Opinion

Felix Salmon

Puerto Rico needs to prepare for its default

Felix Salmon
Feb 5, 2014 23:40 UTC

Ryan McCarthy has a good round-up of Puerto Rico’s debt problems, which have now been exacerbated by S&P downgrading the island’s bonds to junk status. (Moody’s and Fitch are certain to do so as well, in short order.) For a good one-stop overview of most of the big issues, I can recommend Nuveen Asset Management’s note, which includes this chart:

Screen Shot 2014-02-05 at 5.21.10 PM.png

What you’re seeing here is a vicious cycle: as debt problems pile up, economic activity decreases, which causes even bigger debt problems, even lower economic activity, and so on. Puerto Rico is now shrinking at a 6% annual pace, and that number is probably going to get worse before it gets better. The chances of the island’s economy actually growing at any point in the foreseeable future seem remote: indeed, the country has essentially been in one long and nasty continuous recession since 2006.

Puerto Rico has $70 billion in debt outstanding, all of it needing to be repaid with interest — and the simple fact is that there’s no way it’s going to be able to do that, if its economy continues to shrink and its most talented nationals continue to decamp for the mainland, where their prospects are much brighter. Labor mobility from Puerto Rico to the rest of the US, and particularly to Florida, has never been higher, while most of the migration in the other direction comes in the form of retirees, who are not exactly going to kick-start the economy. In fact, in terms of the labor force participation rate, they’re just going to make matters worse, on an island where only 1.2 million of the 3.4 million inhabitants are employed.

In many ways, Puerto Rico is similar to those other tourist destinations, Portugal and Greece — it’s highly indebted; it’s not particularly well educated (only half of Puerto Ricans over 25 have graduated from high school, and only a quarter of high-school graduates go on to get a bachelor’s degree); and it is hobbled by being unable to devalue its currency.

All of this is a clear recipe for default: if Puerto Rico can’t repay that $70 billion in debt, then it won’t. The only alternative is a bailout — but as Martin Sullivan explains, the US government has already extended a back-door tax-code bailout worth some $2 billion per year, and even that is both insufficient and constitutionally dubious. A more explicit bailout is not going to happen — not when Detroit is being left to deal with the ravages of bankruptcy on its own.

The good news is that the increasingly-inevitable default is not hugely harmful in itself. It’s not fully priced in: the funds owning Puerto Rican debt are going to take more losses, if they don’t sell now. And the insurers who have wrapped some $15 billion in Puerto Rican debt are going to have to get used to making a lot of coupon payments for quite a long time. But that’s their job. This is the way debt markets should work: if you lend money at high rates of interest to someone who can’t pay it back, then you have to understand there’s a pretty good probability of default.

The default will be messy, however, since there’s no chapter of the US bankruptcy code which encompasses Puerto Rico. A lot of different court cases will be held in a passel of different jurisdictions, and a lot of lawyers will get rich. In the end, everybody is going to have to take a nasty hit — including the island’s retirees, whose pension fund is woefully underfunded. From a legal perspective, there will be some fascinating arguments about sovereign immunity, and whether (and how) bondholders can attempt to enforce their contractual rights, absent any kind of overarching bankruptcy regime. In the end, restructuring terms could end up simply being dictated by Congress.

Still, the important thing is not the process, it’s the final outcome. If Puerto Rico manages to emerge from default freed of its massive debt burden, it will finally have a chance to start growing again. If it doesn’t, it won’t. The problem is that there’s no easy way of herding the bondholders and bond insurers, all of whom are going to want to maximize their financial recovery, thereby making Puerto Rico’s real recovery that much more difficult.

My advice to the Puerto Rican government, then, is this: start having quiet conversations in Washington about a piece of legislation which would give the island the legal freedom and ability to restructure its debts in a clean, one-and-done manner. Such a law would not be a bailout: it would involve no money flowing from DC to PR. But it would allow Puerto Rico to default on its debt and come out the other side, without the risk of years of legal chaos. While bondholders would squeal, at least they would get certainty. And Puerto Rico would get something much more valuable still — an opportunity to finally drag itself out of its horrible recession.

COMMENT

Also: PR will prioritize its voters’ pensions over Yankee bondholders who don’t vote.

Posted by nixonfan | Report as abusive

The realistic and the optimal ways to overhaul energy taxes

Felix Salmon
Feb 4, 2014 16:15 UTC

Back in December, Max Baucus, the chairman of the Senate Finance Committee, came out with a pretty bold proposal to simplify America’s energy taxes, and to focus them on a simple goal: that the US should emit less carbon. That should be a pretty easy thing to do, in theory: you just raise taxes on the more carbon-intensive energy sources, while not raising them, or even cutting them, on sustainable energy sources. Except that’s not the way the US tax code works. America, it turns out, doesn’t really tax energy at all: instead, it subsidizes energy. And the amounts of money involved are very large:

Under current law, there are 42 different energy tax incentives, including more than a dozen preferences for fossil fuels, ten different incentives for renewable fuels and alternative vehicles, and six different credits for clean electricity. Of the 42 different energy incentives, 25 are temporary and expire every year or two, and the credits for clean electricity alone have been adjusted 14 times since 1978 – an average of every two and a half years. If Congress continues to extend current incentives, they will cost nearly $150 billion over 10 years.

As a result, Baucus can’t simply tweak energy taxes; instead, he has to tweak energy subsidies. His proposal is a good one: he essentially consolidates all those 42 existing subsidies into two new ones — one for electricity, and one for transportation fuel. In both cases, tax credits get handed out in direct proportion to how clean the facility is. Once carbon emissions have reached 75% of their current level, the subsidy phases out.

Charles Komanoff, of the Carbon Tax Center, responded to Baucus’s discussion draft last month, in testimony to his committee. Komanoff’s paper is conceptually simple: he asks what the outcome would be if instead of subsidizing clean energy, the government decided to go ahead and tax carbon emissions directly.

The first big difference, of course, would be fiscal. Komanoff takes 2024 as his base year, and reckons that under the Baucus plan, the government subsidies will cost taxpayers some $39 billion in per year, in ten years’ time. A carbon tax set at roughly the same level, on the other hand, would generate a whopping $450 billion per year in fresh government revenues. That’s enough money to make the system progressive, rather than regressive: checks could be sent out to lower- and middle-class households to cover any extra expenses they suffered as a result of the carbon tax. The Baucus proposal, by contrast, is regressive: most of the benefits would end up flowing to the highest-income households with the highest energy use.

