comes to immigration reform. One is the immigrant-entrepreneur visa; the second is the idea of giving green cards to up to 50,000 foreign students who graduate from an American university with an advanced degree in science, technology, engineering, or mathematics — so long as they remain in that field for five consecutive years.

The immigrant-entrepreneur visa is pretty simple. You create a pool of 75,000 such things, available to anybody who’s here already on an H1-B or F-1 visa. When those people switch from their old visa to their new one, they have to start a new company; employ at least two full-time, non-family member employees “at a rate comparable to the median income of employees in the region”, and invest or raise at least $100,000. After that, they have to continue adding employees at a rate of one per year, so that after three years, there must be at least five employees. At the end of three years, you graduate to a green card, and with it the standard path to citizenship.

The visa addresses the main problem which Ross Eisenbrey has with H1-B visas: the fact that people on such visas are “more or less indentured, tied to their job and whatever wage the employer decides to give them”. The new visa would create an employer exit strategy for H1-Bs, allowing workers to leave companies which pay too little or offer too few opportunities, and instead strike out on their own.

And of course — by definition — it would create jobs. The Kauffman foundation’s math is solid, here: they conservatively estimate job creation at somewhere between 500,000 and 1.6 million new jobs after ten years, and possibly substantially more. (Those estimates don’t include jobs created by the new firms after they’ve left the program, for instance.)

I also like the fact that the new immigrants created by this program would go overwhelmingly to the parts of America where immigration is wanted and embraced: big cities and research hubs. This plan is full of positive externalities: it improves tax revenues, from all the new employment and consumption; it improves America’s share of global innovation, and of course it helps to position America once again as the land of opportunity.

The Kauffman foundation is understandably worried that the visa would unfairly punish failure in an inherently risky world, but we’re living in a world of pivots, these days, where a gay social network can become a discount shopping site — and so long as the immigration people are OK with pivoting business plans, I think the failure problem will be manageable.

Most fundamentally, however, this visa is a great idea just because without it, the incentives are all wrong. As Stuart Anderson demonstrates, “in a practical sense, it may be easier to stay in the United States illegally and start a business than to start a business and gain legal temporary status and permanent residence (green card) as the owner of that business”. If we want to reduce illegal immigration, we obviously have to make it less attractive than legal immigration: as Jeb Bush and Clint Bolnick point out, you can only realistically ask illegal immigrants to “return to their native countries and wait in line like everyone else” insofar as there is, actually, a line to wait in. Right now, there isn’t one.

The only real question, when it comes to this visa, is how it’s going to get signed into law. The proponents of immigration reform tend to fall into one of two groups: US employers, on the one hand, who are looking to increase the size and/or quality of the pool of potential employees they’re choosing from; and illegal immigrants, on the other hand, along with their families and friends, who want to stop living in the shadows. Neither group has much incentive to support an immigrant-entrepreneur visa. But let’s hope we manage to get one somehow, anyway.

Restaurants are the natural home of impulse purchases. Would you like a third bottle of that wine? Would you like to see the dessert menu? What the hell, why not. All you need to do is say the word, and it all just appears, fresh and delectable for your consumption, before you’ve so much as paid a penny. Eventually, of course, the bill comes — essentially, it’s an invoice listing everything that you’ve already consumed. Then you pay that invoice, and leave.

This is a very sensible way for restaurants to operate. They don’t all work that way: at fast-food joints, for instance, or coffee shops, you tend to pay for what you’re consuming before you consume it. At that point, if you want more, you have to pay again. Which is just one reason why you rarely see people doing that. But generally, the extra amount that people order before the bill arrives more than makes up for the fact that some tiny percentage of them might try to dine-and-dash. Paying is never very pleasant, and if you force people to do it before they’re get what they want, that’s going to reduce both the number of people who buy things and the number of things that they buy.

When we order food in a restaurant, we know that we’re going to be paying for it, literally, in the future — but thanks in part to hyperbolic discounting, even pushing the moment of truth back half an hour or so makes us more prone to running up a tab right now. Similarly, we spend more on credit cards than we do on debit cards: it’s always easier to spend money in the future than it is to spend money in the present.

Online merchants, especially ones who have a lot of mobile shoppers, face a similar problem to restaurants. They want to encourage impulse purchases, but it’s hard to make an impulse purchase when you’re laboriously typing in your name and address and credit card number. The ideal solution would be for would-be purchasers to be able to just press a button, and presto, the item is ordered: the buyer can worry about exactly how to pay for it tomorrow.

