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Megan McArdle

Megan McArdle

Megan McArdle is a senior editor for The Atlantic who writes about business and economics. She has worked at three start-ups, a consulting firm, an investment bank, a disaster recovery firm at Ground Zero, and The Economist. More

Megan was born and raised on the Upper West Side of Manhattan, and yes, she does enjoy her lattes, as well as the occasional extra-dry skim-milk cappuccino. Her checkered work history includes three start-ups, four years as a technology project manager for a boutique consulting firm, a summer as an associate at an investment bank, and a year spent as sort of an executive copy girl for one of the disaster-recovery firms at Ground Zero … all before the age of 30.

While working at Ground Zero, Megan started Live From the WTC, a blog focused on economics, business, and cooking. She may or may not have been the first major economics blogger, depending on whether we are allowed to throw outlying variables such as Brad Delong out of the set. From there it was but a few steps down the slippery slope to freelance journalism. She has worked in various capacities for The Economist, where she wrote about economics and oversaw the founding of Free Exchange, the magazine's economics blog. She has also maintained her own blog, Asymmetrical Information, which moved to The Atlantic, along with its owner, in August 2007.

Megan holds a bachelor's degree in English literature from the University of Pennsylvania and an M.B.A. from the University of Chicago. After a lifetime as a New Yorker, she now resides in northwest Washington, D.C., where she is still trying to figure out what one does with an apartment larger than 400 square feet.

When Will Housing Hit Bottom?

Business Jan 27 2012, 3:54 PM ET
The National Association of Realtors is (quel surprise!) quite bullish on the future of the housing market.  Not so fast, says Lance Roberts of StreetTalk Advisors:

He sees 2012 as another year of lagging sales, considering the average household debt for Americans over the age of 16 comes to $96,229 per person. In addition, the average income before taxes is roughly $54,110 and many Americans have a debt-to-income ratio of 177.8%, making it difficult for them to qualify for a home loan.

Roberts says the average median income for a family is $55,000, and the average median home sales price is $214,000. To afford such a home, the average American would have to put down 20%, or roughly $42,800. But, Roberts says that amount is nearly impossible to save, given the state of the economy and consumer debt levels.

"In today's credit constrained environment due to the financial crisis which has left the major banks saddled with millions of homes that are delinquent or in foreclosure -- there is little reason to lend money to borrowers who can't meet very stringent qualification requirements," Roberts wrote in a recent blog posting.

Still, his contrarian report arrives at a time when analysts are placing confidence in lower prices to spark a housing turnaround.
Even here in DC, which has been basically the only market to defy recent trends, housing prices stalled in the fourth quarter. And while housing starts had been finally recovering, new home sales fell in December, weakening what had started out as a strong quarter. Owner occupied sales rose, but all that does is eat up a wee bit of the outstanding inventory; it doesn't mean a return to growth. 2011 now stands as the weakest year for new home sales on record. And that's in a record low interest rate environment.

Of course, the general rule of recoveries is that things look really bleak until they don't.  But still, let's ask the question: what if housing doesn't recover?  Can the economy recover without it?

There are a lot of reasons to think that it can't. Underwater houses constrain consumer spending; they make people feel poorer; they depress labor mobility, because people who can't sell can't move elsewhere to look for a job.  Since new businesses are often funded with personal credit--or even loans against the house--it probably depresses firm formation, and the resulting innovation.  And of course, construction is normally a substantial component of GDP.

On the other hand, there's no iron law that says that we can't have a strong economy with a weak housing sector.  We just never have had, before.

What Did Ron Paul Know, and When Did He Know It?

Politics Jan 27 2012, 2:43 PM ET
The Wall Street Journal is reporting that Ron Paul actively signed off on the not-so-veiled racism in the newsletters published under his name in the 1980s.  I'm sure that in the next few days, there will be some hot denials, and some Paulistas and paleolibertarians complaining about the Koch-funded conspiracy to destroy him.  (See, liberals?  You're not the only ones who think that Charles Koch is spending his massive fortune to destroy America).  

I think the arguments and counter-arguments about what he knew and when he knew it will be rather beside the point.  It is simply not credible that Ron Paul never saw any of the newsletters published under his name, and so the minimum working thesis has to be that whether or not Ron Paul believed that the biggest problem America faced was all those black folks getting one over on the white man, he was perfectly willing to encourage such sentiments if doing so would advance his political goals.  This alone should disqualify him from office, so we shouldn't need to waste time litigating other charges on the indictment.

Now, if Ron Paul were to sorrowfully admit that he had once harbored such beliefs--or failed to understand what it really meant to encourage such thoughts in others--then I would probably agree that we should forgive and forget.  But that is not what he has done.  What he has done is to cravenly attempt to avoid responsibility by blaming his subordinates.

