Opinion

Felix Salmon

The Piketty pessimist

Felix Salmon
Apr 25, 2014 20:08 UTC

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This chart comes from the World Economic Forum’s 2014 Global Risks Report, which came out just before Thomas Piketty’s book started becoming the topic of discussion in economic and plutocratic circles.* You can clearly see what you might call the rise of inequality-as-an issue: before 2012 it’s nowhere to be found, but since then it’s been consistently in the top spot. My prediction is that in 2015, thanks to Piketty, the WEF will start talking less about income inequality, and more about wealth inequality.

The big question, though, is whether inequality is really much of a risk at all. After all, from the point of view of the average billionaire WEF delegate, inequality would seem to look much more like a reward.

Chrystia Freeland has a hopeful thesis. “Piketty’s work,” she says, “and the wider shift it surely portends, poses a new, powerful, existential threat to the plutocrats.” Her argument in a nutshell: politicians across the political spectrum, but especially on the left, have historically used the language of criminality to rail against the rich. (See, for instance, how the WEF said that “corruption” was the third-most-likely global risk in 2011.) In other words, capitalism itself is generally assumed to be a pretty good thing, which works well for everybody so long as everybody plays by the rules. But Piketty has challenged that assumption, by showing that even if everybody plays by the rules, inequality is very likely to increase to obscene levels. It’s not the corrupt and venal robber barons who are the problem, it’s rather that unless we make a concerted effort to impede capitalism’s natural tendencies, the entire middle class is likely to get hollowed out.

Freeland limns this debate well: on the one side are the likes of Matt Taibbi and Michael Lewis, always on the hunt for villains; on the other side are people looking at a broader historical sweep, and saying that if you go around blaming individuals you are always going to miss the bigger picture. Piketty, of course, is in the latter camp, but so are people like Erik Brynjolfsson and Andrew McAfee, who see success in the future accruing increasingly to a small group of high-level “ideators”, while the jobs of much of the present middle class become automated.

If the broad public stops being angry at individuals and starts understanding that the entire system is constructed so that it benefits the few at the expense of the many, then that system itself will start looking unsustainable and ripe for dismantling.

Freeland herself concedes that this is unlikely to happen any time soon: “The only thing worse than having plutocrats is not having them,” she writes. “San Franciscans may be rising up against their tech billionaires, even blockading the Google bus, but the rest of the world, from Moscow to Malaysia, is trying to replicate Silicon Valley.” On top of that, as Paul Krugman explains in his masterful NYRB review, the forces described by Piketty are more likely to be self-reinforcing than they are to carry the seeds of their own destruction:

Falling tax rates for the rich have in effect emboldened the earnings elite. When a top manager could expect to keep only a small fraction of the income he might get by flouting social norms and extracting a very large salary, he might have decided that the opprobrium wasn’t worth it. Cut his marginal tax rate drastically, and he may behave differently. As more and more of the supersalaried flout the norms, the norms themselves will change.

Which means that ultimately I have to disagree with Freeland. Her syllogism runs something like this:

-Capitalism has survived this far because it delivered strong, widely-shared growth.
-If capitalism fails to continue to deliver strong, widely-shared growth, then it will fail and die.
-Thanks in part to Piketty, the leaders of the major western democracies — both the politicians and the plutocrats — now understand this.
-Therefore, they will, of necessity and of self-interest, alter the structure of society to preserve (what’s left of) the middle classes.

This starts off well, but becomes increasingly improbable as it goes on. As Piketty shows, capitalism can continue indefinitely with obscene levels of inequality. Politicians and plutocrats are not focused on what’s going to happen decades from now; instead, they’re engaged in a constant battle to maximize their own personal power, even — especially — if that means amassing enormous quantities of wealth for themselves. And finally, for all that it’s the job of politicians (including Freeland) to campaign on the basis that they can change the world in effective and predictable ways, there’s precious little evidence that really they can. Just as the forces of capitalism are bigger than any individual robber baron, so are they bigger than any individual politician or political party.

The many reviews of Piketty’s book are surprisingly unanimous on one point: that the weakest part of the book is the final part, where Piketty moves away from diagnosis and starts attempting to formulate a solution. Piketty’s rather French idea of a global wealth tax isn’t getting nearly the same amount of acclaim as the rest of the book is, and is very unlikely to happen: countries will always compete with each other to attract the stateless rich by not taxing them.

