Felix Salmon

Kathleen Madigan had an important post on Friday, showing financial profits roaring back to more than 30% of all domestic US profits. As she says, “that’s an amazing share given that the sector accounts for less than 10% of the value added in the economy” — and makes it “hard for banks to cry poverty” when it comes to things like debit-card interchange legislation.

Madigan gave us the percentage chart, which shows the finance industry taking an even greater share of total corporate profits than it did during most of the boom year of 2006.

But I wondered: how much of this is a function of generally lower profitability overall — a question more of a low denominator than a high numerator? So I went along to the BEA website and put together this chart:

The blue line is total domestic profits. The green bars are the massive profits made by the Federal Reserve — an incredible $233 billion in 2010 alone. But as you can see, those Fed profits are dwarfed by the red bars, which are private-sector financial profits. Those dipped into negative territory just once, in the fourth quarter of 2008, and in the fourth quarter of 2010 reached an annualized $379 billion — bringing the total for the year to more than $1.3 trillion.

What this chart says to me is that nothing has changed, and nothing is going to change. Banks are still extracting enormous rents from the economy, and profits which should be flowing to productive industries are instead being captured by financial intermediaries. We’re back near boom-era levels of profitability now, and no one seems to worry that the flipside of higher returns is higher risk. Any dreams of seeing a smaller financial sector have now officially been dashed. And the big rebound in corporate profits since the crisis turns out to be largely a function of the one sector which we didn’t want to recover to its former size.

Update: Thanks to John Coogan for pointing out that the BEA already annualized the quarterly figures, as well as seasonally adjusting them. So I was wrong to add up all the quarterly figures for 2010 to get what I thought were annual figures. Sorry.

James Murphy, of LCD Soundsystem, is not on Twitter a lot. In the past month, he’s tweeted precisely eight times. But when he was trying to sell tickets to his final show at Madison Square Garden back in February, he was very active. He started on Tuesday February 8, with two tweets to announcements of a ticket presale on February 9. And then after the presale released tickets onto the market, he started getting angry, with a series of eleven tweets expressing violent and profane anger towards scalpers in general and StubHub in particular. It seems his ire was raised by someone selling a single ticket for $1,500.

But there’s something very interesting going on here. I talked to Glenn Lehrmann of StubHub today — himself the subject of an irate Murphy tweet — and he said that when Murphy started sending his tweets out, there were roughly 1,000 tickets for the LCD Soundsystem show available on StubHub. Most of them were priced at about $130 to $140, with about 90% under $200. The tweets, however, “significantly raised demand” and the perceived value of the tickets. By the time that tickets officially went on sale to the public on the morning of Friday February 11, fewer than 30 tickets had asking prices of less than $200, and the average price was around $500.

When the tickets went on sale, no one got any. And so the demand moved naturally to StubHub — of the 1,915 tickets to LCD Soundsystem’s MSG show that StubHub has sold to date, roughly one third were sold on February 11, when prices were at their peak. Right now, prices are much lower; the average is $212, and the lowest-priced tickets are about $100.

Lehrmann confirmed to me that StubHub saw no increase in the number of tickets available for sale after 11am on Friday. The official James Murphy theory — that scalpers with bots had bought up all the tickets and were flipping them with StubHub — is simply not true: substantially all of the tickets which sold on StubHub that day came from the American Express pre-sale on the 9th.

“It’s not humanly possible to sell 9,000 tickets in one minute,” Lehrmann told me, adding that if MSG or Bowery Presents (the promoter) or Murphy himself simply published the manifest for the show, that would clear everything up, by showing to the public just how many tickets were sold on February 11 when the bulk of the tickets ostensibly hit the market. “The artists and promoter aren’t going to share the ticketing manifest, so they hide behind the bots theory,” says Lehrmann. “But if the bot theory was true, wouldn’t you be waving the manifest from the tallest mountain?”

The fact is that the number of LCD Soundsystem tickets sold on StubHub is entirely normal for the venue — the Lady Gaga show in February, for instance, saw more than twice as much activity on the site.

So what’s going on here? “I’m not revealing any huge industry secret,” says Lehrmann, “when I say that the majority of tickets are held back, and are sold either to local brokers or directly resold on a secondary site.”

Essentially, what happens is that bands set the face value of the tickets artificially low, so as not to look as though they’re ripping off their fans. But they only release a fraction of tickets to the public at face value. Lehrmann told me that a Taylor Swift show at National Arena last year sold just 13% of its tickets to the general public, with another 30% going to American Express and to the fan club. Fully 57% of the tickets were sold through some kind of back channel, presumably at a substantial mark-up from face value. In the case of MSG, it’s clear that’s going on: “at $40 face value,” says Lehrmann, “the promoter probably isn’t even paying the rent on the building.”

Between them, the band and their promoter build up long-standing relationships with ticket brokers, who then sell on their wares in a variety of ways. Some appear on StubHub and other secondary-market sites; others are sold directly to clients; others still are hawked on the street on the evening of the show. The risk is borne entirely by the brokers: the promoter has sold its inventory to them, and then leaves it up to the brokers to determine how, where, and when those tickets might appear for sale.

In the case of LCD Soundsystem, it looks very much as though the overwhelming majority of tickets went to brokers, and few if any were sold at face value on the public on-sale date. Murphy can rage against the scalpers as much and as loudly as he likes. But looking at the numbers from StubHub, it seems that Murphy himself — and/or his promoters at Bowery Presents — are exactly the people putting those tickets into the scalpers’ hands. If Murphy wants to go around blaming people, he should first come clean on how much his own behavior caused the very problem he’s complaining about.

One of the best aspects of being a journalist is that you get to talk at length to the most knowledgeable and interesting experts on just about any subject you can think of. For me, yesterday was a prime case in point: a long and fascinating lunch with James Macdonald, the author of my favorite book on the history of sovereign debt. Turns out he also has a microscopic vineyard in Tuscany, so the conversation ebbed wonderfully from economics to wine and back.

Macdonald has an economic historian’s view of the current austerity debate, and he was very clear: if you look at the history of countries trying to cut and deflate their way to prosperity while keeping their currencies pegged, it’s pretty grim — all the way back to Napoleonic times. Sometimes, the peg is gold. For a good example of the destructive abilities of that particular peg, look at the UK in the 1920s, which Macdonald says was arguably worse than the US in the 1930s: shallower, to be sure, but substantially longer. The devaluation of the pound, when it finally came, was very long overdue.

At other times, the peg is simply political: Macdonald gives the example of southern Italy being locked into what was essentially the Piedmontese monetary system at the time of the Risorgimento. That might have been well over a century ago, but there’s a case to be made that it has hobbled just about everywhere south of Rome to this day — and that’s in a country with about as much internal labor mobility as between EU countries.