Even if it were actually true that Ron Paul had allowed a newsletter to be published under his name without ever reading it, this would not do; the first thing that any aspiring leader should learn is that you are responsible for what is done by your subordinates, whether you knew about it or not.  "I am the kind of leader who allows my subordinates to run a multi-year racist newsletter under my name without ever once stopping by, or even picking up the damn newsletter, to see how they were getting along without me" is not mitigation.  Rather, it should be the first count on the indictment.

Moreover, since even before the Post report, it seemed really unlikely that this was what had actually happened, Ron Paul is not merely guilty of unmanly buck-passing, but also of lying like a truant teenager.

Such behavior is unworthy of the Oval Office.  Fortunately, it looks like he won't get there, so we don't need to devote much more energy to the question.

How Rich Is Warren Buffett's Secretary?

Business Jan 26 2012, 10:20 AM ET
Thanks to ABC, we now have a number on the difference between Warren Buffett's tax rate, and his secretary's.  According to the network, "Bosanek pays a tax rate of 35.8 percent of income, while Buffett pays a rate at 17.4 percent."

Conservatives have swooped on this.  What sort of income is implied by a 35.8% tax rate?  A very, very high one.  Various commentators have suggested that she must be making north of $200,000.

Well, it's clear that we're not just talking about federal income taxes, because her claimed taxes are higher than the top marginal tax rate.  They're also higher than the top effective tax rate, including payroll taxes.  As far as I can ascertain, there is no way at all to pay effective federal income tax--or even effective federal income tax + payroll tax--that sums to 35.8%.  You can--just barely--get a marginal tax rate of 35.8% if she is making almost exactly the taxable social security limit of $110,000.  This is not vast riches, though of course, it is also not the sort of income most people are thinking about when they hear that Warren Buffet pays more in taxes than his secretary.

However, this assumes that she has no deductions: no health insurance charges, no 401(k), nothing.  Perhaps Warren Buffett's secretary is already so rich with Berkshire Hathaway stock that she doesn't need a 401(k)--but again, this does not seem like a good representative case with which to illustrate the folly of US policy.  To put it bluntly, I don't care if people too rich to need to save for retirement are paying higher taxes than some other absurdly wealthy people.

If we impute the employer half of the payroll taxes to her, as most economists agree that we should, then we can get closer.  The problem is that if we impute the employer half of the payroll taxes to her, then we should impute corporate income taxes to Warren Buffet, at which point he has nothing like a 17.4% effective tax rate; more like a 40+% tax rate.

There are also Nebraska state taxes, of course.  It's really questionable whether we should add these in, both because Nebraska's tax policy is not really a national issue, and also, because I am hard-pressed to see how Warren Buffett's 17.4% rate can possibly include Nebraska state taxes on his capital income, which would be 6.68% according to this table.  Unless he's heavily invested in tax-free munis, which would be contrary to what I know of his personal finances, and also, be the result of something that Buffett is not proposing to change.

In sum, the presentation of these numbers is quite confusing, and I suspect a little bit of cherry-picking to maximize the invidiousness of the comparison.  Ms. Bosanek probably does have a somewhat higher effective federal tax rate than her boss, and it may even be much higher.  But if so, this is because she is a very unusual taxpayer--exactly the opposite of what is implied by comparing Warren Buffett's taxes to those of his secretary.

Update:  apparently, she makes $60K.  So I gather what Buffet is talking about is comparing her federal marginal tax rate, including both sides of the employer tax, to what must be his effective tax rate, since there is no marginal rate of 17.4%.  That comparison is beyond bizarre.

The President's Nostalgianomics

Business Jan 25 2012, 3:34 PM ET
I was on Stossel's State of the Union special last night, so I watched the speech in the company of David Boaz, Matt Welch, and Governor Gary Johnson.  I had a lot to say about it on television, which you can watch here.  

I thought the speech was better-written and better-delivered than many of the critics I read this morning; it had a lot of good applause lines (along with, yes, the groaner about spilled milk), and the president is stylistically a very good speaker.

But I also thought that, three years in, I'd like to see a little more from his speeches than base-pleasing applause lines and pleasing delivery.  The content of the speech was sorely disappointing. 

The harsh way to put it is that the speech was an extended whine about how all the rich bankers and George Bush have screwed everything up.  That was fine campaign rhetoric when he was a Senator.  But it's pretty weak when he's been in charge for most of a full term--two years of that with a majority in congress.