That’s the promise behind Klarna, in Europe, and Affirm, which launched today. You click a button, and the item is ordered and on its way to you; the merchant is actually paid by Klarna or Affirm, and not by the purchaser. It then becomes the job of the intermediary — Klarna, or Affirm — to invoice the buyer and chase down the payment, long after the actual purchase has been made.

The two companies work on slightly different models. Klarna uses credit: it’s essentially lending money to the purchaser, and charging interest. Affirm, by contrast, charges the merchant, rather than the customer. Merchants already pay an interchange fee so that they can accept credit cards as payment; paying a similar fee to Affirm will surely be worth it, if they can convert a greater percentage of shopping carts into actual purchases. Also, Affirm seems to be a lot more mobile-native than Klarna.

At heart, however, the two shops are selling much the same product: a way of making online shopping as painless as possible, with payment pushed off until tomorrow. It’s a pretty good idea. But what’s interesting to me is the way that Affirm founder Max Levchin is touting Affirm’s know-your-customer algorithms: the site will identify who you are using Facebook, pull in lots of other data including your Zip code and your mobile device ID, and use all of that information to predict how likely you are to pay the bill once you receive it.

Levchin’s a big fan of such predictive usage of data:

At PayPal, where I was the CTO, we succeeded because we gained deep understanding of the immense quantities of behavioral data that we captured in processing millions of transactions per day. We learned so much about our customers, that we could predict their intentions, and prevent vast majority of intentional fraud.

This is clever, but it can also be a weakness. The reason why so many fintech startups are aiming at PayPal is that people don’t like PayPal; and the one of the main reasons that people don’t like PayPal is precisely its sophisticated fraud-detection algorithms, which tend to throw up a lot of very annoying false positives.

Obviously, Affirm needs to know who you are, and where to find you, so that it can invoice you for the stuff that you’ve bought online. And if you do end up being rejected when you try paying with the Affirm button, then the worst-case scenario is that you’re just back to the status quo ante, forced to pay with a credit card or similar. Still, people don’t like being instantly profiled as untrustworthy; the problem, of course, is that it’s precisely the untrustworthy people with no intention of paying who are likely to be flocking to Affirm in an attempt to order free stuff.

Affirm is trying to make buying stuff on your phone as easy as two taps, without being sunk by massive coordinated fraud. If it works, merchants will surely love it — and won’t much care about the fees it charges. Also, if it works, it will probably end up being bought by Facebook. Which would only exacerbate the worries that people already have about multi-billion-dollar corporations monetizing their personal data. Buying stuff online might become a lot easier. But there’s bound to be a privacy cost, somewhere.

Remember the force-placed insurance scandal, which first came to light back in 2010? Well, despite being addressed in Dodd-Frank, the problem is still there: loan servicers are buying massively overpriced home insurance on behalf of homeowners, and getting enormous kickbacks from the insurers — if they don’t own the insurers themselves. The victims, here, are usually the investors who own the mortgages in question — which means that the biggest victims of all are Fannie Mae and Freddie Mac.

Fannie alone has seen its hazard insurance costs rise from around $25 million a year before the financial crisis to $631 million in 2012. That’s real money, and so Fannie came up with a plan to save hundreds of millions of dollars. Rather than paying through the nose for the most expensive insurance the servicers could find, Fannie decided to buy the insurance itself.

Fannie ran this idea past its regulator, FHFA, on February 17, 2012, reports Jeff Horwitz in another one of his fantastic articles on this issue today. Back then, the FHFA had no objections. So Fannie put out an RFP, asking 12 insurers for their ideas. The results can be seen here: the winner was a proposal from Overby-Seawell Company, which proposed a system anybody could join.

OSC excelled at program design, Fannie concluded. It had also pulled off a coup by partnering with Zurich Insurance, a Swiss reinsurer with a $400 billion balance sheet, a superior A+ rating from insurance rating company AM Best and historical experience in the force-placed market.

Zurich stood ready to take on all of Fannie’s business if necessary, but under OSC’s model any qualified insurer could take a piece of the GSE’s business by joining a consortium of carriers willing to divide Fannie’s risk. Among the proposal’s attractions were “market driven pricing,” and “one entity fully accountable to Fannie Mae and servicers,” Fannie documents state.