Which means that my reading of Piketty is ultimately pessimistic. The dynamics of the world economy are bad, and they’re getting worse; inequality is natural in human history, and right now we’re reverting to a state of affairs which is highly unfair but also both sustainable and, in its own way, unsurprising. Piketty has diagnosed a nasty condition. But I don’t think there’s a cure.

*Le capital au XXIe siècle was published in French in August 2013, and the WEF is based in francophone Geneva, so it was hovering in the background of Davos 2014 somewhere. Certainly there was some buzz about the book in the Alps this year, even among those of us who don’t read 970-page books in French, thanks to Branko Milanovic’s definitive 21-page review, which came out in October.

COMMENT

“so long as everybody plays by the rules”

but the rules are rigged

Posted by dajobr | Report as abusive

The problems of HFT, Joe Stiglitz edition

Felix Salmon
Apr 16, 2014 00:04 UTC

Never mind Michael Lewis. The most interesting and provocative thing to be written of late about financial innovation in general, and high-frequency trading in particular, comes from Joe Stiglitz. The Nobel prize-winning economist delivered a wonderful and fascinating speech at the Atlanta Fed’s 2014 Financial Markets Conference today; here’s a shorter version of what Stiglitz is saying.

Markets can be — and usually are — too active, and too volatile.

This is an idea which goes back to Keynes, if not earlier. Stiglitz says that in the specific area of international capital flows, “there is now a broad consensus that unfettered markets are welfare decreasing” — and certainly you won’t get much argument on that front from, say, Iceland, or Malaysia, or even Spain. As Stiglitz explains:

When countries do not impose capital controls and allow exchange rates to vary freely, this can give rise to high levels of exchange rate volatility. The consequence can be high levels of economic volatility, imposing great costs on workers and firms throughout the economy. Even if they can lay off some of the risk, there is a cost to doing so. The very existence of this volatility affects the structure of the economy and overall economic performance.

The question is: does the same logic, that traders seeking profit can ultimately cause more harm than good, apply equally to high-frequency trading, and other domestic markets? Stiglitz says yes: there’s every reason to believe that it does.

HFT is a negative-sum game.

In the algobot vs algobot world of HFT, the game is to capture profits which would otherwise have gone to someone else. Michael Lewis’s complaint is that if there weren’t any algobots at all, then those profits would have gone to real-money investors, rather than high-frequency traders, and that the algorithms are taking advantage of unfair levels of market access to rip off the rest of the participants in the stock market. But even if you’re agnostic about whether trade profits go to investors or robots, there are undeniably real-world costs to HFT — costs like drilling through Pennsylvania mountains. As a result, the net effect of the algorithms is negative: they reduce profits, for everybody, rather than increasing them.

In theory, HFT could bring with it societal benefits which more than offset all the costs involved. In practice, however, that seems unlikely. To see why, we’ll have to look at the two areas where such benefits might be found.

HFT does not improve price discovery.

Price discovery is the idea that markets create value by putting a price on certain assets. When a company’s securities rise in price, that company finds it easier to raise funds at cheaper rates. That way, capital flows to the places where it can be put to best use. Without the price-discovery mechanism of markets, society would waste more money than it does.

But is faster price discovery better than slower price discovery? Let’s say good news comes out about a company, and its share price moves as a result — does it matter how fast it moves? Is any particular purpose served to seeing the price move within a fraction of a millisecond, rather than over the course of, say, half a minute? It’s hard to think of a societal benefit to faster price discovery which is remotely commensurate with the costs involved in delivering those faster price moves.

What’s more, faster price discovery is generally associated with higher volatility, and higher volatility is in general a bad thing, from the point of view of the total benefit that an economy gets from markets.

HFT sends the rewards of price discovery to the wrong people.

Markets reward people who find out information about the real economy. Armed with that information, they can buy certain securities, sell other securities, and make money. But if robots are front-running the people with the information, says Stiglitz, then the robots “can be thought of as stealing the information rents that otherwise would have gone to those who had invested in information” — with the result that “the market will become less informative”. Prices do a very good job of reflect ignorant flows, but will do a relatively bad job of reflecting underlying fundamentals.

HFT reduces the incentive to find important information.