The other big difference is in carbon emissions. Here’s Komanoff’s chart:

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A carbon tax, by its nature, affects everything: it’s applied equally to every sector of the economy, and encourages energy conservation (turning your thermostat up a little in the summer, for instance) just as much as it encourages cleaner energy creation. Komanoff’s model assumes a carbon tax which changes exactly as the Baucus subsidies do. Baucus’s tax credits work out at about $55 per ton for eliminated electricity-related carbon, and $102 per ton for eliminated carbon in the transportation sector. Komanoff’s carbon tax is set at just those levels for those industries, and at the average of the two everywhere else; overall it works out at a high $78 per ton. (Which serves to demonstrate how generous the Baucus proposal is.)

The problem is that there’s no easy way to get there from here. Fiscal policy is path-dependent, and Baucus knows full well that it’s hard enough to take one group of subsidies and replace them with two new subsidies which go to the same industries and cost roughly the same amount of money. In the current Congressional climate, it’s downright impossible to take an existing group of subsidies and replace them with a brand-new tax. Doing that would be wonderful in terms of reducing carbon emissions, but it would generate so many squeals of pain from the energy lobby (not to mention Republicans who hate all new taxes on principle) that it would never even get as far as a vote.

President Obama has said that addressing climate change will be a top priority of his second term — but he said that it would be a top priority of his first term, too, and he did exactly nothing on that front in his first four years. I doubt that Komanoff’s testimony came as any surprise to Baucus: it’s a well known fact in Washington that a carbon tax would be an extremely efficient way of raising much-needed revenues, reducing US carbon emissions, and helping America achieve energy independence. But Washington is not a town which tends to embrace efficient or logical solutions. If we’re going to reduce carbon emissions any time soon, we have a much higher chance of doing so with carrots than we do with sticks. Even when the sticks are much more effective.

COMMENT

“America, it turns out, doesn’t really tax energy at all: instead, it subsidizes energy.”

On net dollar terms this statement is clearly false. We subsidize the generation of energy via solar, wind, and the transformation of energy via ethanol. The subsidizes offered to these favored power sources are dwarfed by the taxes paid by fossil energy producers and consumers.

Europe offers the carbon lite sources even more generous breaks while on net taxing energy even more heavily than we do in the states… hard to see what they get for their money aside from crushing electric bills and $7-8/gallon gas… god bless them for getting the ball rolling though.

5 of the 7 billion people alive on this planet owe their very existence to the fossil fuel industry… THAT is the real inconvenient truth.

p.s. to BenE… those new CAFE standards are a paper tiger… they are back end loaded and when congress wises up to the fact that they cannot be met they will just be torn up like the renewal motor fuels mandates are being as we speak.

Posted by y2kurtus | Report as abusive

Why the Post Office needs to compete with banks

Felix Salmon
Feb 3, 2014 23:32 UTC

Back in 2011, I said that “the only way to save the Post Office will be to allow it to move into financial services”, seeing as how “banks in the US are mistrusted and disliked and many people would love to be able to just bank at the Post Office instead”.

That’s still true, and has been given a lot more salience since the Post’s Office inspector general released a 33-page white paper, last week, saying that the Post Office should move into what it calls, in its headline, “Non-Bank Financial Services for the Underserved”.

The report has been warmly greeted by Elizabeth Warren, on its own terms:

If the Postal Service offered basic banking services — nothing fancy, just basic bill paying, check cashing and small dollar loans — then it could provide affordable financial services for underserved families, and, at the same time, shore up its own financial footing.

Warren also, however, praises David Dayen’s article about the white paper, which has an unambiguous headline: “The Post Office Should Just Become a Bank”. And Adam Levitin, who used to be Warren’s co-blogger at Credit Slips, also uses the paper to push the idea of postal banking.

So let’s be clear: there’s a very important difference between postal banking, on the one hand, and what the inspector general is proposing, on the other. And while postal banking is a good idea, the non-bank proposal from the inspector general is simply not going to fly.

Indeed, it’s rather worrying and disconcerting — not to mention disingenuous — that the inspector general goes out of its way to say that the Post Office should be a non-bank, rather than a bank:

The Postal Service is well positioned to provide non-bank financial services to those whose needs are not being met by the traditional financial sector. It could accomplish this largely by partnering with banks, who also could lend expertise as the Postal Service structures new offerings. The Office of Inspector General is not suggesting that the Postal Service become a bank or openly compete with banks. To the contrary, we are suggesting that the Postal Service could greatly complement banks’ offerings.

This is a bit weird, since the centerpiece of the inspector general’s proposal, the Postal Card, seems to do nearly all of the things that a bank account does:

 

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The inspector general, it seems, wants the Post Office to partner with a real bank, which would ensure that the funds on the Postal Card were FDIC insured: such a setup would be similar to the way in which Simple (which is technically a non-bank) partners with Bancorp for such things. But this is nit-picking, really: Simple explicitly sells itself as a bank replacement, and the Postal Card does pretty much everything that Simple does, plus — crucially — loans. (Which are the one big banking service Simple doesn’t offer right now.)

The inspector general — along with Elizabeth Warren — is at great pains to point out how useful the Postal Card would be to the “underserved” — that is, the millions of Americans without bank accounts. And they’re absolutely right about that: 38% of post offices are in ZIP codes with zero bank branches, and so such a card would bring banking services to lots of people who have no easy access to them right now.

But if the Postal Card is as attractive as the inspector general paints it, then why shouldn’t it also appeal to people who do have bank accounts? After all, the white paper explicitly says that the Post Office should offer “a diverse suite of financial services”: this is a much broader proposal than the basic savings account, capped at $2,500, which the Post Office offered between 1911 and 1967. And while it might well make sense to farm out back-end services to a bank rather than making the Post Office a bank itself, the fact remains that the Post Office would still be competing with banks. (Which explains why the banks are so opposed to the idea.)