Fannie put thought into preventing excessive market disruption as well, the documents show. Incumbent insurers willing to match Zurich’s prices would be permitted to retain existing business. If they didn’t, banks could still hire them to administer force-placed programs. Insurers were also welcome to join the Zurich consortium.

Fannie showed OSC’s proposal to the FHFA on May 9, and again faced no objections. The “final project recommendations” were then run by the regulator on September 28, as well as on follow-up calls on October 12 and October 22. Everything was in place: the only thing left was formal FHFA approval.

Which never arrived.

Instead, faced with lobbying from the American Bankers Association and others, the FHFA vetoed the whole plan on February 8; once the news was made public, shares in the largest force-placed insurer, Assurant, immediately surged. At this point, Fannie’s plan seems to be definitively dead — replaced with a group of committees whose objective isn’t obvious and which have every incentive to drag things out.

The result is that Fannie has seen at least $150 million of savings evaporate — and homeowners are going to wind up overpaying even more, for insurance their servicers have chosen for them.

So, what does the FHFA think it’s playing at, here? It’s not exactly being forthcoming on the subject: a spokeswoman said only that “FHFA will work with Fannie Mae, Freddie Mac and key stakeholders… to address issues associated with force placed insurance,” although the FHFA’s Meg Burns has said that the regulator has no timeframe and no particular idea what approach it’s going to take on these issues.

I’ve heard of regulators being captured by the organizations they’re supposed to be regulating — that happens all too frequently. But the situation at the FHFA seems to be even worse: it looks as though it has been captured by the banks which are extracting rents from the regulated organizations.

Indeed, it’s hard to think of a single good reason why the FHFA should exist at all. By all means regulate Fannie and Freddie — but give that job to the same regulators who are in charge of overseeing all the other major financial institutions in the country. The FHFA has been useless and obstructive pretty much from day one, and this latest decision only serves to underscore how counterproductive it’s being. If the Obama administration can’t get rid of its head, Ed DeMarco, maybe it should just abolish the entire thing.

Following a recommendation from Bond Girl on Twitter, I spent a 95-minute chunk of Saturday night on YouTube, watching the first of five Leonard Susskind lectures on cosmology and very much looking forward to the rest. By coincidence, it’s targeted pretty much at exactly my level: you need a decent grounding in Newtonian mechanics and basic calculus, but nothing too sophisticated.

It turns out there are a lot of people like Bond Girl and me out there: a slightly different version of the same lecture already has well over 200,000 views on YouTube. Give people the opportunity to learn interesting material by watching lectures by the best professors in the world, and it turns out they’ll do just that. This is fantastic for the Stanford brand: it gets it out into the world in the best possible way, and will surely, at the margin, drive up demand in terms of the number of people wanting to attend the university. And it’s also fantastic for the hundreds of thousands of people who are learning new and fascinating things by watching these lectures.

The free YouTube content can be considered to be an extra column on the far left side of this chart, which Barry Nolan put together after watching a Fred Wilson video:

YouTube is even more democratic than MOOCs: there’s basically no structure at all, you can drop in and drop out as you please, and the yield is effectively zero, since no one ever “graduates” with any kind of credential from watching videos online. It’s 100% education, 0% credentialing.

This is an important point: even if 99% of the people who enroll in MOOCs never graduate, that doesn’t mean they never learned anything along the way. What you get when you move from left to right, in this chart, is an increase in structure: some kind of organized, disciplined way of getting a group of people to basically experience the same thing at the same time. It’s not so much that the content gets better (although it might); it’s more that the formal architecture surrounding the content becomes increasingly elaborate and expensive.

This phenomenon is not confined to education, of course. Think about the Metropolitan Opera. There’s the real deal, on the far right, where you pay hundreds of dollars for a ticket, sit in a darkened hall with a few thousand other opera-goers, and experience a full-on live performance. Then, one step over to the left, you have the Live in HD performances — you spend a couple of dozen dollars, sit in a darkened cinema with many others, and experience the performance on screen, over an excellent sound system. It’s not exactly the same experience, of course, but in some ways it’s better, especially when compared to the view from the cheaper seats at the Met. Take another step to the left, and you have the storied Metropolitan Opera radio broadcasts — they’re still live, but you lose the visuals, and the physical architecture of the opera house or cinema.

