Opinion

Felix Salmon

Greenspan squanders his final reserve of credibility

Felix Salmon
Mar 30, 2011 22:55 UTC

Thank you, internet: Henry Farrell and his commenters have all the snark so desperately required in response to Alan Greenspan’s ludicrous op-ed in the FT. And they’re not alone: as Alex Eichler notes, “everyone is laughing at Alan Greenspan today”. Greenspan could hardly have made himself look like more of an idiot if he’d tried, not only because the “notably rare exceptions” construction is so inherently snarkworthy, but also because it’s so boneheadedly stupid. Anything which normally makes money is a good idea if you ignore the times that it doesn’t work.

That said, it’s worth looking in a bit more detail at Greenspan’s nutty ramblings, because scarily they’re actually representative of what much of the financial sector believes these days. (And Clive Crook, too.) The context is the GOP-controlled Congress, which has the ability to hobble or even abolish key parts of Dodd-Frank. And Greenspan is urging them on, saying that the early consequences of Dodd-Frank “do not bode well”. In order to do this, he first sets up a straw man, saying that Dodd-Frank was designed to “readily address” the causes of the financial crisis. It wasn’t, of course, but Greenspan pretends it does, and proceeds to give five examples of how it fails to do so, helpfully delineated with bullet points.

The first is that the credit rating agencies didn’t like the idea that they should take responsibility for their ratings. Well of course they didn’t like that idea — but the SEC was so captured that it happily waived the relevant bit of Dodd-Frank. Is it true, pace Greenspan, that the SEC’s supine reaction could not have been “readily anticipated”? Maybe. But the point here is that the unintended consequence of Dodd-Frank was a significant weakening of Dodd-Frank. Greenspan should be happy about this one! It’s the intended consequence of Dodd-Frank that he didn’t like.

Greenspan’s second point is that banks “contend” that they won’t afford to be able to issue debt cards if the Durbin amendment to Dodd-Frank goes through. This contention is silly, of course: no one’s going to stop issuing debit cards at all. But Greenspan believes them, maybe because his entire career was based on trusting whatever he was told by the banks, since banks are always going to do what’s best for their shareholders, and what’s good for bank shareholders is good for America. Or something along those lines, anyway.

Back in 2008, Greenspan admitted that there was “a flaw” in that reasoning, and that he was “very distressed by that fact”. But he’s clearly got over his distress at this point, and is back to his old tricks of simply parroting the spin of the very entities he was purportedly regulating. “Concerns are growing,” he writes, “that without immediate exemption from Dodd-Frank, a significant proportion of the foreign exchange derivatives market would leave the US.”

Who has these concerns? Greenspan doesn’t say, but I’ll let you into a secret: it’s bankers. They like trading derivatives because trading derivatives makes them lots of money. Does it help the broader economy, or create a significant number of jobs? That doesn’t really matter, and neither does any specificity as to what the word “significant” might mean in this context. This isn’t argument, it’s inchoate scaremongering.

Greenspan then moves on to the Volcker Rule, complaining that it puts US banks at a competitive disadvantage. Well, yes. If you have a central bank which takes its regulatory function seriously, then less fettered banks are likely to be at a competitive advantage to your own. Ask Canada. Which is feeling pretty smug, these days, about putting its banks at a competitive disadvantage.

And of course on the subject of international regulatory arbitrage, Greenspan makes no mention of the rumors that Barclays might relocate to the US, welcomed with open arms by Mike Bloomberg among others. Either Greenspan isn’t being intellectually honest here, or else he really believes it’s the function of government to relax regulations in every conceivable area to the point at which all governments compete to see who is the most laissez-faire in as many parts of the financial system as possible. He’s an acolyte of Ayn Rand, so that’s possible. But it’s not an idea which deserves serious consideration.

Finally, Greenspan defends high pay for bankers on the grounds that “small differences in the skill level of senior bankers tend to translate into large differences in the bank’s bottom line” — an assertion which cannot possibly have any empirical basis.

At this point, Greenspan clearly decides that nothing he writes need have any factual or even rational basis:

These “tips of the iceberg” suggest a broader concern about the act: that it fails to capture the degree of global interconnectedness of recent decades which has not been substantially altered by the crisis of 2008. The act may create the largest regulatory-induced market distortion since America’s ill-fated imposition of wage and price controls in 1971.

Well, he’s right that banks are just as interconnected now as they were pre-crisis. But how Dodd-Frank was meant to “capture” that, and what that has to do with “regulatory-induced market distortion”, is left as an exercise for the reader. I think that what he’s saying is that any deviation from a complete laissez-faire approach where banks can do anything they want is, ipso facto, a market distortion. And that since Dodd-Frank is the first time in living memory that bank regulation has got tougher rather than laxer, that gives him license to wax apocalyptic about unintended consequences and the like. Despite the fact that the main unintended consequence to boot seems to have been a massive increase in bank profits.