Of course, one can argue--correctly--that Obama actually doesn't have the power to fix the economy; the recession was deeper than he thought it would be.  I'm entirely sympathetic to this argument except for one thing, which is that Barack Obama got himself elected by claiming that "the Republicans have driven the economy into a ditch" and he could drive it out again.  It doesn't seem unfair to judge him on his failure to actually deliver what he promised:

Lauer: "At some point will you say, `Wait a minute. We've spent this amount of money, we're not seeing the results. We've got to change course dramatically.' "

Obama: "Yeah, look, I'm at the start of my administration. One nice thing about the situation I find myself in is that I will be held accountable. You know, I've got four years and...

Lauer: "You're going to know quickly how people feel about what's happened."

Obama: "That's exactly right. And you know, a year from now I think people are going to see that we're starting to make some progress. But there's still going to be some pain out there. If I don't have this done in three years, then there's going to be a one-term proposition."
If Obama didn't want to be judged on the basis of the economy's performance, he shouldn't have let his mouth write checks that he couldn't cash.  If it turned out to maybe be a little harder to steer the economy where you want it than he thought it was, then maybe he should lay off claiming that the Republicans drove the thing into a ditch.  

But he hasn't.  Instead he's complaining that the GOP won't let him steer--pretty rich considering that he started out with a 60-seat majority in Congress, and chose to ignore the economy in favor of passing a health care bill that has gotten even less popular since we passed it to find out what was in it.



That's the harsh version.  The slightly kinder version is that Obama, stymied by an economy that's still pretty weak, and an opposition that has no more interest in cooperating with him than Republicans did with Hoover, has turned to a laundry list of weak proposals that sound pleasing to interest groups, but wouldn't achieve much.  Of those, the best was allowing students who study here to stay here; the stupidest was probably adding yet another investigation of bank fraud (what have you been doing for the last three years, Mr. President?)  And the worst was the bizarre proposal for states to force students to stay in school until graduation or the age of 18.  Beyond the obvious enforcement questions, by the time people drop out of high school, they're normally already badly lagging their classmates, with low grades and test scores, and high rates of truancy.  Commanding them to physically stay in the building for another two years is not going to fix those problems; presumably, it's a sop to any teachers he pissed off by proposing that we might fire those whose students aren't learning.

There's no real common thread holding all of these proposals together except what you might call "nostalgianomics".  

Think about the America within our reach: a country that leads the world in educating its people; an America that attracts a new generation of high-tech manufacturing and high-paying jobs; a future where we're in control of our own energy; and our security and prosperity aren't so tied to unstable parts of the world. An economy built to last, where hard work pays off and responsibility is rewarded.

We can do this. I know we can, because we've done it before. At the end of World War II, when another generation of heroes returned home from combat, they built the strongest economy and middle class the world has ever known.
What a strange thing to say. "We know how to do this?" Do what? Have World War III?

Surely Obama's economic advisors have not told him that they know how to replicate the growth of the 1950s--and if they did, surely the last three years have given the lie to this belief.

I think the speech made it even clearer that other speeches have that the president's vision of the world is a lightly updated 1950s technocracy without the social conservatism, and with solar panels instead of rocket ships.  Government and labor and business working in tightly controlled concert, with nice people like Obama at the reins--all the inventions coming out of massive government or corporate labs, and all the resulting products built by a heavily unionized workforce that knows no worry about the future.

There are obviously a lot of problems with this vision.  The first is that this is not what the fifties and sixties were actually like--the government and corporate labs sat on a lot of inventions until upstart companies developed them, and the union goodies that we now think of as typical were actually won pretty late in the game (the contracts that eventually killed GM were written in the early 1970s).

And to the extent that the fifties and sixties were actually like this, we should remember, as Max Boot points out, that this was not actually the day of the little guy.  Big institutions actually had a great deal more power than they do now; it was just distributed somewhat differently--you had to worry less about big developers slapping a high-rise next to your single-family neighborhood, and a whole lot more about Robert Moses deciding he wanted to run a freeway through the spot where your house happened to be.  

The military model of society--employed by both Obama, and a whole lot of 1950s good government types--was actually a kind of creepy way to live.  As Boot says, "America today is far more individualistic and far more meritocratic with far less tolerance for rank prejudice and far less willingness to blindly follow the orders of rigid bureaucracies."  If you want the 1950s except without the rigid conformity and the McCarthyism, then you fundamentally misunderstand what made the 1950s tick.

Finally, there's the fact that the 1950s ended in the 1970s.  In the 1950s, American products were envied all over the world; by 1980, they were a joke.  This is not some radical disconnect; it is the beginning and end of the same process.  The technocratic American institutions became sclerotic agents of inertia.  Bosses whose pay was capped poured their energy into building personal empires instead of personal fortunes.  Unions like the UAW began making demands on their companies so heavy that even the UAW president who had negotiated these amazing pay increases began to fear that his members had lost their minds.