If you’re willing to break the operas up into tiny chunks, you can head over to the Met’s YouTube channel, which has over 1.5 million views already, and allows people to dip in and out at their pleasure — just like they can fire up a DVD they’ve bought or rented, watching it at home. (Netflix, sadly, doesn’t have a lot of opera available for streaming yet, although it does have Zeffirelli’s much-disliked Otello.)

Fred Wilson’s advice to Wharton, then, is basically to be more like the Met: take what you do, and put it out there with varying degrees of structure and architecture, at various price points from $0 to $133,600. The more discoverable you are, the richer your brand will become — and, just like TED discovered when it started putting its talks online for free, the more you give such things away, the more demand there is for the very expensive live product.

In education, the worry isn’t really about the future of schools like Stanford and Wharton, but rather about the future of smaller universities: could their full-price offerings be pushed out of the market by the cheaper versions from elite colleges? It’s possible, but it hasn’t happened yet, and it might not happen at all. After all, my intuition is that people are more likely to want to go see a performance at their local opera house after seeing a Live in HD performance from the Met. And the more Leonard Susskind lectures you watch online, the more you might want to take a proper course at your local college.

It seems to me that the rise of what you might call these “diffusion lines” is the rise of a brand-new marketing platform for the asset class as a whole, be it education or opera or anything else. Up until now, it’s been hard to get many people interested in opera, because the barriers are so high, and because most of us need a bit of structure in order to be able to sit through it and appreciate it. (I love going to see live opera, for instance, but never listen to it on the stereo at home, because I’ll end up getting distracted almost immediately.) Similarly, the arguments for going to college tend to center on the value of the credential, rather than the inherent value of the education itself. Once we bring first-rate educational experiences to everybody, then the proportion of those people who want to go to college can only go up. And that, in turn, will be great for everybody, and for the economy as a whole.

There’s a very simple and cost-free thing that all news organizations can do to make their news better: every time you write about a court filing or judgment, link to it. (And, ideally, make sure it’s been uploaded to Recap, too.) For instance, consider Patricia Cohen’s NYT article about David Mirvish’s lawsuit against the Knoedler gallery. (See what I did there? You’re welcome.)

Cohen’s article is a very interesting view of the lawsuit and its context, but it doesn’t come close to capturing the barminess of the complaint. And because Cohen understands the bigger picture, she actually ends up misrepresenting the suit itself, in which Mirvish is seeking to take possession of two paintings on the grounds that Knoedler, which has now closed, isn’t selling them. Here’s Cohen:

While most of the suits have argued that the paintings Ms. Rosales brought to market were fakes, Mr. Mirvish says his are Modernist masterpieces and that he lost out on millions of dollars in profits when Knoedler failed to sell them.

In reality, Mirvish isn’t suing for “millions of dollars in profits”: he just wants the paintings, is all. Which is pretty aggressive, seeing as how he’s only paid for a 50% share in them.

The case is fascinating because Mirvish was acting as an unabashed speculator in this case: he bought the Pollocks low, knowing that they had dubious provenance, and hoped, with Knoedler’s help, to be able to sell them high and make a tidy profit. Call it provenance arbitrage: Knoedler was a storied and highly-respected gallery, and a painting being represented as genuine Pollock by Knoedler is worth a lot more than a painting being represented as genuine Pollock by a sketchy Long Island dealer by the name of Glafira Rosales.

In the beginning, everything worked out great for both Knoedler and Mirvish, even if Mirvish’s lawyer, Nicholas Gravante, seems to find it incredibly difficult to explain what actually happened. For instance, he writes:

Knoedler purchased the Silver Pollock from Rosales for $950,000 in 2002.

Knoedler paid $475,000 to Rosales from its own funds and contemporaneously sold Mirvish a 50% investment interest in the Silver Pollock for $1.6 million. Thus, the end result of the transaction was that Knoedler held title to the Silver Pollock, and Knoedler recorded a profit of $1.125 million.

This is not easy to understand. On a cashflow basis, if Knoedler buys the painting for $950,000 and then sells a 50% stake in the painting for $1.6 million, then the profit to the gallery is $650,000, not $1.125 million. And on a mark-to-market basis, if the Mirvish deal ratifies a $3.2 million valuation on the painting, then Knoedler has made $650,000 in cash, plus $1.6 million for the value of its own 50% stake, for a total profit of $2.25 million. The only way to get to $1.125 million is to think of the painting in two halves. Knoedler bought both halves for $475,000 apiece, and then sold one of the halves for a profit of $1.125 million, while holding on to the other half for itself.