The less money that you can make by trading the markets, the less incentive you have to obtain the kind of information which would make you money and increase the stock of knowledge about the world. Right now, the stock market has never been better at reacting to information about short-term orders and flows. There’s a good example in Michael Lewis’s book: the president of a big hedge fund uses his online brokerage account to put in an order to buy a small ETF — and immediately the price on the Bloomberg terminal jumps, before he even hits “execute”. The price of stocks is ultra-sensitive to information about orders and flows. But that doesn’t mean the price of stocks does a great job of reflecting everything the world knows, or could theoretically find out, about any given company. Indeed, if investors think they’re just going to end up getting front-run by robots, they’re going to be less likely to do the hard and thankless work of finding out that information. As Stiglitz puts it: “HFT discourages the acquisition of information which would make the market more informative in a relevant sense.”

HFT increases the amount of information in the markets, but decreases the amount of useful information in the markets.

If markets produce a transparent view of all the bids and offers on a certain security at a certain time, that’s valuable information — both for investors and for the economy as a whole. But with the advent of HFT, they don’t. Instead, much of the activity in the stock market happens in dark pools, or never reaches any exchange at all. Today, the markets are overwhelmed with quote-stuffing. Orders are mostly fake, designed to trick rival robots, rather than being real attempts to buy or sell investments. The work involved in trying to understand what is really going on, behind all the noise, “is socially wasteful”, says Stiglitz — and results in a harmful “loss of confidence in markets”.

HFT does not improve the important type of liquidity.

If you’re a small retail investor, you have access to more stock market liquidity than ever. Whatever stock you want to buy or sell, you can do so immediately, at the best market price. But that’s not the kind of liquidity which is most valuable, societally speaking. That kind of liquidity is what you see when market makers step in with relatively patient balance sheets, willing to take a position off somebody else’s book and wait until they can find a counterparty to whom they can willingly offset it. Those market makers may or may not have been important in the past, but they’re certainly few and far between today.

HFT also reduces natural liquidity.

Let’s say I do a lot of homework on a stock, and I determine that it’s a good buy at $35 per share. So I put in a large order at $35 per share. If the stock ever drops to that price, I’ll be willing to buy there. I’m providing natural liquidity to the market at the $35 level. In the age of HFT, however, it’s silly to just post a big order and keep it there, since it’s likely that your entire order will be filled — within a blink of an eye, much faster than you can react — if and only if some information comes out which would be likely to change your fair-value calculation. As a result, you only place your order for a tiny fraction of a second yourself. And in turn, the market becomes less liquid.

It’s important to distinguish between socially useful markets and socially useless ones.

In general, just because somebody is winning and somebody else is losing, doesn’t mean that society as a whole is benefiting in any way. Stiglitz demonstrates this by talking about an umbrella:

If there is one umbrella, and there is a 50/50 chance of rain, if neither of us has any information, the price will reflect that risk. One of us will get the umbrella. If it rains, that person will be the winner. If it does not, the other person will be the winner. Ex ante, each has the same expected utility. If, now, one person finds out whether it’s going to rain, then he is always the winner: he gets the umbrella if and only if it rains. If the other person does not fully understand what is going on, he is always the loser. There is a large redistributive effect associated with the information (in particular, with the information asymmetry), but no real social benefit. And if it cost anything to gather the information, then there is a net social cost.

HFT is socially useless; indeed, most of finance does more harm than good.

As finance has taken over a greater and greater share of the economy, growth rates have slowed, volatility has risen, we’ve had a massive global financial crisis, and far too much talented human capital has found itself sucked into the financial sector rather than the real economy. Insofar as people are making massive amounts of money through short-term trading, or avoiding losses attributable to short-term volatility, those people are not making money by creating long-term value. And, says Stiglitz, “successful growth has to be based on long term investments”.

So let’s do something about it.

HFT shouldn’t be banned, but it should be discouraged. The tax system can help: a small tax on transactions, or on orders, would reduce HFT sharply. “A plausible case can be made for tapping the brakes,” concludes Stiglitz. “Less active markets can not only be safer markets, they can better serve the societal functions that they are intended to serve.”

COMMENT

I have the feeling Michael Stewart doesn’t believe the ridiculous anti-HFT nonsense in his own book. The entire “controversy” is simply Stewart deciding to amplify an irrelevant bandwagon to stir up the politicians and the ignorati and profit.

Stiglitz is delusional so he might actually believe the nonsense he is spouting here.

Posted by Stiglitzator | Report as abusive

The utility of switching lanes

Felix Salmon
Apr 11, 2014 05:42 UTC

Josiah Neeley has an evil, hour-long commute. But unlike most of us with traffic issues, he actually decided to do something constructive with it: according to the flip of a coin, he either commutes normally, switching lanes when doing so seems sensible, or else sticking religiously to the left-hand lane and just sweating it out, no matter how fast or slow it goes.