If the Post Office was hobbled so that it would compete only with payday lenders and not with banks, then the whole Inspector General plan is, I’m sad to say, a non-starter — for exactly the same reasons why the Church of England can’t play a similar role in the UK. Non-banks compete on convenience, not on cost, and tend to be open very long hours; while the Post Office has the advantage that a lot of the underserved go there anyway, it’s still going to have real difficulty competing with Western Union, check-cashing stores, and all the other high-cost non-bank financial-services shops which do exist in the ZIP codes without banks.

In order to make a postal bank work, it needs to be a postal bank: it has to be able to take market share away from existing banks. That in turn means that the existing banks will fight tooth and nail to prevent such a thing from ever seeing the light of day.

The charitable view of the Inspector General’s report is that it’s essentially pushing a Trojan horse: that it will try to set the Post Office as a “non-bank”, on the grounds that doing so will help the underserved and not really compete with banks. That’s the only way Congress would ever allow such a thing to happen. But once the Postal Card is up and running, nothing’s going to stop the Post Office from competing directly with every bank in the country.

But if the Post Office is hobbled from day one in such a way as to prevent it from competing with banks, then the Inspector General’s idea is never going to work.

COMMENT

By the same token, the Postal Service should have been at the vanguard of email (specifically), but in providing Internet services as a ‘common good’.

Who wouldn’t have paid…say…$5/month for Internet access back in the mid-90s? And every post office could have been a digital hub.

C’est la vie.

Posted by josfrick71 | Report as abusive

Viral math

Felix Salmon
Feb 2, 2014 15:23 UTC

This chart, from Newswhip via Derek Thompson, has been doing the rounds, and causing a bit of debate:

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The question: What on earth is Upworthy doing so right? How is it that Upworthy’s articles shared a good order of magnitude more often than anybody else’s?

Part of the answer is that Upworthy simply doesn’t publish that many articles overall — a couple of hundred a month, each one carefully and laboriously optimized, through extensive A/B testing, to be as socially infectious as possible. But that doesn’t fully explain how Upworthy’s articles can be so much more viral. For that, Upworthy needs the help — either on purpose or inadvertent — of Facebook.

Facebook is the monster in the publishing room: a traffic firehose which can be turned on or off at Mark Zuckerberg’s whim. Right now, it’s turned on, and while a lot of sites are feeling the love none is doing so more than Upworthy. (Except, maybe, ViralNova.) So, how does Facebook give Upworthy such a big boost?

Let’s start with the basic mathematics of virality. Start with an article, any article; let’s stipulate that it gets 1,000 pageviews, naturally, just by dint of being published on a certain website. Now, let’s say that 1% of that article’s readers decide to share it with their friends, and that each reader has 100 friends. That means 10 people sharing, and 1,000 new people seeing the link. How many of those people will click the link? Let’s say it’s 10%. Which means that the article gets a boost of 100 new pageviews. Those extra pageviews cause their own viral loop, which generates an extra 10 pageviews, and that’s where the cycle pretty much peters out. Thanks to sharing, the article has been viewed 110 times, over and above the original 1,000 pageviews.

This requires a formula. Call the basic strength of the website PP, for publisher power: that’s the number of pageviews you can expect to get when you publish an article on your website. You then multiply that by S, or shareability: the likelihood that a reader will share your article on Facebook. That in turn gets multiplied by F, or the number of friends per reader, and then by C, which is the clickbaitiness of the headline.

The key number here is S·F·C, or shareability times friends times clickbaitiness. In our model, that’s 0.01 * 100 * 0.1 = 10%. If you increase any of those numbers — if you make people more likely to share your article, or more likely to click on the headline — then you’re going to increase the virality of the piece. For instance, if you double the proportion of people sharing the article and also double the probability that someone is going to click on the headline after seeing it, then S·F·C becomes 0.02 * 100 * 0.2 = 40%. If you start with 1,000 pageviews, then you’ll get another 400 viral views which in turn will generate another 160, and so on: your viral boost goes up from 110 views to 660 views.

You can see that a relatively small tweak to the variables in the S·F·C formula can make a very big difference to your total pageviews. Pretty soon you can double your initial pageviews, or treble them — and, then, when S·F·C exceeds 1, you achieve escape velocity: your article just keeps getting shared more and more and more. Getting S·F·C > 1, then, is the goal of all would-be viral content, and it’s by no means impossible: if 5% of an article’s readers share it, and those readers have 200 friends each, and 25% of people who see the headline click on it — well in that case, S·F·C is a whopping 2.5, or 250%.

At those levels, it almost doesn’t matter what PP is — how many pageviews you seed your article with before it goes viral. PP still matters, however — which is why so many viral sites have pop-up boxes which try to harvest your email address. It turns out that emailing lots of people with links to new content is a great way to start the ball rolling.

But there’s a fly in the ointment, here — something which makes achieving escape velocity much more difficult. Let’s call it FBT, for Facebook Throttle. If you share an article on Facebook, and you have 100 friends on Facebook, that does not mean that your 100 friends are all going to see that article in their newsfeed. Far from it. After you click “share”, Facebook then decides whether the article you just shared is going to appear in your friends’ feeds or not. (This is a very big difference between Facebook and Twitter, which shows you everything your friends are sharing.)

As a result, the important formula isn’t S·F·C; rather it’s S·F·FBT·C, where FBT is the probability that the article you’re sharing is going to actually appear in your friends’ feeds. In recent months, Facebook has been taking its foot off the throttle quite dramatically — but no one knows how long that’s going to last.

Which brings me to Upworthy. We know that Upworthy spends a lot of time optimizing for maximum S and maximum C. It more or less invented the “curiosity gap” headilne, for instance, which turns out to be a great way to boost C. In other words, Upworthy is maximizing the variables under its own control.

What’s less well understood is that there seems to be a direct correlation between C and FBT. While Facebook controls its own throttle, it does so in response to user behavior: it wants to show its users more of what they want to see, and less of what they don’t want to see. And it’s easy to tell what Facebook’s users want to see: just look at what they’re clicking on. As a result, there’s a direct feedback loop between C and FBT: the higher your clickbaitiness (C), the less that Facebook will throttle you, and the more likely that your articles will be seen by your readers’ friends.