Now this may or may not be the way that Knoedler thought about the deal; the whole thing is massively complicated by the fact that, as Cohen reports, Gravante also represents Knoedler’s former president, Ann Freedman. Why on earth would Mirvish hire the lawyer who represents the president of the gallery he’s suing?

What’s more, the public version of the lawsuit omits what happened next to the Silver Pollock: Freedman sold it to a London hedge fund manager, Pierre Lagrange, for $17 million, and, according to Cohen, “for four years, the sellers, including Mr. Mirvish, enjoyed the gains from their commercial coup”. Presumably, Mirvish received half of that $17 million, and made a personal profit of $6.9 million; Knoedler also made $6.9 million, plus the $1.125 million it had already made on the Mirvish deal, for a total of $8.025 million.

There is one short paragraph of the lawsuit which has been redacted, which may or may not explain some of what happened after Lagrange declared the painting to be a fake and asked for his money back; it certainly doesn’t seem long enough to explain the whole story. Still, the upshot, at least in Mirvish’s mind, seems to be that Knoedler now possesses the painting; that it’s not attempting to sell the painting; and that if Knoedler isn’t going to try to sell the painting, then Mirvish wants his $1.6 million back.

All of this seems to hinge on a “contract” between Mirvish and Knoedler, under which Mirvish’s payment of $1.6 million was not a once-and-for all purchase of 50% of the painting, but was rather a revocable deal, under which Knoedler had the right to retain the $1.6 million only if it was “marketing and attempting to sell” the painting. Naturally, Mirvish can’t produce a copy of this “contract”. But never mind that: it’s just not fair, what Knoedler did. In probably the most astonishing sentence in the entire complaint, we’re told that

Mirvish’s investment in the Silver Pollock was worthless absent Knoedler’s agreement to market and sell the painting.

Worthless! Remember, here, that Mirvish still believes the Silver Pollock to be a timeless masterpiece. But he, like the White Queen, is clearly one of those people capable of believing six impossible things before breakfast, since he also seems to think that a 50% ownership stake in a significant Pollock painting is worthless — unless, that is, an Upper East Side art gallery is attempting to sell the thing.

Now Mirvish used to be an art dealer in his own right, and I’m sure he never told people buying a painting that their painting would be worthless unless it was consigned for sale somewhere. But for the purposes of this complaint, the money that Mirvish spent on his 50% of the painting amounts to “unjust enrichment” of Knoedler, just because Knoedler (which is no longer operating) isn’t actively trying to sell the thing.

All of which is to say that in this lawsuit, Mirvish has taken the idea of art-as-an-investment to a particularly bonkers extreme. In Mirvish’s world, it seems, artworks have no inherent value, just by dint of being beautiful or genuine or unique. Instead, an artwork is only an investment if it’s being shopped around — if someone’s trying to make a profit on it, by selling it.

Similarly, in Mirvish’s world, if a gallery has a claim to 50% of the value of a painting, but again isn’t actively shopping that painting around, then the gallery’s claim is worthless. That’s basically what Mirvish is saying with respect to the other two Rosales Pollocks he took a 50% stake in.

The deal with these two Pollocks — which are rather hilariously referred to in the complaint as “the Greenish Pollock” and “the Square Pollock” — was slightly different than the deal with the Silver Pollock. The basic facts are similar: Knoedler bought the Greenish Pollock from Rosales for $750,000, and then sold a 50% stake in it to Mirvish for $1.25 million. And after buying the Square Pollock from Rosales for $2.25 million, Knoedler sold a 50% stake in that painting to Mirvish for $2 million.

But these two paintings weren’t split into conceptual halves, in the way that the Silver Pollock was. Instead, a rather complicated arrangement was worked out. Mirvish contracted to buy both paintings in full, outright — but he only paid half of the total purchase price. The other half of the purchase price was lent to Mirvish by Knoedler, in the form of “a non-recourse, non-interest bearing loan”. And just as with the Silver Pollock, Knoedler kept physical possession of the painting, with an eye to flipping it for a profit. Under the terms of the loan, 50% of the sale proceeds would go to Knoedler, and 50% to Mirvish; if all went according to plan, Knoedler’s 50% would be more than enough to pay off the loan and to keep a healthy profit for itself.