Neeley doesn’t have a statistically significant result yet, but initial indications are pretty much what you might expect, if you understand the psychology of traffic: if you just sit in a single lane, you spend no more time in traffic than if you aggressively switch lanes and try to go as fast as possible at all times.

There are two possible conclusions to draw from this. The first is that, rationally, no one should switch lanes when they’re stuck in traffic. It doesn’t make them get to where they’re going any faster, but it does slow down the road as a whole.

The second, however, is the exact opposite. As Neeley says:

The hardest part of the experiment is just sticking to it. When it’s a left hand lane only day, it’s often quite difficult to keep to the plan when my lane is going forward at a crawl. But then I remind myself that this is for Science, and I soldier on. Perhaps more importantly, I’ve noticed that my subjective sense of how bad the traffic is on a particular day doesn’t necessarily line up with the objective data. On many a day I feel like my drive has gone on forever, only to find that it wasn’t any longer than on previous days where it felt like I was flying down the highway.

This is important: the really painful part of being stuck in traffic is not, really, the actual amount of time that it takes to get from Point A to Point B. Rather, it’s the “stuck” bit. As a result, the best way to minimize the suffering involved in a long commute is not, necessarily, to simply get to your destination as fast as you possibly can.

One of my lesser-value skills is that when my wife and I are stuck in highway traffic, and she’s driving, I’m quite good at looking at the live traffic maps, from Google and Apple, and finding a way to use surface streets to skip forward a couple of exits. My guess is that 90% of the time, when we do that, we don’t actually save time. But pretty much 100% of the time we both end up significantly happier than we were when we were crawling up the freeway. If you go a longer distance at a modest speed, but you’re not stuck in traffic on an ugly highway, you feel as though you’re getting somewhere.

The same is true when you stay on the highway, rather than leave it: the act of changing lanes, and thereby briefly overtaking the car which up until a moment ago was in front of you, makes you significantly happier than just sitting there like a passive schmuck. Which is why we all do it.

In other words, if you want to understand utility functions, don’t talk to an economist. The economist will find a proxy for utility — in this case, time — and then try to work out what kind of behavior optimizes for the proxy. If Neeley had discovered that changing lanes frequently only served to cause a significant increase in time spent commuting, he would probably just opt to sit in a single lane henceforth, even when doing so was difficult, and even when doing so increased the number of days where it felt like his drive had gone on forever.

The more interesting experiment, I think, would be to judge not actual time spent commuting, but some kind of subjective measure (say, on a four point scale) of how brutal the commute was that day. The important thing isn’t whether you shave a minute here or there: it’s how you feel once you get to your destination. This is something I’ve noticed since switching almost exclusively to Citibike when I bike around New York — while the Citibikes are undoubtedly slower than my regular bike, that doesn’t make me more impatient in traffic. Quite the opposite, indeed: I feel as though I’ve become a more zen biker as a result of the switch.

If you look at subjective rather than objective measures, I’m pretty sure that all our lane switching will turn out to have a useful purpose after all: it makes us feel as though we’re in control of our own destiny. Which, ultimately, is more important than an extra minute’s commute.

Is there opportunity in art history?

Felix Salmon
Feb 18, 2014 23:40 UTC

Last month, at an appearance in Wisconsin, Barack Obama made a mild dig at art history graduates like myself. “A lot of young people no longer see the trades and skilled manufacturing as a viable career,” he said, “but I promise you, folks can make a lot more potentially with skilled manufacturing or the trades than they might with an art history degree.”

It took Obama roughly 1.5 seconds to backtrack — or at least to emphasize that he loves art history. “I’m just saying,” he clarified, that “you can make a really good living and have a great career without getting a four-year college education, as long as you get the skills and training that you need.”

This is a really important point. We’re living in a world where the cost of college education is rising much faster than inflation, and saddling graduates with enormous debts which can’t even be discharged in bankruptcy. The result is that an art history degree has never been more expensive — and that you’ll be better off, in terms of total lifetime earnings, getting a vocational qualification in the trades than spending four years and a six-figure sum learning about the influence of Piero della Francesca on Jacques-Louis David.

Which is not to say that getting an art history degree is a bad idea. Virginia Postrel is the queen of this beat, and points out that even though art history graduates account for only 0.2% of adults with college degrees, a very impressive 5.9% of them are in the top 1% of incomes. In other words, someone with an art history degree is more likely to be in the top 1% than someone with a finance degree.