To put it another way: at the moment, Facebook assumes that people click on exactly the material that they want to click on, and that if it serves up a lot of clickbaity curiosity-gap headlines, then it’s giving its users what they want. Whereas in reality, those headlines are annoying. Curiosity-gap headlines are a bit like German sentences: you don’t know what they mean until you get to the end, which means that the only way to find out what your friend is saying is to click on the headline and serve up another pageview to Upworthy. (Or ViralNova, or Distractify, or whomever.) It’s basically a way of hacking real-world friendships for profit, and there’s no way Facebook is going to allow it to continue indefinitely.

All of which is to say that the massive advantage which Upworthy has, as seen in the chart at the top of this post, is certain to go away. It’s a temporary phenomenon, a function of the fact that Upworthy is better than anybody else at turbocharging virality by using artificially-optimized curiosity-gap headlines as a way of sending a (false) message to Facebook that those headlines are the stories its users really want to read. Upworthy’s formula will work until it doesn’t. Which is why I think that Dennis Mortenson is going to win his bet against James Gross.

COMMENT

AbeB makes a good point. Computing the average for an extremely skewed distribution is next to worthless.
I just want to point one other thing out… the data is not for Facebook shares! If you read the paragraph before the chart, it clearly says they took the number of Facebook Likes divided by the number of articles published. I don’t know how correlated FB Likes and FB Shares are but I presume them different unless otherwise proven.

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Who’s to blame for the emerging-market crisis?

Felix Salmon
Feb 1, 2014 23:23 UTC

Paul Krugman and Dani Rodrik are out with dueling op-eds (the latter written with Arvind Subramanian) on the subject of the latest bout of financial-market craziness in places like Argentina and Turkey. Both men have been following emerging-market crises for decades; both indeed, are world-class experts on such episodes. What’s more, both economists have a broadly left-liberal worldview: there’s no deep ideological or philosophical rift here. And yet the two seem diametrically opposed.

Here’s Krugman:

Turkey isn’t really the problem; neither are South Africa, Russia, Hungary, India, and whoever else is getting hit right now. The real problem is that the world’s wealthy economies — the United States, the euro area, and smaller players, too — have failed to deal with their own underlying weaknesses.

And here’s Rodrik:

Emerging markets aren’t hapless and undeserved victims; for the most part they are simply reaping what they sowed…

The fact is that the emerging economies’ troubles are domestically generated problems and not the fault of foreigners. The complaint of emerging-market countries seems a classic case of blaming outsiders for choices and actions that have been predominantly domestic.

Take a step back, and you’ll find a certain amount of agreement: both Krugman and Rodrik would accept that a large part of the story here is that the Fed’s QE program caused enormous amounts of cash to flow into the world’s emerging markets, thereby helping to inflate the markets which are currently crashing. What goes down must have gone up — and it’s easy to see where the inflows came from.

That said, neither Krugman nor Rodrik is blaming the Fed for causing the emerging-market bubble in the first place. The Fed had a (domestic) job to do, and did it; QE was part of that job, and the Fed simply can’t worry too much about potential unintended consequences on the other side of the planet when it’s setting US monetary policy.

The stories being told by both Krugman and Rodrik are consistent, then, with the “taper tantrum” theory of the current emerging-market crisis. Basically, emerging-market economies have become reliant on the constant flow of very cheap dollars being printed by the Fed; now that QE is coming to an end, they’re finding themselves in a real pickle.

Here, however, the two narratives diverge. Krugman, if I’m reading him right, is saying that if only US economic policy had worked better, we would have a much more vibrant economy, throwing off enormous amounts of cash which would more than make up for the taper. Employed Americans, along with fast-growing US companies, would naturally look to invest their money abroad, and the flows to emerging markets would remain healthy, thereby avoiding a crisis. Instead, we have too few employed Americans, we have overly cautious US companies, and the markets have come to the collective (and self-fulfilling) decision that the end of QE will mean the end of substantially all capital flows to emerging markets. The result is a “sudden stop” — and all sudden stops are extremely painful.

Rodrik, on the other hand, says that the current crisis is the emerging markets’ own fault, for opening themselves up to fickle and volatile capital flows in the first place. Worse, whenever these economies run into difficulty, they tend to respond by becoming even more open to international capital flows. This is a story which is bound to end in tears, no matter what the Fed does.

The two narratives aren’t entirely contradictory, but ultimately Rodrik’s is more important, and more correct. Sure, a healthier US economy might well have kept the money flowing to emerging markets for a bit longer. But as Krugman himself demonstrates, sudden stops in emerging markets can happen in any number of US economic environments, and for any number of reasons. The trick to preventing sudden stops isn’t to keep the money flowing: the trick to preventing sudden stops is to not make yourself susceptible to them in the first place. Here’s Rodrik:

Over the last five years in India, every episode of rupee pressure has provoked a relaxation of regulations on foreign inflows, which has rendered the economy vulnerable to the next rupee shock, which, in turn, provokes the next liberalization and so on. In Turkey, policy makers spun a tale of invulnerability to shocks and contagion even as the economy’s growth was driven by a flood of short-term capital inflows. China provides an instructive contrast. China has chosen to insulate itself from foreign capital and has correspondingly been less affected by the vagaries of Fed actions and the fickleness of foreign finance. Chinese policies aren’t blameless, but their economic insulation has afforded them the luxury of being the recipient of complaints rather than the distributor.

With the taper ending, we’re beginning to see markets start to become rather more discerning than they have been in recent years. No longer will money simply flow to anything and everything, be it gold or Turkish lira; instead, we’re beginning to see the return of volatility. Sometimes, as in the case of this week’s Facebook earnings report, that volatility is welcome. And sometimes, as we’re seeing in emerging markets, it isn’t — especially when the volatility looks as though it’s more a self-fulfilling caprice than a rational reaction to economic fundamentals.

Still, as Rodrik knows better than anybody, Turkey has real political and economic problems of its own: you don’t need to look to the Fed to find reasons for the current sell-off. Sometimes, small open economies are the blameless victims of forces outside their own control. This is not one of those times. They knew what they were doing, when they allowed the Fed’s liquidity to flood their economies. One day, the tide was going to start going out. That day has now arrived.

COMMENT

Two morons duking it out without understanding the obvious trigger. A trigger that has been discussed a great deal in the financial media. It is the taper and reduction of cheap Fed liquidity that is pulling money out of these emerging markets. It was predicted this would happen and it is happening. That’s not to say the emerging markets wouldn’t be having problems anyway but we’re seeing concerted chaos in these emerging markets because of the Fed’s QE and zero interest rate policies. Policies that chumps like Krugman support.