As David Boaz said last night, Obama's talk of blueprints was telling.  A blueprint is a simple plan that an architect imposes on an inanimate object.  Obama really does seem to think that he can manage the economy in the same way.  No, I don't think that he is a socialist.  Rather, I think that he really believes there are technocratic levers that can make the income distribution flatter, the rate of innovation faster, and the banking system safer, without undesireable side effects.

The problem with all nostalgia isn't even that it's necessarily wrong--by many standards, the 1950s was a great time to live.  Rather, the problem is that it almost always wants to turn a transient moment into a steady state--or worse, only "the good parts" of those transient moments.

I had hoped that the last three years had taught Obama the limits of this sort of thinking.  But if they have, he certainly hasn't chosen to share that hard-won knowledge with the rest of us.

Can the Rise of the Internet Explain D.C. Zoning Fights?

Business Jan 24 2012, 3:32 PM ET
Yesterday's post about the internet challenge to brick-and-mortar retail has triggered a number of really interesting discussions in the comments about things like big box supply chains, the sustainability of Amazon's Prime strategy, and the future of teenaged jobs in a world without physical retail.  I highly recommend reading them.

One of the sub-discussions caused my thoughts to turn--as they so often do--to neighborhood politics in DC.  Yes, those of you who are sick of my DC-centric posts can tune out now.  The rest of you, read on . . . 

Many of the urban planning debates that take place in DC are in fact proxy battles over gentrification.  Almost no one on either side ever actually voices the core conflict, which is that the poorer, mostly black current residents do not want gentrification to force their community out of their affordable and centrally located homes, and the newer, mostly white residents want the sort of services (and property values) that materialize when a neighborhood gentrifies*--and that the presence of one community is an obstacle to the goals of the other.  

Since no one wants to come right out and say this, the debate focuses on procedural issues:  noise, parking, safety, "respect to the community".

Basically, the gentrifiers spend a lot of time arguing in favor of new bars and restaurants; the current residents spend a lot of time arguing that they aren't needed.  Both sides argue--and may even genuinely believe--that this is a purely principled argument over, say, the procedural mechanisms for distributing liquor licenses, but this is pretty transparently not the actual motivation.  In my own neighborhood, many of the people who had argued forcefully in favor of licensing Shaw's Tavern seem to have neatly switched sides when the applicant was Full Yum Carryout, a sort of Chinese-hybrid takeout place that caters almost exclusively to the area's black residents.

(Before you ask, I am against liquor licenses on principle, but if we must have such a regime, I believe that the regime should follow the "shall issue" principle that governs dog tags and fishing licenses.)

If you follow these debates long enough, you end up hearing a lot of the anti-gentrifiers argue that they too, want services--just not bars and restaurants, or so many bars and restaurants.  This has always struck me as a little bit odd because they're sort of vague on what services they do want.  Grocery stores are a big favorite--but my neighborhood, Eckington, now has two large, well stocked supermarkets, and I doubt that the density would support much more than that.  Everyone seems to love dry cleaners, and drugstores (but we have a fair number of those, too).  Beyond that, it's not been clear to me what people had in mind when they complained that all the bars and restaurants would prevent the development of needed retail.

So the discussion about shopping patters suggested something I hadn't quite grasped before.  DC's young gentrifiers are, even as gentrifiers go, disproportionately well-connected to the internet. Indeed, I wonder if Amazon isn't partly responsible for the pace of gentrification here.  In the neighborhoods that are currently gentrifying, the retail corridors were destroyed in the 1968 riots and never really came back; it's no joke living in a neighborhood like that without a car.

. . . unless Amazon delivers bulky stuff to your door.  Most of the affluent "new" people I know in DC are like my husband and I: they order everything they can over the internet.  We don't need much in the way of brick-and-mortar retail; what we need is bars and restaurants, and maybe a salon or two.  If you are not so thoroughly web-ified, you almost certainly want a much more retail-heavy commercial district.  And while many of the "old DC' residents are of course on the internet and social media, many others cannot afford broadband connections, or credit cards--and given their older age skew, many others probably simply aren't that comfortable with, or interested in, shopping online.

I'd been thinking of the bar-and-restaurant complaint as a convenient shorthand, rather than something that is almost literally true: the gentrified districts in DC boast very little other than places for young people to gather and refresh themselves.  Not nothing, but much less than, say, the streets I grew up on in New York.

All of which is another way of saying that your neighbors cause externalities.  Who lives next to you will determine many important things about your life, from how late the music plays, to how far you have to walk in order to buy a radio or a baby carriage.  In aggregate, the people in a neighborhood eventually customize that place to suit their particular wants (unless, of course, those wants are limited by their wallets).

The corollary of that is that it is not irrational to want to control who moves in around you--or even to want to maximize the number of people who are like yourself.  The more people there are like you, the more the neighborhood will suit your needs.