As Postrel says, the causation here is probably backwards, from family wealth to the decision to get a degree in art history — but still, an art history degree is nothing to sneeze at, which is possibly why Obama has apologized more formally for his remarks, in a (lovely) handwritten letter to an art history professor at UT.

I’m very sympathetic to the art historians here, and not only because that’s what I studied. The subject is almost ideal for teaching the kind of abstract-thinking skills that the next generation of graduates are going to need, in a world where a lot of number-crunching jobs are becoming rapidly automated. Studying art history means moving back and forth between words and ideas and images all the time, putting them together in novel ways while building on the work of countless smart people who came before you. I can hardly imagine a better qualification for much of the high-level knowledge work and ideation which will power the 21st Century economy.

But at the same time, the qualification is an expensive one, and (as I can tell you from my own experience, circa 1995) it’s not exactly easy to get a job as a fresh-faced graduate armed with nothing but an art history degree. The gamble is big, especially if you’re going into debt to get the degree, and frankly it’s not worth it. I wouldn’t have done it, if I had to borrow tens of thousands of dollars in order to get that degree. It’s much more sensible to pursue a vocational qualification which takes less time, costs less money, and gives you a much higher chance of getting a good job once you’ve earned it.

One of the big tasks facing the US economy is the challenge of reducing the cost of not getting a four-year degree. Not everybody can go to college, or should. The very small number of people who study art history are an elite minority; they’ll largely be fine no matter what. It’s the people who don’t go to a four-year college who need economic opportunities. And so it’s excellent news, as Obama says, that those opportunities exist. And that, on an economic level, they’re significantly more attractive than an art history degree.

COMMENT

I think that a lot of the problem is that people are treating a Bachelor’s degree in the Arts & Humanities like a technical degree. Studying Art History/Art/Creative Writing/Whatever does not mean that it’s the only thing that you can apply those skills towards. The auxiliary skills are what will get you a job.

Art History isn’t a degree for lazy people (I am an art professor, so I see this firsthand.). I’ve found that Art History majors tend to be the most organized, curious, and dedicated students in the classroom. It requires a lot of reading, writing, memorization, and analyzation. Many art students are scared to take art history courses because of how difficult it is to memorize 16+ things about 150+ works of art, to then only be tested on 10 of them.

Education is not just about learning a specific technical skill set, but also is learning how to THINK. Learning how to think critically and solve problems creatively is an invaluable skill that can be used in many occupations that are not directly related to degree field. Arts and Humanities majors are hungry for constructive feedback. They aren’t just interested in being told that they got the “right answer,” but instead they want to know how to improve their work.

There are more options than you think, and just because they aren’t directly arts related doesn’t mean that their degree has somehow failed them. (if this is the case, college has failed most people)

It’s a very disciplined degree, and an art historian could easily tackle law school. …Or a spreadsheet. Whatever they want.

Posted by biffy | Report as abusive

The non-scandal of Scott Irwin and Craig Pirrong

Felix Salmon
Dec 29, 2013 22:01 UTC

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

COMMENT

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

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

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

Posted by Robcarter | Report as abusive

Why cab drivers should love Uber

Felix Salmon
Dec 12, 2013 01:18 UTC

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

COMMENT

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

http://goo.gl/VCCB3R

Posted by indifferents | Report as abusive

When the 2-and-20 crowd drives economic research

Felix Salmon
Dec 5, 2013 00:42 UTC

Elizabeth Warren sent a letter to the CEOs of America’s biggest banks today, telling them to reveal how much money they give to Washington think tanks — policymakers and the public, she says, should know when they’re being fed a corporate-lobbying line, and when they’re getting valuable information from a genuinely independent think tank.

Matt Yglesias says that Warren’s letter is little more than “legislative subtweeting”, but she does have a point: the more that think tanks become beholden to vested interests, the less useful they become. If a think tank is working from an ideology and everything that it concludes is in line with that ideology, it’s really little more than a derp tank. On the other hand, if a think tank has a reputation for intellectual independence but is in fact secretly being controlled by ideologues or other people with a certain agenda, then more transparency is definitely in order.

But if you’re worried about Washington think tanks falling under the influence of the finance crowd, it’s not the bank CEOs you should really be concentrating on. Instead, it’s the 2-and-20 crowd, who are giving quite astonishing amounts of money to fund economic research in such places. Last year, for instance, Bill Janeway gave $25 million and George Soros gave another $50 million to The Institute for New Economic Thinking, which gifts spurred INET to announce that it was going to try to raise another $75 million on top of that.