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When disruption meets regulation

Felix Salmon
Jan 30, 2014 15:37 UTC


Nick Dunbar has a fantastic post today headlined “Disruptive Business Models, Uber and Plane Crashes”, talking about how “the latest flurry of innovation” is being concentrated in regulated industries. Dunbar concentrates on non-financial companies: his examples are Uber, Airbnb, and a small company called Manx2, which was an airline in much the same way that Uber is a taxi service or Airbnb is a hotel company. Manx2 no longer exists, in the wake of a plane crash which killed two pilots and four passengers.

What Manx2 actually did was sell tickets. For each particular route, Manx2 then contracted with a plane operating company to fly the passengers…

The Spanish regulator that oversaw Flightline had no clue that the crew who had trained and been accredited in sunny Spanish climes were working remotely for Manx2, flying to fogbound Irish airports. And the passengers who bought tickets from Manx2, which the report says was ‘portraying itself as an airline’ had no clue about the risks they were taking by flying in such a plane run by a freelance operator. Reading the report, it’s hard not to get the impression that the virtual airline business model of Manx2 was partly to blame for what happened.

All regulated industries are inefficient: regulation cannot help but add a layer of bureaucracy to any organization, and no one ever hired a compliance officer as a way of boosting productivity. This creates a natural inclination, on the part of entrepreneurial types, to want to disrupt the industry in question. They look at it, they see all that inefficiency, and they know they can produce 90% of the output with 10% of the overhead.

The problem is that from a societal perspective, sometimes 90% — or even 99% — just isn’t good enough. Airlines are a good example: thanks to regulation, they’re incredibly safe. And when a company like Manx2 manages to slip through the regulatory cracks, the consequences can be disastrous.

The anti-Uber lobby is making similar claims about taxicabs: that they’re licensed for a reason, and that Uber’s attempt at doing an end-run around taxicab regulations is going to endanger passengers and other road users. When you get in a cab, you’re placing your life in someone else’s hands, and you really don’t want that person to be a violent criminal, or have a history of nasty traffic accidents. What’s more, the government is generally better at checking on such things than private companies are.

The main reason why local governments mistrust Uber, however, has nothing to do with public safety: it’s simply a fiscal matter. Both hotels and taxis are important revenue sources for municipalities, which is why city governments tend to be unenthusiastic about Airbnb and Uber.

From the point of view of Silicon Valley libertarians, the idea that they’re disrupting a long-established flow of public monies is a feature, not a bug. If you threaten their disruptive business models, you’re threatening their freedom! That’s the message being sent quite explicitly by the mild-mannered Fred Wilson; his west-coast counterparts, like Balaji Srinivasan and Peter Thiel, have a tendency to go even further.

In finance, regulation is very important indeed — if you want to prevent everything from terrorist finance to global financial meltdown, central authorities need to be able to keep tabs on all financial flows. Finance startups generally operate in a lightly-regulated grey area, just because compliance costs tend to be prohibitively high if you want to, say, start a bank. That explains why Simple isn’t a bank; why most microfinance shops don’t accept deposits; why Apple didn’t storm into the payments space years ago; why it’s so difficult for startups to compete with PayPal, which has spent many years and hundreds of millions of dollars on global compliance; and so on and so forth.

And so when states like New York and California try to gently embrace bitcoin, bringing it into the regulatory fold while not stifling it entirely, the result is always going to be a little bit messy. Bitcoin is built on libertarian mistrust of regulations; indeed, much of the enthusiasm surrounding it comes precisely because it is such a powerful and elegant means of circumventing government control.

I can see the argument for lighter regulation of microfinance institutions: if your depositors have just a few dollars in their accounts, you can’t be expected to spend $50 per customer per year on know-your-customer operations. But in the case of bitcoin, the scoundrels have the head start, and the regulators are never going to be able to catch them. As a result, the entire bitcoin edifice is probably going to end up being shut down by the Feds at some point. It might well get replaced by some other cryptocurrency, but in the case of bitcoin, the regulatory arbitrage is already far too advanced. Which means that if the bitcoin economy continues to grow, the world’s financial regulators will eventually have no choice but to kill it.

COMMENT

The manx2 example sounds like a far more basic failing if Dunbar actually knows what he is talking about – which he may not.

The notion of pilots being trained only to fly in certain geographies sounds dramatically off vs. FAA practice, which I thought was similar in other countries. If the pilot and equipment are only qualified for VFR – Visual Flight Rules – then they only fly in VFR conditions, which would mean without fog. Full stop. If pilot and equipment are IFR – Instrument Flight Rules – then they can land based on instruments, and fog shouldn’t matter. It would be very unusual – maybe impossible – for any sort of commercial passenger or large-scale charter to operate VFR in the U.S.

Posted by realist50 | Report as abusive

Digital media goes highbrow

Felix Salmon
Jan 27, 2014 23:35 UTC

‘Tis the season, it seems, for high-minded new media launches. Last week Arianna Huffington unveiled her new website, The World Post, in front of a group of well-fed plutocrats in Davos; this week it’s the turn of Ezra Klein to announce that he’s going to build a new news site under the Vox Media umbrella, and for Pierre Omidyar to release a video outlining his own journalistic ambitions.

In each of these cases, the principles of the sites are pretty much indistinguishable from the principals of the sites. Omidyar is by far the most ambitious: he wants to build a global news organization with multiple brands, deep pockets, fearless journalists, top-notch support services, and even its own technology company. You can see how he could get to $250 million pretty quickly, at that rate. That’s a lot of cash — but it’s still less than a single year’s journalism budget for Bloomberg, Reuters, or the BBC. Omidyar needs to make his money go a long way: he’s building not only an international virtual newsroom (with real physical newsrooms in more than one city) but also an elaborate technology, sales, and even legal infrastructure.

Klein’s venture, while ambitious, is not quite as ambitious as Omidyar’s. Rather than building his own infrastructure, he’s using Jim Bankoff’s, at Vox: that’s surely a good idea for anybody who doesn’t consider himself first and foremost to be a technologist. And rather than trying to be all things to all people, Klein is taking the thing that he’s best at — clear explanatory journalism — and simply extending it into new areas.