I'm not saying that we should cater to this desire (in either the gentrifiers, or the gentrified).  But we shouldn't act like it's necessarily crazy or evil, either.

* (Note: there's a another sort of argument that takes place when the neighborhood has already gentrified, and the residents band together to prevent new people from coming in to block their views and compete for free street parking spaces.  But these arguments are basically pretty naked displays of self interest, so I've left them out.)

Retail in the Age of the Internet

Business Jan 23 2012, 2:11 PM ET
It's kind of embarassing how often I see the UPS man.

My household has made extravagent use of the benefits of Amazon Prime.  We order grocery staples, hardware, paper goods, electronic accessories, air filters for the furnace, and oh yeah, sometimes books.  The brown truck stops in front of our house several times a week.  Since I am almost always the one who answers the door, I am beginning to worry that our unusually young and good looking UPS guy thinks there is an ulterior motive behind the volume of our orders.

At least I'm not alone.  Almost certainly, you, too are ordering more and more of your merchandise via an online retailer.  There's nothing wrong with that, of course.  But it gets a little sketchy when you start visiting big box retailers like Best Buy and Target so that you can have a look at the goods--and then place your order on Amazon.com.  

That practice, known as "showrooming", is becoming increasingly common, and it seems to have cut pretty deeply into the all-important Christmas profits of brick-and-mortar retailers.  Since it's probably a lot cheaper to sell over the internet than to pay for prime real estate and employees to walk you through all the features, it's hard to see how the brick-and-mortars can compete with see-it-here, buy-it-there.

Those retailers may complain about the morality of it, and in truth, it seems kind of mean to me.  When I was planning our wedding, I used to come across a lot of bulletin board posts from brides complaining that bridal shops had cut the labels out of the dresses they tried on.  Since this was done to prevent exactly what said brides wanted to do--tie up hours of the shop's time trying on and fitting dresses, and then order the dress from some cut-rate internet retailer--I found it hard to muster up a whole lot of sympathy.  There's nothing wrong with taking your business to a cheaper retailer, but it's pretty shifty to try and trick someone else into providing the expensive service that the discounters don't offer.

But complaining isn't going to stop it.  How do you maintain a business model in the face of this sort of unwinnable price competition?

One answer is that you don't: a lot of these retailers are going to end up going out of business.  I'd guess that Best Buy, for example, will eventually follow Circuit City into liquidation.

Another answer is that you specialize in goods that people tend to buy onsite.  Target already has very strong revenues in groceries, clothes, and home decor; those may end up accounting for more and more of their revenue.  But given the speed with which people are moving towards buying even clothes and furniture online, this alone may not be enough to sustain a viable business.

The approach retailers seem to have decided on is to emulate mattress retailers.  Ever tried to shop a mattress at Macy's, and then buy it at Mattress Discounters?  You can't.  Each store has a different name for the mattresses, making it almost impossible to comparison shop.  This allows Macy's to charge an outrageous markup on the mattresses they sell--but without this technique, mattress showrooms might not exist at all, because mattresses are expensive, rare purchases that people are willing to take some time over.  If it were easy to comparison shop, everyone would do, well, what you were hoping to do when you browsed beds at Macy's: try out the beds, and then order from somewhere cheaper that didn't have to pay the expenses for the showroom.

But to do this, retailers need the cooperation of the manufacturers.  Target needs specialized products that can't be procured anywhere else--or at least, products that are sufficiently hard to compare to the stuff on Amazon.

Obviously, they've had little trouble getting this sort of help from clothing manufacturers--Target's special Missoni line crashed their website.  But electronics retailers?  The supply chains are a mite more complicated, and the economies of scale somewhat larger.  Is it worth it to produce a special line just for Target?

The Wall Street Journal suggests that, at least for Target, they may have to; the discount giant is just too big a customer.  But that raises a different question:  what would a Target-specific television look like?  It's easy enough to imagine Proctor and Gamble allowing Target a specialty line of skin cleansing products.  It's hard to imagine Sony creating a Target-branded line of flat panels with--what?  Red tailfins?

It may be that the internet simply makes the big box brick-and-mortar retailer economically unviable, and that one day, we'll have to buy big ticket items on faith, without being able to look at them ahead of time.  Perhaps the internet will get better at showing us our merchandise, developing virtual avatars so that we can try on clothes and put furniture in our rooms.  Or perhaps some entrepreneur will go into the showroom business:  pay $5, and browse to your heart's content.

Whatever happens, I think it's quite likely that the retail business will look quite different in fifteen years.  Of course, that's not much of a prediction; it's been a safe bet since at least the invention of the railroad.



What Cost Cancer Treatment?