This is not easy to follow, but the key word here is “non-recourse”. What it means is that although Knoedler had technically lent Mirvish $3.25 million, Mirvish personally has no legal obligation to ever pay Knoedler that money. If Mirvish ever gets possession of the paintings, then he has title to them already, and never needs to pay the $3.25 million that Knoedler is owed. Economically, the deal is the same as with the Silver Pollock: Mirvish paid a certain amount of money for a 50% economic stake in the artwork, on the understanding that he would receive 50% of the eventual sale proceeds. But legally, at least according to this complaint, Mirvish owns these artworks outright — he has title to both of the paintings in full, rather than just to some kind of 50% investment stake.

In a weird way, the tables are turned, with the Greenish and Square Pollocks: it’s Knoedler, rather than Mirvish, which has the speculative investment interest. And so by the logic of the Silver Pollock, now that the works aren’t being actively shopped any more, Knoedler should be able to retrieve from Mirvish the $3.25 million it lent him, and zero out the whole deal. Except, of course, Mirvish doesn’t see it that way: he has no interest at all in repaying those loans. In fact, he wants to take possession of both paintings without repaying the loans.

Once again, Mirvish conjures up an invisible contract, under which Knoedler was obliged to hand over the paintings to Mirvish if it ever stopped trying to sell the paintings. It’s hard to see why Knoedler would ever enter into such a contract while also being owed $3.25 million in non-recourse loans: after all, the minute it gives Mirvish the paintings, it can basically kiss that $3.25 million goodbye.

Indeed, if there was some kind of implied contract between Mirvish and Knoedler, it was surely that Knoedler would never just hand the paintings over to Mirvish and receive nothing in return for its 50% economic stake in the works. Both parties entered into this deal in a spirit of financial speculation, and both parties thought of themselves as having an equal share in the works. The complaint says that “equity and good conscience require that Knoedler deliver the Greenish Pollock and Square Pollock to Mirvish” — but there’s nothing equitable about that outcome whatsoever, where Mirvish ends up with 100% of the paintings, and Knoedler ends up in the hole to the tune of $3.25 million.

Knoedler is bust, now; it will never reopen. Its liabilities exceed its assets, but among those assets is a 50% economic stake in two Mirvish Pollocks. Those Pollocks are basically unsellable at this point, given their Rosales provenance, and in Mirvish’s eyes, that means the 50% economic stake is worth zero, even though (he says that ) he’s convinced the paintings are genuine.

The whole thing would stink of Mirvish trying to kick Knoedler and Freedman while they’re down — an investor trying to take advantage of their misfortunes by getting 50% of two (alleged) Pollocks for free. Except, that is, for the fact that Mirvish is using Freedman’s lawyer. Which means that the real story is more complicated still.

In any event, this lawsuit is a rare glimpse into a side of the art world which is very rarely seen — a purely mercenary world of co-investments and speculative bets, where stakes in artworks are bought and sold with an eye to making many millions of dollars in profit should a convenient hedge-fund manager turn up brandishing a $17 million check. It’s a world which is deliberately kept very secret from the buyers of the art: if you’re a gallery trying to sell a painting for $17 million, you’re not exactly going to advertise the fact that you bought it for $950,000 just five years earlier. But that’s the thing about the art world: there is literally no limit to how big the mark-ups can get. And it’s a world where the most successful dealers are the ones who can deal in established names like Pollock, and still try to lock in a sale price at a double-digit multiple of what they paid.

Sarah Kliff and Matt Yglesias both have good summaries of Steve Brill’s monster Time article on healthcare costs. Both of them correctly point out that the heart of the piece is about negotiating power: who has it (Medicare); who doesn’t have it (the uninsured); and how the lack of negotiating power on the healthcare-consumer side inevitably leads to sky-high costs.

Yglesias says that the natural conclusion from this is that either Medicare should cover everybody — which would massively increase Medicare costs while massively decreasing overall healthcare costs — or else that rates should be set by the government, even if the bills are paid privately. He also says that Brill “rejects both of these ideas”.

Weirdly, Brill’s rejection of these ideas comes not in his conclusion, but higher up in the piece — a mere 22,000 words in — when he explains that if we reduced the age that people were eligible for Medicare, then that would save a lot of money. He then continues:

If that logic applies to 64-year-olds, then it would seem to apply even more readily to healthier 40-year-olds or 18-year-olds. This is the single-payer approach favored by liberals and used by most developed countries.