So from a historical perspective, the prospects for countries like Portugal, Ireland and Greece are pretty grim. They can cut their budgets drastically and stay pegged to the euro, but most of them would be better off in the position of Iceland, which can and did devalue in a crisis (and allowed its banks to default, too). So far, the Baltic states have stuck to their deflationary guns with the most determination and discipline, but such things work until they don’t: at some point it’s entirely possible that Latvia or Estonia could pull an Argentina and kickstart growth by devaluing.

All of this is relevant for the US states, of course, which are also locked into a currency union and facing very tough fiscal cuts, as Steven Pearlstein says today:

Will the pain come in the form of prolonged high unemployment? Or wage and salary cuts? Or reduction in the value of homes and financial assets? Or loss of ownership of American companies? Or price inflation? Or higher taxes? Or reductions in government services and benefits?

The right answer, of course, is “all of the above.”

Meanwhile, David Leonhardt takes an important look at Germany, which you might think was benefiting, in some kind of zero-sum mathematics, from the pain of the European periphery. It isn’t: German GDP is still significantly lower than it was in the first quarter of 2008, while US GDP is now back above its pre-crisis levels. (Britain is doing significantly worse than either.)

“The historical lesson of postcrisis austerity movements,” writes Leonhardt, “is a rich one,” and also clear: they don’t work, even if they’re “morally satisfying.”

The answer, it seems, would be for crisis-hit countries to do the equivalent of what Macdonald and I did at lunch yesterday. I was coming off a slightly feverish and bed-ridden Monday, but we still went ahead and ordered the macvin, a spectacular fortified late-harvest white (yellow, really) pinot noir from the Jura. It goes very well indeed with mangalitsa ham. And I feel much better today, thanks.

A clear narrative emerged pretty quickly in the wake of last week’s LCD Soundsystem ticket fiasco. Annie Lowrey tried and failed to get tickets when they went on sale at 11am on Friday, but was foiled:

Had something gone awry? I quickly checked Twitter. Nobody—really nobody, it seemed—had gotten through. Perhaps there was a problem with the site?

No. As it turned out, the show had sold out within seconds. It is just that professional ticket resellers, otherwise known as scalpers, had scooped up the bulk of the seats. Within minutes, hundreds of them were available on StubHub and other secondary markets where sellers can charge whatever they want. Tickets with a face value of $49.50 were going for 12 times that—with some coveted spots in the general-admission dance area going for thousands of dollars.
How did they do it? With bots. Computer systems—not particularly sophisticated ones, either—submit tens of thousands of requests for tickets the very instant they go on sale, crowding regular folks out.

This story seemed to be confirmed by LCD Soundsystem itself, with a profanity-laden posting blaming scalpers for the problem and presenting new shows at Terminal 5 as the solution. As Lowrey puts it, frontman James Murphy “realized he had an ace up his sleeve. He flooded the market, adding shows, upping ticket supply, and hopefully pushing prices down.”

For anybody who loves both music and teachable moments in microeconomics, the subject was irresistible. Lowrey’s post was followed up by Matt Yglesias, who drily declaimed that “optimal allocation of LCD Soundsystem tickets requires demand-responsive ticket pricing” if scalpers aren’t going to end up collecting rents. And Rob Cox, after looking into the matter, concluded similarly that what we’re seeing here “offers a strange insight into the laws of supply and demand”.

But in fact the story of these shows is much murkier than all this pop-economics punditry would have you think. Bob Lefsetz, who has real-world experience of how tickets are sold in practice, says that far from selling out 13,000 tickets at the public on-sale date, LCD Soundsystem in fact only sold 1,000. He notes:

James Murphy could publish exactly how many tickets go on sale to the general public, but he doesn’t want to. No act wants to, they’re afraid of the public outcry. This information is available to acts, but they don’t want to disseminate it.

After publishing his analysis, Lefsetz then mailed out a letter he received which lays out an intriguing counternarrative. What if the MSG show has not, in reality, sold out at all? The conspiracy theory goes like this: LCD Soundsystem’s promoter, Bowery Presents, owns Terminal 5. By holding back most of the MSG tickets, secondary-market prices would be sure to skyrocket. The way that MSG is structured, the coveted general-admission area in front of the stage is actually pretty small, which means that it’s quite easy to generate a handful of headline-grabbing offers of tickets for sale at $10,000 apiece or more. If they wanted, LCD’s promoters could even put those offers up themselves, and then encourage the band to complain in public about the exorbitant prices.

After getting everybody’s attention by artificially clamping down on the supply of MSG tickets, LCD’s promoters can then easily sell out four or more shows at their own venue, Terminal 5, which by coincidence just happened to be unbooked in the run-up to the MSG gig. Given all the buzz that this activity creates, the unsold MSG tickets can then be quietly disposed of on StubHub and other secondary-market sites.

I suspect that there’s more than a little truth in the conspiracy theory. For one thing, the number of tickets available on StubHub did not actually increase appreciably after 13,000 tickets were purportedly sold out in seconds. On top of that, we’re in mid-February already; it’s definitely weird that Terminal 5 was set to be completely dark from March 20 through March 31, with the exception of a single show on March 25. And it’s even weirder that no one — no one at all — got public tickets for the MSG show when they supposedly went on sale en masse: the only people who have gotten tickets in the primary market did so on the pre-sale dates or through tickets allocated to American Express.

The fact is that concert promoters, like art dealers, are fiercely protective of the asymmetric information advantage they have over the general public. Bowery Presents, the promoter of these shows, knows full well how many tickets were sold to the MSG show, and when. But they’re not releasing that information, because it’s very much in their interest for everybody to believe that 13,000 tickets sold out in a matter of seconds.

I don’t think that’s possible. Bots are sophisticated, to be sure, and anybody familiar with high-frequency trading on stock exchanges knows how quickly financial transactions can take place electronically. But Ticketmaster is not set up as a high-frequency exchange, and indeed puts up obstacles designed to make it harder for bots to buy lots of tickets quickly.

On top of that, bot-wielding scalpers had no particular reason to believe that LCD tickets would become hugely valuable on the secondary market, given that the band had never played a show of remotely MSG’s size in the past. I can see them buying a few hundred tickets over the course of 15 minutes or so; I simply don’t believe that they bought more than 10,000 tickets in the space of less than 15 seconds. I don’t believe they wanted to, and I don’t believe they’re capable of doing that even if they did want to.

People sympathetic to the band, like Rob Cox, claim that LCD Soundsystem and its promoters didn’t understand the economics of scarcity when they put the MSG tickets on sale. I, by contrast, think they understood the economics of scarcity all too well — and successfully used it to generate buzz and publicity. What really happened here, I think, is akin to the IPO of theglobe.com back in 1998, where the supply of new shares was so tiny that the price soared from $9 to $97 on the first day of trading. In turn, that generated lots of headlines, and ensured that the number of people who had heard of the website increased by orders of magnitude.

Supply and demand for concert tickets aren’t static numbers which then get reflected in prices. There are complex feedback loops here too: scarcity and price mechanisms can feed back into increased demand for tickets. Certainly this story has meant a large increase in the number of people who know that LCD Soundsystem is playing its last-ever gig at MSG in April. It’s surely naive to think that all the second-order effects here were completely unintended.