Most interestingly, Klein is ditching what he calls “the constraint of newness”. He has been talking about this for many years now, and he’s absolutely right: what most people want to know, when they’re reading about (say) the riots in Kiev, is not some incremental news article about what has changed in the past few hours. And yet that’s generally what they get. Here’s what he wrote back in 2010:

If I edited a major publication — or even a medium-size one — I would begin each major legislative battle by detailing a few of my smartest, clearest writers to create a hyperlinked, fairly comprehensive, summary of the basic legislation. That summary would be updated throughout the process, and it would be linked in every single story written on the topic. As reader questions came in, and points of confusion arose, it would be expanded, so by the end, you’d have a document that was current, comprehensive, navigable and responsive to the questions people actually had about the legislation. Telling people what just happened is undeniably important, but given that most people aren’t following that closely, we in the media need to do a better job of telling people what’s been happening.

Expand that vision beyond just legislation to news more generally, and I think you’ll have a pretty good idea of what Klein’s going to try to build at Vox. It’s an exciting move for Klein, who gets to try to reinvent the way that journalism is done on the internet, and it’s pretty much a no-brainer for Bankoff, who, like Omidyar, has calculated that it’s a lot more efficient to build than it is to buy. Vox Media will have 100% ownership of Klein’s operation, and also gets to turbocharge its growth by allowing Klein to use Vox’s proven technology. As a result, Bankoff’s return on investment could be very substantial indeed.

And then there’s the World Post, which is a joint venture of Huffington Post and something called the Berggruen Institute on Governance. BIG is the main project these days of Nicolas Berggruen, who’s almost a caricature of Davos Man: a billionaire financier, industrialist, philanthropist and all-round schmoozer with an unparalleled rolodex. Berggruen had a byline on the World Post’s lead story, the day the site was launched, and the tone is unmistakeable: “China,” he declares in his opening sentence, “looms larger than ever”. He then continues in this vein for another 2,400 words, concluding boldly:

The next ten years under Xi Jinping will be the ultimate test of whether China’s system of governance ends up on the wrong or right side of history. Either outcome will fundamentally affect the state of our world.

This is Davos bloviation masquerading as journalism, complete with boldface names:

Along with other members of the Berggruen Institute’s 21st Century Council, we had the opportunity to gain a firsthand glimpse into the mindset of China’s new leadership during a rare, wide-ranging discussion with Xi Jinping… We also met with Premier Li Keqiang as well as top generals of the People’s Liberation Army and other ranking officials from National People’s Congress as well as governors and Party secretaries from Zhejiang, Guangdong and Yunnan provinces.

There’s lots, lots more where that came from: similarly vapid articles have already been contributed to the World Post by a host of Davos types such as Bill Gates, Fernando Henrique Cardoso, Yo-Yo Ma, Elon Musk, Larry Summers, Richard Branson, Parag Khanna, and many others. Call it the International Brotherhood of Privilege.

The thing that makes Berggruen so very Davos is not just that he knows all these people, but rather that he only knows these people. If you live your life shuttling from private jet to Four Seasons suite, you end up in an echo chamber where everybody is urbane and friendly and comfortable, and where it seems crazy that big problems can’t get ironed out in a rational manner with the application of a little goodwill and a fair amount of high-minded talk.

That idea is the driving force behind Davos, and it’s also the driving force behind the World Post. If you weren’t invited to Davos, and want exposure to the kind of stuff that’s said on Davos panels, then you should definitely be reading lots of World Post articles. Similarly, if you’re Nicolas Berggruen, and you think that the kind of thing that’s said on Davos panels is incredibly important and deserving of wide distribution, then you’ll set up the World Post with Arianna Huffington, in the hope that a decent chunk of her 95 million global readers will find your stuff and read it.

From Huffington’s perspective, the whole thing is a win-win-win. She gets a bunch of new bigwigs blogging for her site; she gets an entree into Berggruen’s rarefied social circle (and also into his private jet); and she gets a substantial check every year from Berggruen, who will happily pay for HuffPo employees to man the phone banks, ready and willing to take dictation from any plutocrat who wants to share his opinion on the state of the world.

As a business model, the World Post is fascinating: it’s essentially low-priced native advertising for Berggruen. He’s subsidizing the site to the tune of about $850,000 per year; while I’m sure that’s very welcome income for the Huffington Post, it’s also a veritable bargain for a brand wanting to permanently sponsor an entire HuffPo vertical.

In any case, between these three sites, we have a pretty broad range of business models for those who would aspire to the Reithian project of informing the world about what’s important. Any one of them might be considered a random folly, but if all three are happening at once, then we might as well declare a trend. As David Carr says,

With high broadband penetration, the web has become a fully realized consumer medium where pages load in a flash and video plays without stuttering. With those pipes now built, we are in a time very similar to the early 1980s, when big cities were finally wired for cable. What followed was an explosion of new channels, many of which have become big businesses today.

It’s not unreasonable to think that at least some high-quality journalism will make its way into the list of the big digital-media businesses of the future. Certainly Pierre Omidyar and Jim Bankoff and Ezra Klein and Nicolas Berggruen and Arianna Huffington think that it will. It might take a while to get there. But the potential global audience is exploding, and for the first time it’s possible to imagine a digitally-native journalism venture being genuinely global. It’s an enticing dream — and it’s reasonable to expect that someone will get it right.

COMMENT

Re. Vox Media,
much to be said about neat archives.

Reuters does a nice job giving context – continued, comprehensive coverage must surely help [cudos intended].

Google News is not dead. I wish this project on them !

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Why the irrelevance of Davos is good news

Felix Salmon
Jan 27, 2014 09:17 UTC

No crisis can last forever, and the main lesson I’m taking from the 2014 World Economic Forum is that, at least as far as the world’s elite are concerned, we’ve finally put the financial crisis behind us. There are still a lot of things to worry about, of course, both political and economic. But this was by far the least economically interesting Economic Forum I’ve been to.

Now admittedly I’ve been coming to this conference during extremely interesting times. My first WEF was in 2008, when the credit crisis was top of mind; in all of the conferences since then, the unquestioned center of the proceedings has been the various conversations — formal and informal, public and private — between all the financial-sector bigwigs who attend. Finance ministers, central bank governors, bank CEOs — this was their conference, and it was important because they controlled the levers at the heart of all the world’s major economies.