Then again, however much hospitals might survive or struggle under that scenario, no doctor could hope for anything approaching the income he or she deserves (and that will make future doctors want to practice) if 100% of their patients yielded anything close to the low rates Medicare pays.

Weirdly, in 24,000 words which include a lot of railing against the large salaries enjoyed by hospital executives, Brill never supports or clarifies this assertion: he never says how much money doctors deserve, how much they actually make, or how high physician salaries would need to be in order to make future doctors want to practice. That last one, in particular, seems very unconvincing to me: the world is full of highly-qualified doctors who would love to be able to practice in the U.S. for much less than the current going rate.

In his conclusion, Brill says — again, without adducing any evidence whatsoever — that “we’ve squeezed the doctors who don’t own their own clinics, don’t work as drug or device consultants or don’t otherwise game a system that is so game able”. It’s a bit weird, the degree to which Brill cares so greatly about keeping doctors’ salaries high: he certainly doesn’t think the same way about teachers.

If the only thing preventing Brill from embracing sensible reform is a worry about doctors’ salaries, then surely the obvious solution is to address doctors’ salaries as part of a broader healthcare-cost reform. Given the path-dependency of such things, my idea — and I’m coming at this from a very naive position, I’m no healthcare wonk — is that we should simply allow insurers to outsource their cost negotiations to Medicare.

For any given medical procedure, Medicare pays the least amount of money, and rich foreigners pay the most, with insurers being somewhere in the middle. Here’s my idea: any healthcare insurer should be allowed to get rid of its cost negotiators, and instead be able to get Medicare to pay for all procedures on its behalf. Medicare would then bill the insurer, which would pay the Medicare-negotiated rate plus a small premium for Medicare’s time and effort, maybe 2% or 3%. (If insurers start defaulting on the amount they owe Medicare, then the premium would have to rise, to cover credit risk.)

The basic idea here is that all Americans should have access to Medicare’s discounted rates — either by being eligible for Medicare, or else by signing up for health insurance with an insurer who allows Medicare to negotiate on its behalf. All of this would be voluntary, of course. If you want your insurance to cover the kind of things that Medicare won’t pay for, then you can do that. But if you think that Medicare-quality coverage is good enough, then you should be able to get it, at only a modest premium to what Medicare itself pays.

Would doctors be paid less, under such as system? Possibly. But that shouldn’t prevent the change from happening, and maybe the government should simply step in to top up doctors’ salaries where necessary. At the very least, I think it’s incumbent upon people like Steve Brill to say exactly how much they think doctors should be paid, and how much is too little. Because of all the problems with U.S. healthcare costs, the problem of underpaid doctors is never likely to be anywhere near the top of the list.

I like index funds, and I believe that the best way to maximize your retirement savings is, simply, to save more money. So I was intrigued to see a press release from Charles Schwab this week, touting its new 401(k) product, which combines index funds with opt-out advice services. The results, according to Schwab, are impressive: investors save 77% on operating expenses, and also tend to put more money into their plans:

Nearly 90 percent of workers in Schwab Index Advantage plans are receiving low-cost, professional, third-party advice to help manage their 401(k) investments. Prior to the transition, only about four percent of these same workers elected to receive advice…

Schwab data shows that employees who have chosen to use independent, professional, point-in-time 401(k) advice services in the past have tended to save twice as much, were better diversified and stuck to their long-term plan, even in the most volatile market environments.

Sounds good! But it really isn’t. The headline of the press release says that “Schwab’s Index-Based 401(k) Offering Cuts Investment Costs by 77%, Delivering on Low-Cost Goal” — but that’s incredibly misleading, precisely because the overwhelming majority of plan participants wind up paying for that “low-cost, professional, third-party advice”.

Here are the numbers: the weighted average operating expense ratio for the new index-fund product is 14.78bp, down from 65.11bp in Schwab’s old actively-managed plans. That’s a handy savings of just over 50bp. But as part of the deal, all the participants in the new plans automatically get enrolled in a plan which gives them something called “independent point-in-time advice”. How much does that advice cost? Turns out, it’s about 45bp. Which means that far from seeing their expenses fall by 50bp, the new savers are actually only saving about 5bp, all-in. (Under the old system, the advice came free, although it did so on an opt-in basis rather than an opt-out basis.)