I love Binya Appelbaum’s NYT article on the various different values of a human life which are used by government agencies to justify regulations.

The first thing to admire about the piece is that it doesn’t dwell on ethics or philosophy, as most such stories do — there are no rhetorical flights of fancy about the government trying to put a dollar value on love, or that kind of thing. Instead, Appelbaum goes on a tour of government agencies, looking at the numbers they’re using now, how those numbers differ from other agencies, and how they have changed over time:

The Food and Drug Administration declared that life was worth $7.9 million last year, up from $5 million in 2008, in proposing warning labels on cigarette packages featuring images of cancer victims…

The Bush administration rejected a plan in 2005 to make car companies double the roof strength of new vehicles, which it estimated might prevent 135 deaths in rollover accidents each year…

Last year, the Obama administration imposed the stricter and more expensive roof-strength standard, and it published a new set of calculations showing that the benefits outstripped the costs.

Most of the difference came from the increased value of human life. By raising that number to $6.1 million from a figure of $3.5 million in the original study, the Obama administration rendered those 135 lives — and hundreds of averted injuries — more valuable than the roofs…

Agencies are allowed to set their own numbers. The E.P.A. and the Transportation Department use numbers that are $3 million apart. The process generally involves experts, but the decisions ultimately are made by political appointees.

The Office of Management and Budget told agencies in 2004 that they should pick a number between $1 million and $10 million. That guidance remains in effect, although the office has more recently warned agencies that it would be difficult to justify the use of numbers under $5 million, two administration officials said.

This kind of behavior leaves the agencies open to charges of inconsistency and capriciousness: if at first you don’t succeed in making your cost-benefit calculation work, then just try again with an arbitrarily higher number for the benefits involved.

But I think that this is a case where the perfect is the enemy of the good. As Manchester University professor Robert Hahn notes in the article, “the reality is that politics frequently trumps economics”. That’s a fact of life. And in a world where political considerations are ultimately going to power many if not most decisions, using dollar values for lives saved is a good way of keeping such arguments grounded in reality.

Sure, businesses don’t like it when the FDA ups its value for a life saved by acetaminophen warning labels to $7 million from $5 million, and it’s entirely possible that the FDA changed the valuation only so that it could provide an official justification for a decision it had already made. The fact is, however, that these calculations are always messy at the best of times. It’s easy to point to the value-per-life part of the calculation, because that’s a hard number. But how on earth is the FDA meant to calculate the number of lives saved by adding a second warning label to acetaminophen bottles? The error bars there are going to be much bigger than the differences in value-per-life numbers.

In that context, a little bit of fuzziness in the $5 million to $10 million range seems entirely reasonable to me. It’s regulators’ job to make judgments, not to simply sit at a desk with a calculator and determine which of two numbers is larger. And at the same time it’s reasonable to ask regulators to justify their judgments using math. So sometimes they’ll use a slightly higher number, and sometimes it’ll be lower. Giving regulators a bit of wiggle room gives them the ability to do their jobs, while restricting that wiggle room allows a simple smell test to be applied.

None of this is exactly pretty, and it’s easy to see why Appelbaum couldn’t get straight answers out of the technocrats he talked to. But if anything the amount of wiggle room is smaller than I would think reasonable:

In December, the E.P.A. said it might set the value of preventing cancer deaths 50 percent higher than other deaths, because cancer kills slowly. A report last year financed by the Department of Homeland Security suggested that the value of preventing deaths from terrorism might be 100 percent higher than other deaths.

Both those numbers could and arguably should be significantly higher, I think. Dying of cancer is a particularly gruesome — and expensive — way to go. And the cost of the terrorist attacks of September 11 is well up in the trillions at this point — getting on for a billion dollars per initial life lost.

So color me impressed that the US government has found a way of getting things done and remaining empirical in an atmosphere which by its nature is always going to be highly political. It comes as no surprise that the Obama administration is using values higher than the Bush administration did — that’s part of what Obama meant when he promised to toughen up government regulation of corporations. I’m just happy that there’s a culture in Washington of basing these decisions on some kind of numerical argument.

(On which matter I have one quibble with Appelbaum’s piece. He says that if companies must pay lumberjacks an additional $1,000 a year to perform work that generally kills one in 1,000 workers, that would impute a $1 million value on a human life. I don’t think that’s true: you should take the present value of $1,000 per year before you multiply by 1,000. So the imputed value of human life here would be much higher than $1 million, depending on how long the average lumberjack works at his job.)

New York taxis are a textbook example of gains going to capital rather than to labor. They’re generally owned by one person — the person with the capital — and driven by another — the person with the labor. And the person with the capital has made out very well of late. When the stock market peaked in October 2007, medallions were trading at $425,000 apiece. (All data from this page.) By the time the market had plunged by more than half in February 2009, medallions had risen in value to $552,000. And they’ve only gone up in value since: in December 2010, the average medallion changed hands for $624,000; last Wednesday, a new all-time record was set for a corporate medallion which sold for $880,000.

Meanwhile, drivers earn nothing like that kind of money. Getting reliable statistics for taxi-driver income is not easy, but it seems to average out somewhere around $130 per shift — which is actually less than the the amount the drivers pay to lease the taxi. And remember that the owner leases out the car for two shifts per day, while the driver can only work one shift.

It’s pretty clear to me what’s happening here. The medallion owners hold the power, and will charge whatever they can to drivers. If anything happens (a fare hike, say) which improves drivers’ income, then the rents just get jacked up: there’s a lot of demand for taxi-driving jobs, and so essentially the owners just rent out their taxis to the drivers willing to pay the highest shift fee and therefore take home the lowest income.

When someone like Melissa Plaut, then, starts complaining about a proposed rule change on the grounds that it will reduce drivers’ income, I think that she’s missing the bigger picture. It’s the owners who reduce drivers’ income, by charging them as much money for the privilege of driving a cab as they can possibly get away with.

Meanwhile, it’s the mayor’s job to try to create a system where yellow cabs and livery cabs coexist to maximize the welfare of New Yorkers — the general population first, and the drivers second. The medallion owners come a distant third.

Somehow, annoyingly, the medallion owners always end up the winners here, and that doesn’t seem fair to me. None of them were hurting when medallions were fluctuating in value between $200,000 and $250,000 in the years from 1998 through 2003. And for the past eight years or so they’ve been laughing all the way to the bank.

If drivers have an issue with their income, then, they should take up their beef with the medallion owners. But instead, every time that the city proposes something to improve the taxi system more generally — like issuing more medallions, or putting credit-card readers in cabs, or putting meters in livery cars — the drivers reflexively side with the owners. Anything which might hurt medallion owners, they assume, will automatically hurt drivers as well.