Business Jan 20 2012, 10:12 AM ET
There has been a lot of excitement about Zelboraf, a new drug to treat metastatic melanoma. Since the previous standard of care was to try a bunch of futile chemotherapy and then die pretty much on schedule, this was a rather heartwarming breakthrough in a field that doesn't have enough of those.

Now Derek Lowe brings the bad news:

 
A bigger problem is that (as mentioned in my older post on this drug) resistant melanoma crops up pretty quickly after initial treatment with Zelboraf. Virtually all of the people taking the drug will eventually die of metastatic melanoma; it's just going to take longer. But how much longer, we don't know. The numbers still aren't quite in on overall survival - it's going to be more than the previous standard of care, but it's probably not going to be overwhelmingly more. Of course, the definition of "more" and the value that an individual patient places on it (or an insurance company places on it), well, those are the very things that keep us arguing about health care. Maybe that MEK co-therapy will make it an easier call?
I think the central difference between me, and the people who think that IPAB's reimbursement-rate powers will be a big help in controlling health care costs, is that the latter group tends to think that a lot of expensive health care problems are like back surgery--something that doesn't do any good, but gets done anyway, because of desperate patients and arrogant/ignorant/greedy surgeons. I tend to think that more of the questions are like this one.  Is spending $50,000 to give a pancreatic cancer patient an extra 5-9 months of life a wasted expenditure, or a medical advance? On the one hand, 5-9 months isn't very long.  On the other hand, for a typical pancreatic cancer patient, you've doubled their lifespan, which seems like  a very long time indeed.

If we get better cancer treatments--which is what everyone says they want--we're probably going to be asking those questions a lot.  And either way, we aren't going to like the answer.

So What About Romney's Offshore Tax Havens?

Business Jan 19 2012, 10:37 AM ET
So the story-of-the-week seems to be Mitt Romney's off-shore investments.  I am deeply confused by the reporting.  Either that, or the reporters are.

I first saw this story via Sarah Kliff at the Washington Post:

One possibility is that the tax rate might not be the only politically troublesome revelation in Romney's returns. Over at Reuters, Sam Youngman suggests that his work with Bain Capital might have led Romney to shelter income offshore
The Sam Youngman piece does indeed sort of suggest this, but it's more than a bit hazy on how.

His vast fortune is invested in dozens of funds linked to Bain Capital LLC, the powerhouse private equity firm he co-founded and led for 15 years. Several Bain funds have offshore connections and take advantage of tax breaks used only by the U.S. financial elite.

His tax returns could shed light on how Romney and Bain use offshore strategies to avoid taxes, said Daniel Berman, a former U.S. Treasury deputy international tax counsel and now director of tax at Boston University's graduate tax program.

Bain funds in which Romney is invested are scattered from Delaware to the Cayman Islands and Bermuda, Ireland and Hong Kong, according to a Reuters analysis of securities filings.

"Certain interests in foreign investment structures would have to be reported on attachments to his return," Berman said.
All of these things are true, but they do not add up to tax evasion, or even tax avoidance.  Corporations do not have to pay taxes on income unless they repatriate the money.  Individuals, however, do.   The quote sort of muddies the distinction--the returns, we're told, could shed light on how "Romney and Bain" use offshore strategies to avoid taxes, but while I'm certainly not an international tax expert, from what I know, that the phrases "could shed light" and "and Bain" are doing a whole lot of work there.  

As far as I know, there are only a few ways to "shelter" income offshore, and they usually look very much like "sheltering" income onshore--which is to say that we do not tax people on unrealized capital gains.  And for very good reason--just ask all the dotcommers with employee stock options who paid huge taxes to exercise those options, and then saw the value of those options fall to zero.  The IRS didn't give them their money back, either.

The tax expert Youngman consulted implies that this is a very confusing concept:

"I remember as a young lawyer being surprised to see tax returns of very successful investors showing net losses - because they were recognizing net losses" but not yet factoring in unrealized gains, Berman said.
I am sure that Professor Berman is a very smart, knowledgeable man; it is unfortunate that Youngman chose a quote that makes him sound like an idiot.  "Some years, even successful people with a lot of assets lose money" should not be a shocking proposition for anyone old enough to graduate from law school--or read Reuters.  Would you really be surprised to hear that the owner of a California 7-11 had lost money in 2001, even though the building he'd bought in 1981 had appreciated by 70%?

The other way I know of to avoid taxes with an offshore strategy is to invest in a US corporation which doesn't repatriate earnings, and therefore doesn't pay taxes on this.  Any of you who invest in GE, UPS, or Apple are enjoying this sort of tax shelter, and if you sold some of the stock, I suppose it would be technically accurate to say that your tax returns shed light on whether "George and Apple use offshore strategies to avoid taxes", but this would not really be a very interesting statement.  You still have to pay taxes if you want to get your hands on any of the money.