Last year, I got a brief glimpse behind the curtain when I made it into an invitation-only discussion of monetary policy. The intellectual firepower in the room was absolutely astonishing: great central bankers of the past and present; Nobel laureates in economics; policymakers with decades of deep immersion in the issues at hand. The level of discussion was unremittingly high, and it was clear that everybody in the room was getting real value out of it.

This year, by contrast, economic issues were pretty much an afterthought. Sure, the central bankers and finance ministers all still turned up, and had the meetings they always have. But no one seemed to care. There was dutiful discussion of tapering, for instance, but it was clear that no one’s heart was really in it.

Similarly, while there has never been any shortage of heads of state at the WEF, and while there have even been quite a few foreign ministers in attendance, the reason for the big-name politicians’ presence has always been clear: they want the support of the international economic community. As a result, the job of any given president at Davos is pretty simple: give speeches, appear on panels, take bilateral meetings — and push a simple message at every opportunity. My country is open for business, we welcome investment, our civil society is strong, the opportunities are amazing.

This year, that changed. Two heads of state were in the spotlight — Shinzo Abe, of Japan, and Hassan Rouhani, of Iran. In both cases, the narrative diverged subtly from the economic focus so familiar to the Davos elite. Questions of Abenomics took a back seat to concerns about the new Japanese prime minister’s belligerence, and whether he might be moving towards a real conflict with China. And Iran, of course, is always a political issue first, with economic questions coming a distant second.

At the same time, there was a real urgency in Davos about two national disasters — Syria and Ukraine. Davos is endemically optimistic: its entire raison d’être is for leaders to come together with the purpose of making the world a better place. But this year provided the exception to the rule. Never have I seen a consensus in Davos, on any subject, as grimly pessimistic as I saw with respect to the probable course of both Syria and Ukraine. And so, for all that US foreign minister John Kerry was dashing around holding meetings and giving speeches, there was a real undertone of futility at Davos 2014.

After all, there’s no way that an annual four-day World Diplomatic Forum, held in some remote ski resort, could ever gain momentum. Davos, at its best, is a schmoozefest: it’s a place where CEOs from all over the world can get to know each other socially, and reassure each other that they think the same way and can do business together. For that kind of thing, a series of short meetings and well-lubricated “nightcaps” is perfect. But international diplomacy runs on a very different schedule, and in any case the big-name politicians are the one group which still gets to retain a cordon of aides, preventing the kind of serendipitous mingling at which Davos excels.

This year, as the Davos center of gravity shifted from the economic to the geopolitical, it seemed if anything less relevant and important than ever. Davos is fueled by talk, the more vapid and platitudinous the better. Such talk has real value, to the talkers: it’s a way of creating weak social bonds (which are actually more important than strong social bonds), and it helps to create the illusion that we’re all closer together than we are in reality. (One of my first Davos Moments, back in 2008, involved a 20-minute conversation in a shuttle bus with a very likable ayatollah.)

In the world of international diplomacy, on the other hand, the big personalities already know each other — or have made a tactical decision that they don’t want to. Talks can drag on for months or years, and positions are fought fiercely. There are no problems here that 20 minutes of meditation, or a boozy encounter at the Salesforce party, are likely to solve. As we learned in 2011, the institutionalized shallowness of Davos is incapable of providing any kind of constructive engagement on genuinely salient geopolitical issues.

The irrelevance of Davos is, arguably, good news: it’s a sign that the economic crisis is over, at least if you’re a member of the 0.01%. And the WEF was never designed to be any kind of replacement for the UN: it can’t be faulted for the intractability of the Syria crisis. In fact, Davos 2014 was in many ways the most honest WEF that I’ve been to. Business was conducted, friendships were cemented, and countless panels were convened on matters of Global Importance, mostly featuring men in suits who were a little bit vague about what exactly they were expected to contribute. Seen up close, there was a lot to learn; seen at a distance, it was basically a formless smudge.

Davos 2014, then, was all very fun and busy for the people who made it up the alp. But there was no reason whatsoever for anybody outside Davos to care what was going on. And that’s exactly how it should be. Don’t be fooled by the huge amount of media coverage the conference receives: most of it simply comprises the work of journalists trying to justify their junket. But this year more than ever, Davos was like any other conference: it had value only to the people who attended. Let’s hope (because none of us wants another global economic crisis) that it stays that way.

COMMENT

Did you post something on this? Where’s the link?

“Last year, I got a brief glimpse behind the curtain when I made it into an invitation-only discussion of monetary policy. … The level of discussion was unremittingly high, and it was clear that everybody in the room was getting real value out of it.”

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Davos pusillanimity watch, LGBT rights edition

Felix Salmon
Jan 23, 2014 13:24 UTC

For an organization which loves to talk about the importance of social responsibility and civil society, it’s notable that the WEF has never had a panel on LGBT rights. This year, however, the issue has finally become impossible to avoid. Russia is in the midst of a poisonous campaign against its LGBT citizens; once the Winter Olympics are over, that crackdown is only going to get worse. And in Nigeria, where homosexuality has always been illegal and dangerous, president Goodluck Jonathan — who is here in Davos — recently signed into law a brutal new piece of legislation which makes even supporting gay rights punishable by ten years in prison; a round of arrests under the new law has already begun.

At the same time, the community of LGBT supporters is larger and more powerful than ever, and their message has finally made its way into Davos, if not into the formal WEF program. This morning, there was a classic Davos power breakfast under the title “The Global Fight for LGBT Equality”, which drew some very boldface names, including two US senators (Patrick Leahy and Claire McCaskill) as well as Navi Pillay, the UN high commissioner for human rights. The breakfast was sponsored by a broad cross-section of WEF partners: corporate support came from Credit Suisse, the Huffington Post, Microsoft, and Time Warner, while the main people making the breakfast happen were two big-name hedge-fund managers, Paul Singer and Dan Loeb.