Janeway and Soros were in their own way just following the lead of Pete Peterson, who contributed $1 billion to the Peter G. Peterson foundation, and has pledged to spend the vast majority of it on fiscal and economic issues. And today, Glenn Hutchins announced that he was spending $10 million to create the Hutchins Center on Fiscal and Monetary Policy within the Brookings Institution. The WSJ adds that as vice chairman of the Brookings board, he has also given himself the job of raising another $600 million for the think tank — the kind of money which will pay for an almost unlimited number of distinguished economics commentators. (WSJ columnist David Wessel is leaving the paper to head the new center.)

All of this rich-people money is making a real difference in policymaking circles. Wessel, in the WSJ, is quoted as saying that “there are few forums outside Fed-sponsored events” for questions about monetary policy to be discussed, and that he wants the new Hutchins Center to be the main such forum. This is great for Hutchins, who clearly wants to get his fingerprints on any institution where monetary policy is studied or practiced — he is, after all, already on the board of directors of the NY Fed.

The result is that the people who study monetary policy — academics and technocrats and career central bankers — are increasingly being funded not by the state, or by the academy, but rather by a small number of very rich individuals, most of whom made their fortune in finance. And while it can’t necessarily be identified with either the Democratic or the Republican party, there is a rich-people consensus on economic issues. Tax hikes are bad, first of all, while cuts to programs which serve the poor are much more acceptable. As Hutchins himself puts it, “the big problem is the political failure in this town associated with the inability to solve our government debt problems.”

It’s not news that people spend their money in a self-serving manner, of course, or that rich people in particular tend to be very sure that their own way of looking at the world is the true and right way of looking at the world. It’s not even news that rich people have a disproportionate amount of influence in public life. And different donors require very different degrees of fealty to their own economic vision. INET is a highly heterodox institution: it has no particular point of view, except to broaden the debate, and it has a natural economic curiosity which is in line with Soros himself, without necessarily mirroring Soros’s own opinions. If anything, I should imagine that Soros values INET not as a vehicle for his own ideas, but rather as a source for them. The Peterson Foundation, meanwhile, is at the other extreme: Peterson knows exactly what he thinks, and wants to propagate his ideas as effectively as possible. Hutchins is probably somewhere in the middle.

In many ways I’m glad that his center will now exist. The connection between fiscal and monetary policy is not well understood, but is absolutely central to the way the global economy currently works; if Wessel and Hutchins can help central bankers now, when they need all the smart analysis they can get, that is probably a good thing. (Academics are also studying these things, of course, but they tend to work at a much slower pace and be less policy-focused.)

Still, this is just another step in the Davos-ization of the world — just another way in which rich financiers are managing to institutionalize an astonishing degree of access to central bankers and other key economic policymakers. Hutchins chose Brookings for his millions because it is very good at influencing government, and driving the terms of wonkish debate. Influence is at heart a zero-sum game: if the financial sector has a lot of it, that means the rest of us have less. And given what the financial sector wrought in the 2000s, I don’t particularly trust it to get things right this time around.

COMMENT

Ok. Fine. I googled it. It relates to a quote by Warren Buffet in 2006 where he accuses hedge funds of taking 2% of you principal investment if they fail and 20% of your profits if they succeed.

Posted by BidnisMan | Report as abusive

The GIGO jobs report

Felix Salmon
Nov 8, 2013 14:25 UTC

This is undoubtedly the most distorted jobs report in living memory. Scroll down a bit, and you get to a whole box entitled “Partial Federal Government Shutdown”, which explains that for a multitude of reasons, the amount of “nonsampling error” in this report is going to be much bigger than it normally is — and yet, the BLS also made the correct decision that for the sake of “data integrity”, it was not going to try to correct for any of those nonsampling errors.

The markets, however, are hard-wired to take the payrolls report seriously, especially right now. We had a very strong GDP report yesterday, which was itself subject to all the same errors and omissions, and there’s something more generally febrile about the broader atmosphere: yesterday alone saw an unexpected rate cut in Europe, as well as a decidedly frothy first-day valuation for Twitter. On top of all that, we’re still in the very heart of good-news-is-bad-news territory, where traders only care about when the famous Taper will begin. The stronger the data, the more worried they become, and the more that stocks and bonds sell off.