Most of the writing I've seen today about this seems to be confusing the Cayman's role as an offshore tax haven, and its other role as a headquarters for hedge funds.  They are not entirely unrelated, but they are also not the same thing.  Cayman, and a lot of other islands, became tax havens because they wouldn't tell your government if you had money there.  It's not because there is some special tax break for investing there.  

If the investments are showing up on Romney's tax return, then they are definitionally not this sort of tax haven.

Now, the US tax code is very complicated, and I am not an international tax expert, and it's certainly possible that Bain has hit on some structure which allows its investors to enjoy tax-sheltered income while actually having access to it--and that this structure would show up on Romney's return. For all I know, every rich person in the country has a portfolio positively stuffed with such investments.  

But if so, I would like to hear such structures described, not obliquely hinted at.  I know I have some tax experts in my readership, so how about it?

Andrew Sullivan's Inadvertent Cherry-Picking

Business Jan 19 2012, 9:45 AM ET
Andrew Sullivan's feature about Barack Obama's critics has stirred up a lot of controversy over the last few days.  On one charge, I'll defend him:  it is a little known fact that writers do not choose their headlines (or even necessarily see them).  So the next time you are set to fire off an angry letter to a writer, pause for a moment and ask yourself: "am I reacting to the piece, or to the headline?"  Of course, the publication is responsible for what headlines it slaps on things, but no one writes the publication; they send their nastygrams to the writer, who is completely unable to respond because what are they supposed to say?  "You're right, what my editors did is unforgiveable?"

However, one charge does stick: he's puffing up Obama's record by comparing gross to net. You just can't do that; any resulting numbers are useless:

Sullivan begins -- as Team Obama almost certainly will -- with Obama inheriting a terrible economy, writing that "[n]o fair person can blame Obama for the wreckage of the [first] 12 months, as the financial crisis cut a swath through employment." Yet shortly thereafter, he writes:

Since [the beginning of 2010], the U.S. has added 2.4 million jobs. That's not enough, but it's far better than what Romney would have you believe, and more than the net jobs created under the entire Bush administration.

Sullivan is comparing Obama's gross job creation to Bush's net job creation, ignoring that Bush also inherited a recession resulting from the collapse of the tech bubble. By Sullivan's own standard, this is unfair.

By the standard of net jobs created, Obama remains underwater and will be lucky to get to zero net jobs created by the end of his term. Conversely, if we simply judge Obama by therecovery, the results are terrible when compared to past recoveries. Nearly a million people have dropped out of the labor force, dropping the participation rate to an historic low, implying an unemployment rate close to 11%, instead of the official 8.5%.
Today, Andrew mounts a defense:

The official date of the recession under Bush was March 2001 - November 2001, caused by the tech crash and 9/11. So it started under Bush's tenure. The current recession - far, far deeper - began in 2007, and was already a year-old by the time Obama came into office - with a very steep swoon in the last quarter of 2008.
I really don't think this will do.  First of all, Bush took office on January 21st, 2001.  What exactly does Andrew Sullivan think that he did in one short month to hurl the economy into recession?  It generally takes 12-18 months for fiscal and monetary policy to work their way through the economy, so to the extent that you think the 2001 recession had policy foundations, it was definitionally Clinton's policies that created it.

And second of all, unemployment is a lagging indicator, so time-wise, Bush actually had it more difficult in one way--there was less time for the economy to recover from a recession that ended in November 2001, than from one that ended in June.

Now, of course you can argue that Obama presided over a much deeper recession, and that it's unfair to compare his job creation to George Bush's.  And you'd be right!  I'd go even further, and point out that politicians really have astonishingly little control over the business cycle, making all of these sorts of comparisons complete nonsense.

But Andrew did not say that it's unfair to compare the two; Andrew made the comparison.  Since he thinks it's unfair, he wants to compare Obama's gross job creation since the trough of the recession, to George Bush's net job creation from close to the peak of the internet bubble.  

But there are very good reasons that we do not allow social scientists to pick their start and end dates so as to cast their subjects in the most flattering--or "fair"--light.  And the main one is simply that it's all to easy, even without consciously meaning to, to start out with the argument you want to make, and work back to the metrics that will support that argument.  Scientists have a technical term for this sort of data analysis: nonsense.

An economist who arbitrarily decided to start a job count comparison at the beginning of one president's term, and in the middle of another's, would be laughed out of peer review; a freshman who turned in such work would flunk the assignment.  Whether or not Andrew intended to do so, he is cherry-picking, and as a result, the comparison is worthless.

CBO Report: Medicare Pilot Programs Don't Control Health-Care Costs

Business Jan 18 2012, 3:10 PM ET
I was always skeptical of the projections that ObamaCare would reduce the budget.   In fact, I made some counter-predictions of my own. The cuts needed were very deep, and likely to be politically difficult; the benefits claimed in terms of actual improving health or even personal finances had been far too large.