The breakfast took place directly across the street from the forbidding concrete walls of the conference center, and one of the big questions was whether the clear sense of urgency and importance in the room would help the cause receive more official WEF recognition next year. As Miriam Elder says, the answer would seem to be no:

Event organizers said the World Economic Forum (WEF) in Davos had declined to host the LGBT event; the main gathering in Davos this year features guests like Nigerian President Goodluck Jonathan, who recently blessed the world’s most repressive law restricting LGBT rights.

“The organizers reached out to WEF but it quickly became clear that this program would not be regarded as ‘appropriate’ for the official Congress Center program,” a person familiar with the planning of the event told BuzzFeed.

It certainly doesn’t seem to be a simple oversight that the WEF has failed to address this issue so far. The sponsors of the breakfast, as well as other strategic partners like Goldman Sachs and (yes) Thomson Reuters, are very vocal about this issue, and there’s no shortage of WEF staff who are sympathetic to the cause. Panels on the issue have surely been proposed many times — which means that if we’ve never seen one, that’s because all such events have been systematically vetoed at a very high level.

The reason for such a veto is easy to surmise. Heads of state are at the top of the pecking order in Davos, and any LGBT panel would undoubtedly be very rude about individuals like Goodluck Jonathan and Vladimir Putin. The way the WEF works, if someone like Putin makes it clear that he doesn’t want any such panel to take place, then the panel won’t take place. Indeed, the WEF organizers, who constitutionally err on the side of overcaution, would probably veto any such panel just in case a powerful head of state might object.

Still, the issue is alive now, it’s not going away, and it’s causing serious problems for Davos regulars like Nigerian finance minister Ngozi Okonjo-Iweala. I’m a huge fan of Ngozi’s, but this is not her finest hour: every time that she’s asked about LGBT rights in Nigeria, she gives a what-can-we-do answer about how the law is very popular among Nigerians and how therefore the president had no choice but to sign it. As Fareed Zakaria noted in today’s event, that answer misses the difference between a tyranny-of-the-majority democracy, on the one hand, and a grown-up liberal democracy, on the other. Humans don’t lose their rights just because they’re in the minority, and it’s the job of any democratic leader to refuse to support the forces of intolerance and hate within his country. Besides, as Richard Branson said at the breakfast, you can get pretty much any result you like, in an opinion poll, depending on how you ask the question.

There is an enormous gap between what Okonjo-Iweala can and should be doing, on the one hand, and what she’s actually doing, on the other. Firstly, she should recognize that the issue of LGBT rights in Nigeria is a very important one, and work hard to be a voice of reason and tolerance within the Nigerian government. Far from threatening the WEF if it puts on a gay-rights panel, she should encourage it to do so, and she should even volunteer to participate.

Okonjo-Iweala should also embrace the argument that LGBT rights are an economic issue: that the current climate in Nigeria is so hateful that it will certainly have a negative effect on inward investment and the propensity of multinational companies to operate in the country. Instead, when she’s presented with that argument, she sneers at the westerners with their bleeding hearts, and says that if the west doesn’t want to do business with Nigeria, then the likes of China and India surely will. Investors from those countries, she says, would never let the issue of LGBT rights color their investment decisions. She’s sadly correct on that front, but in embracing the investors who don’t care about LGBT rights, she’s giving up a prime opportunity to place herself on the side of the angels.

Finally, and most importantly, Okonjo-Iweala should simply and clearly come out against the law. After all, she’s not an elected official: she doesn’t need to worry about being voted out of office. She’s happy to say that her own children have no beef with LGBT people, but she consistently stops short of personally saying that she believes in gay rights and LGBT equality.

The breakfast this morning featured a panel of LGBT activists from around the world: Alice Nkom from Cameroon, Masha Gessen from Russia, and Dane Lewis from Jamaica. There was no one from Nigeria, mainly because it’s considered too dangerous, now, for any Nigerian to align themselves in any way with the LGBT community. Ordinary Nigerians, even if they’re sympathetic with the LGBT cause, have good reason to keep their mouths shut; that’s exactly why it’s important for someone like Okonjo-Iweala to step up.

At the breakfast, Sweden’s minister for European Affairs, Birgitta Ohlsson, worried out loud that if westerners were too vocal when it came to preaching human rights. She was worried that such tactics might misfire in proud sovereign countries; she also said that it was “silent” pressure from the west which persuaded Uganda’s president, Yoweri Museveni, to refuse to sign a new anti-gay law in the country.

Ohlsson’s argument did not go down well with the panel: while behind-the-scenes pressure can indeed be effective, it is almost never weakened by outside public support. Still, it’s undoubtedly true that if there’s no domestic opposition to a bill, then it’s probably going to end up getting passed. As a result, powerful Nigerians like Okonjo-Iweala have a moral obligation to speak out.

In doing so, Okonjo-Iweala would certainly be on the right side of history. LGBT rights are not confined to countries like Sweden: Argentina, for instance, has the most progressive gender equality law in the world, while South Africa was the first country to enshrine LGBT rights in its constitution. Today, 60 countries ban discrimination against homosexuals; 16 countries have same-sex marriage; and many more have some formal mechanism to recognize same-sex partnerships or civil unions. Those numbers are only going to increase, but progress will not be linear: Nigeria is by far the biggest economy in the region, and there’s a lot of fear in countries like Cameroon that its anti-gay stance will prove contagious.

Tragically, Okonjo-Iweala has decided instead to simply fall in behind her president. Such pusillanimity is the norm in Davos; we can expect the global corporate sector to similarly ignore this issue. Many companies have a strong record of being gay-friendly in the US, but then turn around and extend no particular protections or benefits to their gay employees in less tolerant countries. Here’s one area where the WEF can be helpful: encourage global companies like Coca-Cola or Citigroup to make sure that all their gay employees are treated equally, including the ones in countries like Russia and Nigeria.

But that’s not going to happen as long as the WEF refuses to give this issue any kind of visibility. A single breakfast on the sidelines isn’t remotely enough. It’s long past time for the WEF to embrace a cause which, I’m pretty sure, is personally supported by a majority of the delegates in Davos. Here’s hoping it happens in 2015.

COMMENT

Most of the world is socially conservative, i.e., not on board with moral and sexual “modernism.” Giving homosexuals/tranvestites/transsexuals equal footing with heterosexuals is seen as a non-starter.

A number of countries do give them a place, but a place apart. That’s the deal, and it’s not likely to change.

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