Put it all together, and you have a recipe for volatility. News organizations have a largely unspoken rule of thumb that the bigger the market move, the more important the news must be; their readers, certainly, have an inexplicably insatiable appetite for stories which try to answer the “why did the markets move so much?” question. But today of all days, the right reaction is to take a deep breath and try not to pay too much attention to any of the numbers coming out of Washington and New York.

For one thing, it’s possible (anything’s possible) that, thanks to the strength of this report, Ben Bernanke, at the very end of his final term in office, will decide to kick off the last full week before the Christmas break with a tapering announcement. But it’s not very likely. The report is unreliable, thanks to the shutdown; the timing would be perverse, needlessly constraining his successor’s option space; and, most importantly, the Fed just isn’t seeing the kind of increased inflation which would cause it serious concern. Just this morning, we saw the release of inflation data for personal consumption expenditures — that’s the number the Fed likes to concentrate on most, even more than CPI. And the number came in at just 0.1%. Nothing to worry about there.

So be very wary of anybody saying that in the wake of this morning’s release, markets now “think” that there’s a significantly increased chance of a taper in December, or even January. (Janet Yellen doesn’t take over from Bernanke until the February meeting.) You can try to back out implied probabilities from market prices if you like, but the more volatile the markets, the less informative those implied probabilities will be.

This is a GIGO jobs report: garbage in, garbage out. In fact, its doubly GIGO. The first GIGO is the way in which all those incorrectly-completed questionnaires resulted in much larger, and much less quantifiable, error bars than we normally see in the jobs report. And the second GIGO is the way in which the unreliable jobs report created significant market moves.

So unless you’re a trader working on a time horizon of minutes, it’s best to ignore all of today’s noise, both in the data and in the markets. These things will resolve themselves eventually, but it could easily take until well into 2014 for them to do so.

COMMENT

Great article. I have studied Economics for over 40 years and laugh at the modern day economic statistics.

About forty years ago I read a book called “How to lie with statistics”. Most modern day Economists are corporate owned like the politicians.

The western world needs a revolution, and I will join it.

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Bad investment of the day, Fantex edition

Felix Salmon
Oct 18, 2013 13:43 UTC

Now that the ban on general solicitation is over, all manner of weird companies are emerging from the nether regions of the internet, trying to persuade people to part with their money in return for a nominal stake in some unlikely investment. One of the glossiest of these new companies is Fantex, which just filed a prospectus for its first athlete-IPO.

Fantex couldn’t have hoped for better press: the NYT covered the story in its Venture Capital section, under the headline “If You Like a Star Athlete, Now You Can Buy a Share”. ESPN, meanwhile, went with “Fantex to offer Arian Foster stock”, while USA Today opted for “Want to invest in NFL’s Arian Foster? Here’s a chance”. Which just says to me that none of the journalists actually read and understood Fantex’s S-1.

The idea here is not a new one; indeed, Michael Lewis wrote about it in depth as long ago as April 2007.

When financial historians look back and ask why it took Wall Street so long to create the first public stock market that trades in professional athletes, they will see ours as an age of creative ferment. They’ll see a new, extremely well-financed company in Silicon Valley that, for the moment, sells itself as a fantasy sports site but aims to become, as its co-founder Mike Kerns puts it, “the first real stock market in athletes.” And they’ll find, in the bowels of the U.S. Patent and Trademark Office, an application from a cryptic entity called A.S.A. Sports Exchange containing a description of a design for just such a market: The athlete would sell 20 percent of all future on-field or on-court earnings to a trust, which would, in turn, sell securities to the public.

Kerns’ cryptic entity ended up being called Protrade, and going exactly nowhere. But Fantex is basically exactly the same thing, just a little bit more complicated and less attractive to investors. With Protrade, you’d buy shares in a trust, which would own 20% of any athlete’s earnings. With Fantex, by contrast, you buy shares in Fantex — a highly risky startup company which is losing money and which has precious little income with which to cover its substantial expenses.

The vast majority of the shares in Fantex — 100 million, to be precise — are closely held by its founders and backers. But another 1 million are being sold to chumps at $10 apiece, to raise the $10 million that Fantex is going to pay Arian Foster, who currently plays football for the Houston Texans. The chumps are buying something called a “tracking stock”, the performance of which is supposed to mirror the economic fortunes of the 27-year-old athlete. And maybe it will. Or, maybe it won’t. The directors of Fantex are under no obligation to pass Foster’s earnings on to shareholders in the form of dividends — even assuming that the contract with Foster does indeed do what it’s meant to do, and result in Fantex receiving 20% of Foster’s earnings, more or less in perpetuity.