Which I’d agree with, if it weren’t for the fact that drivers have signally failed to participate in the good fortune of the owners over the past decade. It’s time I think for the mayor to start putting in protections for cab drivers, which might get an important constituency on his side when it comes to making these kind of changes. Even if doing so annoys a handful of politically-powerful medallion owners.

Update: Plaut responds in the comments.

Last week, when I wrote my post on how to boost employment, the list started off unambiguously:

The first—and this can’t be stressed enough—is simply extending the federal unemployment extensions. As Menzie Chinn notes, the CEA has scored this, and the numbers are enormous: already, the program has increased the level of employment by 793,000 jobs. If the extensions are kept dead, there will be 593,000 fewer jobs in a year’s time than there would be if they were resuscitated, including more than 46,000 jobs in Florida and more than 26,000 jobs in Michigan.

This is not intuitive, especially to economist types who think that incentives matter and that at the margin, paying people to remain unemployed is not going to increase their chances of getting a job. But the fact is that those unemployment benefits are spent, and the extra economic activity naturally creates employment.

There is of course some effect by which paying people to stay unemployed will increase their chances of doing so. Rob Valletta and Katherine Kuang, of the San Francisco Fed, did the math back in April, concluding that the effect is “relatively modest”:

The question arises whether this extended availability of UI benefits has contributed to a lengthening of unemployment spells because jobless workers are staying in the labor force longer in order to continue collecting benefits. Such a dynamic could raise the unemployment rate. However, analysis of data on unemployed individuals decomposed by their reason for unemployment, which affects their eligibility for UI, suggests that extended UI benefits have had a relatively modest effect. We calculate that, in the absence of extended benefits, the unemployment rate would have been about 0.4 percentage point lower at the end of 2009, or about 9.6% rather than 10.0%.

Peter Coy has taken a detailed look at the interplay between the two effects:

Do the extra checks make unemployment higher than it would otherwise be by paying people to sit at home? Or do the checks sustain growth by supporting the spending power of households with out-of-work breadwinners?

In truth, unemployment benefit extensions do both—they raise the jobless rate a bit, and they make the economy grow faster. What’s clear is that extending jobless benefits makes more sense when the unemployment rate is exceptionally high, as it is now, at 9.8 percent in November… Because aid to the jobless is almost immediately spent (as opposed to tax refunds for the wealthy), it is the most effective means of stimulating demand.

Coy’s “bottom line” is clear: “Although the Obama-GOP tax deal extends unemployment benefits, it probably will not dissuade many jobless from seeking work.”

This all adds up to something reasonably clear. Unemployment insurance isn’t only just from a fairness perspective, it’s also extremely effective as stimulus. Any effect whereby it encourages people to stay unemployed is, in comparison, modest.

Which is why it’s very odd to find Kelly Evans, in the WSJ, writing the exact opposite.

More jobless benefits, more unemployment.

A likely rise in the U.S. jobless rate is the unfortunate reality of the government’s move to fund extended unemployment benefits for another 13 months.

The effect probably won’t be huge, but it will be significant. And it may well hamper any recovery in investor and business confidence.

Evans isn’t very good at math*:

Individuals not actively searching for work or willing to take available jobs may claim they are unemployed in order to receive benefits. That could artificially boost the size of the labor force, which is used to determine the unemployment rate.

Well yes, the labor force is indeed used to determine the unemployment rate, but it’s the denominator in that calculation. If the denominator goes up, the rate goes down. The problem is rather that in any ratio less than 100%, if you increase the numerator and the denominator by the same amount, then the ratio goes up.

Evans concludes:

Policy makers are hoping that extending benefits—along with other tax breaks—will generate enough short-term strength in spending and growth to overshadow any rise in the unemployment rate.

That may prove wishful thinking. The late rapper Notorious B.I.G. probably put it best: “mo’ money, mo’ problems.”

Evans’s piece elicited a smart smackdown from Zack Roth, who actually went to the trouble of phoning up the SF Fed’s Rob Valletta:

“These separate effects act in opposition to one another,” said Valletta. So the question becomes: Which effect is greater, in our current situation?

On this, Valletta was clear. In the current weak labor market, he said, the micro effect is relatively small. “I think the macro economic effects, in terms of reducing the unemployment rate, outweigh the micro effects that increase the unemployment rate,” he said.

This makes perfect intuitive sense, since the macro effects right now are huge, on the order of $60 billion being spent, and 600,000 extra jobs created. It really doesn’t seem plausible, in this economy, that more than 600,000 people will stay out of work and live on their unemployment checks rather than accept a job they would have taken in the absence of those checks; neither does it seem plausible that injecting $60 billion into the economy would send the unemployment rate up.

After Roth’s piece appeared, Evans responded, saying that “we’re all making the same point re: jobless benefits.” (It’s fantastic, by the way, that she’s happy and willing to join the public debate over her stories.) Roth was not convinced, replying that “your point was jobless benefits boost unemployment. everyone else’s is that they cut unemployment. seem like different points.” And so Evans clarified, here and here:

The disagreement is over net effect; will extending UI do enough for growth to overcome the rise in unemployment?

I’m not that optimistic about growth. Extending UI helps growth; but enough to overcome upward pressure on UR?

This misses the point: extending UI would be a good idea even — especially — if growth were sluggish. It’s when the economy isn’t growing that you need to apply stimulus, if only to prevent it backsliding into a double-dip recession. Growth doesn’t need to be high in order for UI to create employment; it just needs to be higher than it would have been absent the extra benefits. If you’re “not that optimistic about growth”, that’s all the more reason to want the fiscal stimulus of extending UI.

Evans might be right that the US unemployment rate is going to rise rather than fall. But if the unemployment rate does rise, the reasons for that rise will be found in the macroeconomy as a whole. Blaming any such rise on the extension of unemployment insurance will be silly.

*Update: This passage was ill-written, or ill-advised, or both. When I reposted this at CJR, I changed it to say that “Evans isn’t very good at explaining the math of why more unemployed people add to the unemployment rate”. I probably shouldn’t have included it at all, though, it’s not central to my point.

Given the urgency of boosting employment and reducing unemployment, we need much more than vague ideas about training and apprenticeship. The good news is that there are at least two very good ideas which could be implemented quite easily and which would have a direct effect on employment.

The first—and this can’t be stressed enough—is simply extending the federal unemployment extensions. As Menzie Chinn notes, the CEA has scored this, and the numbers are enormous: already, the program has increased the level of employment by 793,000 jobs. If the extensions are kept dead, there will be 593,000 fewer jobs in a year’s time than there would be if they were resuscitated, including more than 46,000 jobs in Florida and more than 26,000 jobs in Michigan.

This is not intuitive, especially to economist types who think that incentives matter and that at the margin, paying people to remain unemployed is not going to increase their chances of getting a job. But the fact is that those unemployment benefits are spent, and the extra economic activity naturally creates employment.