Greenspan concludes with a paean to financialization and leverage, which Yves Smith has already done a great job of demolishing.

The main problem with all of this is that it’s coming from someone who still, depressingly, is respected in certain policy circles — and who is using that credibility not to advance debate, but rather to lobby for his finance-sector clients. Last year, I thought that Greenspan had realized that he had been wrong in terms of regulatory policy, but not in terms of monetary policy. At this point, however, it seems that Greenspan is having second thoughts about his regulatory-policy apologies, and has reverted to his position of All Regulation Is Bad. I’m sure that’ll get him lots of cheers (and dollars from Wall Street. But it should be the final nail in his coffin when it comes to credibility. There have been many bad Fed chairmen. But Greenspan is out on his own as by far the worst former Fed chairman of all time.

COMMENT

What people constantly forget is that the Fed exists only and entirely to serve the interests of the financial industry. Any thoughts otherwise are pure delusion. Anyone who doesn’t recognize this basic fact, whether media, politico or regulatory, is not being honest. If necessary, look in the mirror every morning and say “the Federal Reserve does not love me” until it sinks in ..

Posted by Woltmann | Report as abusive

Chart of the day: US financial profits

Felix Salmon
Mar 30, 2011 14:44 UTC

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.

percentage.png

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:

profits.png

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.

COMMENT

LOL @ dWj… seriously? You’re either being sarcastic or you’re totally missing the point. The traders and their bosses *are* the financial industry that’s draining the economy. Traders do not add value, except to the pockets of the financial industry… maybe you don’t understand what adding value means..?

Posted by AGreenhill | Report as abusive

James Murphy’s role in the LCD Soundsystem ticket fiasco

Felix Salmon
Mar 24, 2011 21:14 UTC

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.

COMMENT

Your math is wrong – 1,915 is about 9.5% of the capacity.

And to echo what was said above, using Lehrmann as your only source, not talking to Murphy and apparently not contacting Bowery Presents either: all of this looks like sloppy journalism.

Posted by MarcBrubaker | Report as abusive

Austerity’s inauspicious historical precedents

Felix Salmon
Feb 23, 2011 14:48 UTC

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.

COMMENT

It would be interesting to learn if the fiscal state of the government prior to the crises matters (ours, and those of the several EU economies, were pretty poor to begin with). Is it the initial state that causes post-crisis issues with austerity?

The same might apply to US states. Places like CA, IL, and NY were in pretty bad shape to begin with, and seem to be getting worse. Others, not so bad.

Posted by Curmudgeon | Report as abusive

The dynamic economics of LCD Soundsystem tickets

Felix Salmon
Feb 19, 2011 21:27 UTC

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.

COMMENT

wow. tons and tons of conjecture, in the article and comments alike. basically all hot air here. why, people, why?

Posted by werdyo | Report as abusive

The economics and politics of valuing life

Felix Salmon
Feb 17, 2011 13:37 UTC

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.)

COMMENT

9/11 is only costing trillions because the US wants to spend trillions on its reaction. It’s doing that because the US had grown accustomed to having an unwarranted sense of invincibility.

A sense of invincibility, once lost, is virtually impossible to regain, so there’s virtually no natural limit on spending trying to get it back; and there’s lots of clamour for more spending, especially on the side of security suppliers selling snake-oil of all kinds.

Posted by BarryKelly | Report as abusive

Labor vs capital datapoint of the day, NYC taxi edition

Felix Salmon
Jan 22, 2011 18:29 UTC

taxi.jpgNew 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.

COMMENT

“I am a medallion owner, I own half of a corporation of two medallions. I bought it in 1977″

what did you pay for your medallion, 5k ? 10k ? 20k ?

I am surprised you did not sell it in the last year for a million or two and retire, ;)

Posted by sam234566 | Report as abusive

The effect of unemployment insurance on unemployment

Felix Salmon
Dec 9, 2010 22:06 UTC

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.

COMMENT

It’s always interesting to hear the opinions of well-paid, employed critics debating what it is that motivates the unemployed. I know it is naive to expect only those without jobs should be allowed to pontificate about the issue of unemployment, but as someone who has been stuck down that road I find any suggestion that unemployed people prefer the barely livable pittance of unemployment benefits to actually having a job infuriating.

Jack
http://www.accidentinjurydirect.co.uk

Posted by jacktrip | Report as abusive

How to boost employment

Felix Salmon
Dec 3, 2010 23:33 UTC

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?

COMMENT

Quit supporting housing prices at outrageously out-of-whack levels by backstopping the banking and mortgage industry. Get houses back into the hands of owners, not banks. Getting the home sales, repair and remod sectors back to work will probably lop 20% off the unemployment rate ..

Posted by Woltmann | Report as abusive
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