Still, it might be worth paying 45bp for advice, if doing so led plan participants to double the amount they are saving. The problem is, there’s no real evidence that it does. The “Schwab data” cited here is based not on the activity of people in Schwab’s new index-fund plan, but rather on the activity of people who took advantage of the old, opt-in plan. And it’s well worth parsing the exact wording of the results of that study:

Approximately 70% of participants that receive and implement 401(k) advice make a change to their deferral rates, and those savings rates nearly double on average as a result, jumping from approximately 5% to 10% of pay.

To recap: when given the opportunity to opt in to advice-giving services, even when they’re free, only a tiny minority of plan participants — about 4% — actually did so. It’s reasonable to assume that most of that 4% of people were thinking about significantly increasing the amount they save, and wanted advice on how best to do that. Now Schwab doesn’t tell us how many people received advice but didn’t ultimately end up implementing it. It does say that of the people who both received and implemented advice, 70% changed their deferral rates. And within that 70%, deferral rates roughly doubled. But at a maximum, we’re still only talking about 70% of 4%, here, which is a by-definition highly unrepresentative 2.8% of participants.

In other words, Schwab has given us no evidence at all that the people enrolled in its new index-based 401(k) plan are saving more money as a result of paying 45bp a year for advice. I’m sure that a small minority of people who want to save more will ask for advice on how to do so — but that doesn’t mean that the advice causes them to save more. Indeed, the causality probably runs exactly in the opposite direction.

It seems to me that Schwab is looking a bit desperate here. It used to be able to make lots of money by charging high amounts for its 401(k) plans, but now that everybody understands the superiority of index funds, Schwab is being forced to offer its own index-based service. Obviously, the only way to sell such a service is to talk about how much participants will save on fees. But Schwab doesn’t want lower fees, it wants higher fees. So while removing management fees with one hand, it simultaneously inserts huge new advice fees with the other — and the advice fees probably have even bigger margins than the management fees did.

What’s more, Schwab’s messaging around this product has always been less than fully honest. Here’s the launch press release:

“Fund operating expenses for index mutual funds and ETFs are typically lower than those associated with most actively managed mutual funds offered in 401(k) plans today. We believe index funds can provide employees with a better opportunity to accumulate more savings for retirement,” said Steve Anderson, head of retirement plan services at Charles Schwab. “Through such low-cost investments, fund operating expenses could be cut significantly. For the average worker in a 401(k) plan, that can mean nearly $115,000 more at retirement.”

The irony here is deeply hidden: in order to end up with $115,000 more at retirement, you would have to opt out of the advice plan that the Schwab index-fund offering automatically enrolls you into. But actually, “the average worker in a 401(k) plan” is never going to wind up with an extra $115,000 at retirement just by switching to index funds.

If you look at the assumptions behind that $115,000 figure, you’ll find that our “average worker” is, in fact, very far from average. For one thing, she starts saving money at age 25, when she’s already earning $50,000 per year. That’s pretty much the median income for a US household, within just a couple of years of entering the workforce. Well done, that person! She then gets a 3% raise every year for the next 30 years — and once she’s in her 30s, she manages to sock away a full 10% of her income into her 401(k) account every year until retirement. Oh, and she managed to save 66bp by switching to index funds: that’s significantly larger than the real-world 50bp that we saw with the Schwab participants. And all the while her investments are growing by 7.5% per year, even when she’s near retirement and ought by rights to have switched largely to bonds.

But all of these assumptions are deeply buried and hard to find. As far as Schwab is concerned, the main thing to do is to come up with a large headline figure, something which will make it easier to sell the new index-fund retirement service to the less-sophisticated end of the HR spectrum. Schwab is pretty well positioned in this market: it’s known mainly as a discount broker, which means that the brand comes with connotations of low fees and low margins. But if you want to sign your employees up for an index-based 401(k) plan, which is a good idea, then the Schwab plan is not the right way to go, since it’s quite possibly the highest-fee index-fund plan out there, once all those advice fees are taken into consideration.

I work for an enormous company with a very financially-literate HR department; they’re not going to fall for this kind of pitch. But we shouldn’t live in a world where every medium-sized company needs to have people who can navigate the hard sell from people like Schwab offering fabulous new 401(k) plans. Right now, it’s incredibly difficult and time-consuming to choose between them, and it’s easy to see why plan administrators might easily just plump for a known name like Schwab. There really should be some reliable and impartial resource for those administrators. But I’m not holding my breath.