These jobs aren’t cheap: spending $65 billion to create 593,000 jobs works out at about $110,000 per job created. But remember this is just a second-order effect of a policy which makes a lot of sense on its own. (And the net cost is less than $65 billion, thanks to the extra taxes generated by all that new economic activity.)

Cornelius Hurley has a much cheaper idea: using the Federal Home Loan Bank System to try to create jobs rather than homes. He has three specific proposals:

This paper provides three suggestions that utilize the existing system of the FHLB to promote job creation and promotion: 1. making small business and other job-creation loans a more viable and readily accessible source of collateral for advances; 2. expanding the membership of the FHLB System to include firms that are lending to small businesses; and, 3. creating an AHP-like jobs-creation program with the support of funding that formerly went to pay down REFCORP obligations. Changing the mission of the FHLB System to make job creation a primary goal would allow for the use of a pre-existing structure with a channel directly into over 8,000 community banks to increase the amount of credit available to small businesses and thus allow those businesses to immediately create new jobs and the preservation of others.

This I think is a great idea: we’ve learned the hard way that homeownership can cause more harm than good, while employment is a pretty unalloyed Good Thing.

Under Hurley’s plan, the FHLB system would be much more willing than it is now to accept small-business loans as collateral against its own bank lending. Yes, those loans are inherently quite risky, but so in one way it’s much safer to lend against small-business loans than it is to lend against mortgages: souring small-business loans don’t destroy local banks in the way that souring mortgages do.

It’s impossible to know in advance exactly how much these ideas would boost employment. But at the margin they would surely help, and the mechanisms by which they would do so are far more obvious than the mechanisms by which the Fed hopes that quantitative easing will increase employment. So let’s do it: as Hurley notes, some of his ideas could be implemented by presidential fiat, and not even need Congress to pass any laws. What are we waiting for?

It’s all about the bailouts today, as Warren Buffett contributes a thank-you-for-the-bailout op-ed to the NYT to run alongside the paper’s reasonably comprehensive accounting of which bailout monies have been paid back, which might be, and which won’t be. (Think banks, AIG, and Frannie respectively.)

The next big tranche of bailout repayment funds, of course, is going to arrive tomorrow, with the upsized GM IPO. The size of the stake that Treasury’s selling has been growing impressively, and at this point it looks as though taxpayers are going to end up owning just 33% of GM, down from 61% right now.

The more shares that the government sells in the low $30s, of course, the harder it’s going to be for Treasury to realize an average price of $44 per share for its stake by the time its last share of stock has been sold. That’s the point at which the government breaks even on the deal. But I’m glad that Treasury isn’t letting such considerations stop it—holding on to stock just because it’s trading below some arbitrary 0% return figure is simply speculating in the stock market, and it’s not Treasury’s job to be a stock-market speculator.

Meanwhile, the Ireland bailout is already well under way, the protestations of Ireland’s PM that Ireland isn’t asking for one notwithstanding: we’re still in the middle of the bailout era, and we’re not even close to a point where bailouts are a thing of the past. Portugal is next, Greece is inevitable at some point, and various U.S. states might well end up getting bailed out too, sooner or later.

We haven’t even put an end to bailouts of the private sector, since any bailout, even of a sovereign, is ultimately a bailout of its private-sector creditors.

All of which means that sovereign debt is going to continue to go up rather than down: at heart, bailouts are a way of moving indebtedness from the bailed-out entity to the government doing the bailing out. With yet another debt reduction task force reporting today, it might be time to start asking how and whether crisis-related bailouts can ever be accounted for in long-term sovereign debt planning.

Brad DeLong is fed up with vague hand-waving from technocrats, Bob Rubin very much included, who call for the government to make difficult decisions without being remotely explicit about what such decisions might entail. So he comes up with his own seven-point “platform for the bipartisan technocrats of the center”, which “everybody centrist and deficit-hawkish in the reality-based community should be willing to commit to today”.

It’s a provocative and very useful contribution to the fiscal debate, if only because it has exactly zero probability of ever being enacted. But the thinking behind it is solid:

The principal sources of uncertainty in American economics right now are three: we don’t know how the long-run fiscal gap will be closed (but we think it will be), we don’t know how our health-care system will be reformed and transformed (but we know it will be), and we don’t know what our policy toward global warming will be in a generation (but we know that we will have one). The best things the government could do to diminish uncertainty would be to: (1) commit immediately to the full implementation of the version of RomneyCare-plus-cuts-in-Medicare-and-taxes-on-gold-plated-health-plans that was this year’s PPACA, (2) commit immediately to a long-run climate policy in the form of a carbon tax coupled with research incentives for future energy technologies, and (3) commit immediately to a plan to cover the long-term fiscal gap.

The most striking part of DeLong’s plan is not the strict 10-year PAYGO, which would apply not only to extending middle-class tax cuts but also to a second stimulus. Instead, it’s the carbon tax. In contrast to most proposals out there, DeLong’s carbon tax would not be revenue-neutral: half of it — about $73 billion per year, or $635 per household — would go straight to deficit reduction, rather than being used to fund extra spending.

The other half of the revenues from the carbon tax would be used to match extra contributions to Social Security accounts — you could add up to 2% of your Social Security wages to your account, which would then be matched two-for-one by carbon tax revenues.

That, of course, leaves nothing to offset the regressive nature of the carbon tax, the burden of which is disproportionately borne by poor families in rural areas. (And in fact it’s worse than that: poor black families have significantly larger carbon footprints than poor white families, which makes a carbon tax not only regressive but also racially highly charged.)

If you were building a national taxation structure from scratch, you’d definitely include a carbon tax in there somewhere — and probably some kind of Tobin tax, too, not to mention a wealth tax and possibly some kind of consumption tax as well. But of course we’re not building anything from scratch, and the implementation of any new tax is always going to be politically fraught, especially in an environment where most Republicans are never going to vote for any new tax of any description. (See California’s fiscal situation for a good example of where that leads.)

All of which just goes to underline that the likes of Rubin talk gravely about the importance of profound fiscal reform, they know — or they should know — that there’s no way it’s ever going to happen.

DeLong, then, has performed two important services here. He’s translated technocratese into stark policy proposals, and he’s demonstrated that the technocrats in question might as well be talking about giving every US family a free unicorn for all that their wishes will ever come true. Let’s hope (against hope) that when the technocrats continue the debate, they’ll have been paying attention to both messages.

Are you still confused about quantitative easing, what it is and how it works? I certainly was, and so I asked a genuine expert on the matter — Greg Ip, the author of The Little Book of Economics: How the Economy Works in the Real World — whether he could answer a few questions for me. Greg’s been writing some great blog entries on this subject at the Economist, like the one I linked to this morning, but sometimes you need to take a few steps back to clear up some very basic questions first. Thank you, Greg, for these fantastic answers! If you like them, go buy his book!

FS: Does the Fed print money? If so, how?

GI: Yes, and I’m surprised to see Pragmatic Capitalist dispute this.