The press surrounding Fantex makes it seem as though the biggest risk here is that Foster ends up with a dud of a career — and that is indeed one of the many risks with this investment. But that’s also exactly what Fantex wants you to think: that your stock will go down if Foster does badly, and will go up if he does well.

In reality, however, there are even more non-Foster risks to this stock than there are Foster risks. Your stock, for instance, can only be traded on an exchange which is owned and operated by Fantex. The directors of Fantex can, at their sole discretion and at any time, convert all your Foster shares into common Fantex shares, at any ratio which they determine to be fair. Or, more realistically, they can just go bust: after all, as the prospectus notes, they have no experience in this business. And if they go bust, then the holders of the tracking stock will end up owning about 1% of a bankrupt company, no matter how successful Foster is. As the prospectus says:

While we intend for our Fantex Series Arian Foster to track the performance of the brand, we cannot provide any guarantee that the series will in fact track the performance of such brand. The board of directors has discretion to reattribute assets, liabilities, revenues, expenses and cash flows without the approval of shareholders of a particular tracking series, which discretion will be exercised in accordance with its fiduciary duties under Delaware law and only where its decisions are in the best interests of the company and the stockholders as a whole.

In other words, when the directors decide “to reattribute assets, liabilities, revenues, expenses and cash flows”, their duty is to Fantex, the holding company, and not to the chumps with the Foster shares, who between them account for less than 1% of Fantex’s equity. And in general, as the prospectus also says, “any of our tracking series will be subject to the risk associated with an investment in Fantex as a whole”.

This investment, then, is basically the worst of all possible worlds: if Foster fails, it fails, and if Fantex fails, it also fails. And even if they both do quite well, you’ll only be able to profit on your investment insofar as a completely separate business — the Fantex stock exchange — actually works.

Fantex isn’t looking to raise a huge amount of money here: $10 million should be achievable, given the vast sums bet on fantasy leagues every season. You only need 5,000 chumps investing $2,000 each and you’re there. So Foster is likely to get his cash. But after that, I can’t see this thing going well. Football players are notoriously bad at organizing their finances; is Foster really likely to manage to timely file his mandated Quarterly Report, which “shall detail all Brand Income earned during such quarter, detail the calculation of the Brand Amount for such quarter with respect to such Brand Income, and provide such additional information and certifications required to be included in the Quarterly Report, including such matters as specified in Exhibit E”, within ten days of the end of every calendar quarter, for the rest of his career?

Some time quite soon, Foster is going to receive a $10 million check from Fantex; if he’s typical of most 27-year-old star football players, he’s likely to spend most if not all of that money pretty quickly. But for what will probably be the rest of his life, he’s going to be burdened by what is essentially a private 20% income tax, over and above everything he owes to the government, and to his creditors.

There might be people out there who like the idea of buying and selling stock in Arian Foster — speculating on the fortunes of someone else. But if they stop to think about what they’re doing, they’ll probably realize that it’s pretty distasteful. What they’re trading is the present value of Foster’s future earnings: they’re saying that in many years’ time, long after Foster has left the gridiron for good, they will be sitting there, with their hands out, every quarter, demanding from him 20% of everything he earns. Here’s how the Fantex website puts it:

IT DOESN’T HAVE TO END AT RETIREMENT.

This is a stock linked to the value and performance of an athlete’s brand, not the person. When the athlete retires, their brand may or may not continue to generate income into the future (e.g. endorsements, appearances, broadcasting, etc.). As long as the brand continues to generate income as defined in the brand contract, Fantex, Inc. is entitled to continue to receive payments pursuant to its brand agreement.

This kind of language is deliberately dehumanizing: the athlete is referred to not as a person but as a “brand”, throughout. And the racial overtones are unavoidable: Fantex’s About page features four grinning middle-aged white men, while the man they’re taking 20% of is young and black. This isn’t slavery, this isn’t ownership. But the rich white businessmen are buying something for their $10 million, while Foster is legally binding himself to writing substantial checks to those businessmen, and/or their successors, every three months, for what is quite likely to be the rest of his life.

Before you put any money into Fantex, then, ask yourself two questions. First, do you want to make a really stupid investment? And second, do you really want to buy shares in a company which treats young black men as property to be acquired and then privately taxed? Because that’s exactly what you’re going to be doing.

COMMENT

We are happy to answer any questions you may have, please call us between 9:30 AM ET and 8:30 PM ET @ 855.905.5050.

The Fantex Brokerage Services Team

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