It’s true that the Fed is not literally printing the $20 bills that end up in your wallet. As a commenter on your own blog has noted, that’s the job of the Bureau of Printing and Engraving. But money includes both currency in circulation and the reserves that commercial banks keep on deposit at the Fed. By that definition, the Fed is indeed printing it.

Here’s how QE works. The Fed buys a $100 bond from Bank of America. The bond gets added to the Fed’s assets. Bank of America has an account at the Fed. The Fed, with a keystroke, puts a $100 into B of A’s account. Where did the money come from? Thin air. Bank of America can visit its friendly neighborhood Fed branch and withdraw that $100 in the form of bills and coins. So for practical purposes the distinction between currency and reserves is meaningless; the monetary base includes both.

Incidentally, it makes no difference whether the bond belonged to Bank of America, or a customer of Bank of America; the mechanics are identical. When the Fed buys the bond from someone who isn’t a bank (e.g. a primary dealer), the transaction is settled through that person’s bank.

The Fed can also unprint money. Suppose its sells the $100 bond back to Bank of America. It then deducts $100 from B of A’s account at the Fed. The money disappears from existence.

You could argue at a more abstract level that this is not printing money. Normally we treat the Fed as independent of the government. Its liabilities, namely currency and reserves, are therefore not liabilities of the government, like treasury bills and bonds. When the Fed buys a Treasury bond, the liabilities of the Fed (reserves) grow but the liabilities of the government stay the same.

If instead you treat the Fed as an integral part of the federal government and merge their balance sheets, then QE simply takes one liability (a Treasury bond) out of circulation, and replaces it with another (reserves). This is actually a core criticism of QE: that in a liquidity trap, investors don’t really care if they own cash or Treasury bills and replacing one with the other accomplishes nothing.

In the real world I think the two should be, and are, treated separately. The Fed as far as we can tell is acting independently. It doesn’t have to buy Treasury debt; it could theoretically conduct QE by buying private sector or foreign debt.

Is there any difference between QE and the Fed’s normal open market operations, beyond the duration of the assets being bought?

Please allow me a moment of naked self promotion; my book, The Little Book of Economics: How the Economy Works in the Real World provides a layman’s explanation of how both conventional monetary policy and quantitative easing are implemented, on pages 71-72 and 156-161. (It has lots of other cool stuff, too.)

In theory, the two are less different than you’d think, as Ben Bernanke said over the weekend. In both cases, the Fed is buying and selling securities in an attempt to influence interest rates. Under conventional monetary policy, the Fed uses open market operations – buying and selling Treasury debt for holding periods of 14 days or less – to target the Federal funds rate. Since the Federal funds market is so small, the Fed doesn’t have to buy or sell much to get the rate to where it wants. And normally, if it’s targeting, say, a 3% funds rate, it will have to periodically sell, to keep the funds rate from dropping below target, as well as buy to keep the funds rate from rising above target.

Under QE, the Fed shifts its focus to long-term rates from short-term rates, and buys as much debt as it needs to get long term rates down. If it ever gets long-term rates to where it wants, it will stop buying. If it thinks long-term rates have gone too low, it could sell. Since the bond market is so huge the Fed has to buy way more debt than when it’s trying to sway the Fed funds rate.  That’s why its balance sheet has grown so much.

This discussion, however, masks an important practical difference. Under conventional monetary policy the Federal funds rate rises and falls with the supply and demand for reserves. The Fed targets the fed funds rate by buying debt, which adds to reserves, or selling debt, which shrinks reserves. Note that the quantity of debt involved, i.e. assets on the Fed balance sheet, is irrelevant: the Fed is trying to fine-tune the supply of reserves, i.e. its liabilities, to get the Federal funds rate on target.  

It’s just the reverse under QE: the Fed is explicitly targeting the amount of debt, i.e. the asset side of its balance sheet, and the amount of reserves it creates in the process is irrelevant. A lot of people have a monetarist-like conviction that the $1 trillion-plus of excess reserves on the Fed’s balance sheet represent a lake of inflationary gasoline just waiting for a match. My advice is to ignore it. Except when banks are liquidity constrained, reserves aren’t an important determinant of how much they lend; the demand for credit and banks’ own lending standards are far more important. QE will affect the demand for credit by driving down interest rates and the dollar and by driving up asset prices, not through the quantity of reserves.

Interestingly, when the Bank of Japan tried QE a decade ago it used a monetarist framework: it had a target for the quantity of reserves it sought to create which it then hoped banks would lend out, expanding the money supply. It didn’t work. So the Fed deliberately shunned this framework, even trying to supplant the damaged brand of “quantitative easing” with the term “credit easing.” Despite the different terminology, the practical results of the policies is the same: more reserves, bigger central bank balance sheets, lower bond yields.

Is the Fed trying to decrease medium-term interest rates and increase medium-term inflation expectations at the same time? Is that possible?

Monetary policy stimulates demand by lowering the real interest rate – that is, the nominal rate minus expected inflation. It could do this by lowering the nominal interest rate or raising expected inflation. The Fed, by implementing QE and telling us it thinks inflation is too low, is trying to do both. So far, it’s working: since August nominal rates have fallen and expected inflation has risen, so real interest rates are quite low, even negative at shorter terms. It’s conceivable, though, that it could fail: if inflation expectations really take off, then selling by panicked bond investors will overwhelm the Fed’s purchases and drive nominal and perhaps real rates up sharply.

What is a currency war? How would we know if the U.S. were engaging in one?

“Currency war” is one of those phrases that, like “shock and awe” seems destined to leave a bigger mark than the person who coined it (for the record, Guido Mantega, Brazil’s finance minister). It seems to be journalistic short hand for competitive devaluation, a dynamic where every country tries to lower the value of its currency in an effort to get an advantage for its exports over everyone else. Clearly, that’s impossible: currencies are a zero-sum market.

Currency war, or competitive devaluation, had a clearer meaning in the gold standard world where countries had implicitly agreed to keep their exchange rates fixed against each other. Countries that broke ranks by devaluing against gold got an immediate competitive advantage.

In a world of  floating exchange rates, it’s a little less clear. Win Thin of Brown Brothers Harriman says that Switzerland, Japan, Brazil, Mexico, Peru, Korea, Taiwan, and Israel have all intervened, but only to slow the pace of appreciation, not drive their currencies down. More prominently, several countries have tried capital controls to slow the pace of foreign buying of their assets and alleviate upward pressure on their currencies. I don’t think this, as yet, can be equated with currency intervention: it seems to me more a cousin to “macroprudential regulation,” by which central banks deliberately try to tamp down speculative flows in the markets in hopes of heading off a more painful speculative bust later on.

I take a relatively sanguine view of these steps. In their book “The End of Influence,” Stephen Cohen and Brad DeLong make an astute observation about China’s use of an undervalued exchange rate to spur export-led growth. It is, they note, a far less distorting form of industrial policy than subsidies, tariffs and quotas with their attendant corruption and rent-seeking. I feel the same way about the latest round of currency intervention and capital controls: they’re a retreat from the ideal world of perfect capital mobility, but a second best solution if the alternative is naked protectionism.

The U.S., I suppose, could be construed as having declared currency war if it started selling dollars on the open market against other currencies. QE alone doesn’t qualify.

What’s the difference between the Fed’s QE and the BoJ’s unsterilized fx intervention?

First, some Econ 101. When a central bank buys foreign currency, it usually pays for it with domestic currency that it borrows from someone else. Thus, the supply of domestic currency doesn’t change (in the jargon, the impact of intervention on the money supply is “sterilized.”) If, however, a central bank pays for the foreign currency with newly-printed domestic currency, the domestic supply of the currency increases; this is unsterilized intervention.

Buying either bonds or foreign currency with newly printed money are both QE. A monetarist would argue their impact is the same: by increasing the domestic money supply, they ultimately raise the price level and lower the purchasing power of the currency, which should drive down its foreign exchange value. The Swiss National Bank carried out unsterilized purchases of euros with Swiss francs because its domestic bond market was too small for a large QE programme.

In practice, however, the two policies have very different effects, especially by altering expectations. Domestic QE influences what investors think the government wants bond yields to be, while FX intervention does the same for the currency’s value. Not surprisingly, the latter is much more divisive globally.

If every country were to try unsterilized intervention, it would be equivalent to every country devaluing against gold at once: relative exchange rates wouldn’t change but everyone’s price level would rise, pushing down real interest rates. Barry Eichengreen, however, has argued that a more effective and less politically divisive way to achieve the same result would be for the Fed, BOJ and ECB to do domestic QE. It’s noteworthy that after its half-hearted, unsterilized intervention in September, the Bank of Japan has changed tack, accelerating its own QE programme to offset the effect on the yen of the Fed’s QE. “This kind of follow the leader response by central banks is part of the solution and not part of the problem,” Eichengreen says.

Gerald Epstein and Jessica Carrick-Hagenbarth have a 41-page paper out which gets boiled down quite effectively to its title: “Financial Economists, Financial Interests and Dark Corners of the Meltdown: It’s Time to set Ethical Standards for the Economics Profession”.

They took a group of 19 academic financial economists and looked for possible conflicts of interest — board memberships of financial institutions, consultancies, that kind of thing. They conclude:

In this study, we showed that the great majority of two groups of prominent academic financial economists did not disclose their private financial affiliation even when writing pieces on financial reform. This presents a potential conflict of interest. If this pattern prevailed among academic financial economists more broadly this, in our view, would represent an even greater social problem. Academic economists serve as experts in the media, molding public opinion. They are also important players in government policy. If those that are creating the culture around financial regulation as well as influencing policy at the government level for financial reform also have a significant, if hidden, conflict of interest, our public is not likely to be well-served.

The findings understate the severity of the situation in the real world, where most consultancies and substantially all paid speeches are kept secret. Financial economists tend to make a lot of money, most of it from the financial sector rather than their putative employers, and they’re very unlikely to disclose their income or their conflicts in public.

Paul Krugman is an interesting case in point:

Before I went to work for the NY Times I did a lot of paid speaking, mainly to investment bank conferences outside the US… My fee for overseas talks was usually $40-50K.

I do very little paid speaking now, and no consulting, because the New York Times has quite strict rules: basically I can only get paid for speaking to nonprofits that have no possible interest in influencing the content of the column. It’s a good rule – read Eric Alterman’s book “Sound and Fury” to see how speaking fees can corrupt pundits – though it meant that I took a substantial income cut to work for the Times.

Krugman is clearly comfortable with the idea that speaking fees can corrupt pundits, and thinks it’s a good idea that NYT columnists don’t accept them. Yet at the same time he had no problem accepting such fees as an economist, and I’m quite sure he never disclosed those fees when he was writing academic papers on financial subjects.

It seems obvious that when you’re regularly making significantly more than the median national annual personal income from giving a single speech, you’re prone to being captured by the people paying you all that money. And the secrecy makes things much worse. I once mentioned in passing on my blog a consultancy gig which I happened to know about and didn’t think was particularly secret. The consultant in question phoned me up extremely distraught, fearful that the employer, a hedge fund, would read my post and react to it with a whole parade of nasty possible actions. There’s no good reason for such secrecy on either the employer or the employee side — unless, of course, there’s something ethically suspect about the arrangement in the first place.

I don’t know what the solution to this problem is, but clearly more disclosure would be a very good idea. But it’s not going to happen: there’s too much money riding on the continuation of the status quo.

(Via Folbre)

John Carney arrives at all manner of improbable conclusions after staring far too long at this chart:

Writes Carney:

The economic crisis followed a lurch in inequality and years of depleted savings–but a far more proximate cause was the return of savings. The climb in savings preceded both the financial crisis and the recession, although it was obviously given a boost by both. But the data very clearly show, the growth of savings started while Wall Street was booming…

It sure looks like competitive savings got started, and kick started the recession.

What is this “competitive savings” of which Carney speaks? Well, he’s found an unpublished paper about inquality and savings in China, and extrapolated wildly to the U.S.:

As the rich get richer and society focuses on wealth as a source of social status, everyone else starts saving more to improve their social status. It’s keeping up with the Joneses in reverse—competitive savings.

The problem is that it’s obviously impossible to take findings from China — where the gross national savings rate hit 53.2% in 2008 — and apply them to the U.S., where the savings rate was less than a quarter of that.

And in any case, the climb in savings did not precede the financial crisis. Bear Stearns had to bail out its subprime hedge funds in June 2007, the recession officially began in December 2007, and Bear Stearns fell victim to the financial crisis in March 2008. The housing market had been in free-fall for over a year by that point, especially in areas with a lot of subprime mortgages.

Meanwhile, the chart shows the spike in savings rates taking place in the second quarter of 2008, after the recession had already begun, long after the credit crunch had had time to bite hard, and after the implosion of Bear Stearns.

Let me make this a little more obvious by annotating Carney’s chart:

Clearly, the rise in savings didn’t precede the recession: it took place entirely during the recession, as you’d expect.

And we’re not seeing “competitive savings” here. Instead, we’re seeing the collapse of the housing market. During the housing bubble, people thought of their mortgage payments as a type of savings — building up equity in their homes. Those figures never showed up in the personal savings rate statistics, but helped to explain why the savings rate was so low: people felt that they were saving in bricks and mortar rather than dollars.

When the housing market crashed, people started spending much less money on housing, partly because they defaulted on their loans, partly because they took advantage of lower mortgage rates to refinance, and partly because rents declined. To a large degree they saved rather than spent the savings, as is natural in a recession. That isn’t competitive savings: it’s simple prudence.

Mark Thoma sends me a very clear explanation of the economics of paywalls from Kellogg’s Shane Greenstein:

Two fundamentally different models have competed in information markets.

In one model, an information provider formats the presentation of information, selling advertising space to another party. These sites want search engines to find them. This model involves little gatekeeping of the user. Much of the open commercial Web operates this way.

In the other model, an information provider sells passwords to users…

Vendors can charge serious subscription fees for password when the information is unique enough that users are not tempted to go to the free advertising-supported alternatives…

The Wall Street Journal has had a bit of success providing unique coverage of financial matters… Similarly, many sports teams have started gatekeeping for deep coverage of team matters…

In most other news markets, in contrast, gatekeeping had a hard time surviving because it was not valuable. This outcome should be blamed on competition between many news outlets with similar material. If one vendor tried to restrict access with gatekeeping activity, another vendor could offer the same information for free, thereby attracting another eyeball for their advertisers. Users tended to go to the latter, undercutting the former.

This outcome arose because the cost of sending files to one more reader is nearly zero, which makes it tempting for competitors to charge nothing and sell advertising. If that attracts large numbers of users from the gatekeeping site, it renders any gatekeeping strategy unprofitable.

There’s a couple of important things to add to this analysis, I think. Firstly, there isn’t some lumpen mass of “users” who are in search of information and go to where they find the most value. Every major newspaper in the world has vastly more readers today than when the only way of reading it was to pick up a physical copy. And the daily readership of an inside-the-beltway publication like Politico dwarfs the print circulation of the largest newspapers in the world — Bild, or The Sun, or USA Today.

When online publications go free, they’re not just competing for users; they’re creating new readers in a way that pay sites have enormous difficulty doing. That’s one of my big problems with paywalls: even if they’re the most effective way of monetizing existing readers, there’s an enormous opportunity cost of implementing them, in terms of the new readers who will in future never read the site because they’re put off by the paywall.

Sites with paywalls understand this, of course, which is why they make selected content free, or allow readers some quota of free articles before they reach the wall. But there is always a downside: such approaches require registration, which many people find too burdensome; and they also mean that the site develops a reputation as somewhere to be avoided unless there’s an article you really want to read. Certainly it becomes very difficult to search such sites for specific information.

More generally, Greenstein sees the economics of content as a competition between providers, where the lowest-cost providers win. But he misses something, I think. It’s not just that readers don’t see the value in paying for content when something “similar” can be found elsewhere. It’s also that there is positive extra value in reading free content, since it becomes much easier to share that content via email or blogs or Facebook or Twitter, you don’t need to worry about following links or running into paywalls, and in general you know that the site will play well with others on the open web.

The point here is that giving away content for free doesn’t have to be a regrettable necessity; it can actually be an exciting way of maximizing the value of your content.

And meanwhile, the richness of the web does not mean that news sites, say, are competing mainly with each other. If Newsday puts up a paywall and it fails, is that because readers can find content similar to Newsday’s elsewhere for free? Yes, in part. But it’s also because the people who would otherwise visit Newsday.com have lots of other things they also like to do. They like to spend time in Farmville, or they want to watch a video of a dog skateboarding, or they want to see their house on Google Earth, or they want to go walk their dog. These aren’t people who need certain information and are going to seek it out at the lowest cost; they’re just people who would visit Newsday’s website if it was free, but won’t if it isn’t.

That’s why gateways and paywalls are such problematic things, online: they’re a bit like that crappy VIP room in the back of the nightclub which is much less pleasant than the big main space. You might wander in there from time to time if it’s free, but if you need to buy an expensive bottle of Champagne to do so, forget it. There’s lots of other stuff to do, both online and off. And so the walled-off areas of the internet simply get ignored.

“The conventional wisdom likely to be repeated over the next few weeks,” writes Mohamed El-Erian today, “is that political gridlock is good for the economy”.

I’m not so sure. There are certainly some people taking that tack: Ken Fisher is saying that gridlock might be good for the stock market, but like all fund managers he’s talking his book, and his reasons are based more on investors emotions than on the fundamental benefits of gridlock. (People “freak out” when the government does something big, says Fisher, and that makes them less likely to invest in stocks.)

Meanwhile, as both El-Erian and Steve Rattner say, if you really want to help the economy, there’s a long list of things which really ought to get done and which aren’t going to happen under gridlock.

Here’s El-Erian’s:

Democrats and Republicans must meet in the middle to implement policies to deal with debt overhangs and structural rigidities. The economy needs political courage that transcends expediency in favor of long-term solutions on issues including housing reform, medium-term budget rules, pro-growth tax reforms, investments in physical and technological infrastructure, job retraining, greater support for education and scientific research, and better nets to protect the most vulnerable segments of society.

And here’s Rattner’s:

The list of unfinished business is long: action on climate change, reform of entitlement spending, and a revamp of the two zombie housing agencies, Fannie Mae and Freddie Mac.

I’d love to see more specificity from El-Erian on what he means by “pro-growth tax reforms”, especially in the context of those “medium-term budget rules”. But there’s a thread running through all of these columns, which it’s important to emphasize: there’s altogether far too much debt in the economy. That goes for individuals, stuck with enormous mortgages; it goes for Fannie and Freddie; it goes for state and municipal governments; it goes for the federal government; and it goes for some, but by no means all, corporations as well.

Top of my list of Things To Do, then, would be to deal with El-Erian’s debt overhangs by abolishing the ridiculous incentives that the tax code gives for taxpayers (both individuals and companies) to borrow as much money as possible. Those incentives eradicated one of the most glistering sliver linings of the crisis: the fact that the forced deleveraging was, at least, a deleveraging. As soon as the crisis was over, everybody releveraged again.

But that kind of reform was a step way too far even when the Democrats controlled both houses of Congress and the White House; it’s unthinkable today. Similarly, we’re not going to get bipartisan action on things like climate change, entitlement reform, or strengthened social safety nets when neither of the two parties would be willing to touch such hot-button issues on their own.

Gridlock, then, only serves to make impossible what was already highly improbable under the best of circumstances. For all their exhortations, El-Erian and Rattner know full well that they’re not going to get their wish lists — and they know that they wouldn’t have gotten their wishlists even if the Democrats had kept the house. It’s all well and good to ask that “mid-course policy corrections will be identified and undertaken on a timely basis” — but what administration has ever been able to do that? The US government simply isn’t that nimble, and it never has been.

So maybe the gridlock question is germane mainly to the perennial and rather boring debate about what happens to stocks under various permutations of parties in the White House, the Senate, and the House. Grandees like El-Erian and Rattner will continue to use their op-ed bully pulpits to push for grown-up action on a long list of issues facing the country. But the reality of U.S. politics today is that Congress is listening to an angry populace, not to multi-millionaire lefty pundits. And the angry populace has no interest whatsoever in “an encompassing economic vision that acts as a magnet of conversion nationally, counters growing international frictions and facilitates much-needed global economic coordination”.

Or, to put it another way, if you give those angry Americans what they think they want, it’s unlikely to help them and quite likely to harm them. But this is a democracy, so that’s what Americans are going to get.

(Cross-posted at CJR)