So far, events have borne me out.  About half the projected deficit reduction has now evaporated, because programs added to the bill in order to raise revenue, like the moronic provision requiring everyone to give 1099s to all their vendors, and the fiscally unsustainable CLASS Act long-term care program, had to be axed.  The reimbursement cuts to providers and the excise tax on "cadillac" insurance plans that cost too much won't go into effect for a while, but I still think it likely that they, too, will be (expensively) modified in the face of political and administrative realities.  Medicare's chief actuary thinks so too, so this is not exactly a crazy belief.

But always when the law's critics raised these points, supporters of the law would say that we were not considering the possibilities for extra savings, and even bigger care improvements.  The vehicles for these upside surprises were to be first, the Independent Payment Advisory Board, which is supposed to make binding reimbursement rate recommendations that cut down on unnecessary (and unnecessarily expensive) care; and second, the Medicare pilot projects which would allow us to experiment with really game-changing reforms.

I'm considerably less enthusiastic about pilot projects than your average wonk.  Today, re-reading Hannah Rosin's terrific article about housing-project demolition in Memphis, I was reminded why:

Starting in 1977, in what became known as the Gautreaux program, hundreds of families relocated to suburban neighborhoods--most of them about 25miles from the ghetto, with very low poverty rates and good public schools. The authorities had screened the families carefully, inspecting their apartments and checking for good credit histories. They didn't offer the vouchers to families with more than five children, or to those that were indifferent to leaving the projects. They were looking for families "seeking a healthy environment, good schools and an opportunity to live in a safe and decent home."

A well-known Gautreaux study, released in 1991, showed spectacular results. The sociologist James Rosenbaum at Northwestern University had followed 114 families who had moved to the suburbs, although only 68 were still cooperating by the time he released the study. Compared to former public-housing residents who'd stayed within the city, the suburban dwellers were four times as likely to finish high school, twice as likely to attend college, and more likely to be employed. Newsweek called the program "stunning" and said the project renewed "one's faith in the struggle." In a glowing segment, a 60 Minutes reporter asked one Gautreaux boy what he wanted to be when he grew up. "I haven't really made up my mind," the boy said. "Construction worker, architect, anesthesiologist." Another child's mother declared it "the end of poverty" for her family.
Only after we had demolished a bunch of housing projects, it turned out that relocating the poor didn't solve as many problems as we initially thought:

If replacing housing projects with vouchers had achieved its main goal--infusing the poor with middle-class habits--then higher crime rates might be a price worth paying. But today, social scientists looking back on the whole grand experiment are apt to use words like baffling and disappointing. A large federal-government study conducted over the past decade--a follow-up to the highly positive, highly publicized Gautreaux study of 1991--produced results that were "puzzling," said Susan Popkin of the Urban Institute. In this study, volunteers were also moved into low-poverty neighborhoods, although they didn't move nearly as far as the Gautreaux families. Women reported lower levels of obesity and depression. But they were no more likely to find jobs. The schools were not much better, and children were no more likely to stay in them. Girls were less likely to engage in risky behaviors, and they reported feeling more secure in their new neighborhoods. But boys were as likely to do drugs and act out, and more likely to get arrested for property crimes. The best Popkin can say is: "It has not lived up to its promise. It has not lifted people out of poverty, it has not made them self-sufficient, and it has left a lot of people behind."

Researchers have started to look more critically at the Gautreaux results. The sample was tiny, and the circumstances were ideal. The families who moved to the suburbs were screened heavily and the vast majority of families who participated in the program didn't end up moving, suggesting that those who did were particularly motivated. Even so, the results were not always sparkling. For instance, while Gautreaux study families who had moved to the suburbs were more likely to work than a control group who stayed in the city, they actually worked less than before they had moved. "People were really excited about it because it seemed to offer something new," Popkin said. "But in my view, it was radically oversold."

Ed Goetz, a housing expert at the University of Minnesota, is creating a database of the follow-up research at different sites across the country, "to make sense of these very limited positive outcomes." On the whole, he says, people don't consistently report any health, education, or employment benefits. They are certainly no closer to leaving poverty. They tend to "feel better about their environments," meaning they see less graffiti on the walls and fewer dealers on the streets. But just as strongly, they feel "a sense of isolation in their new communities." His most surprising finding, he says, "is that they miss the old community. For all of its faults, there was a tight network that existed. So what I'm trying to figure out is: Was this a bad theory of poverty? We were intending to help people climb out of poverty, but that hasn't happened at all. Have we underestimated the role of support networks and overestimated the role of place?"

The initial study was small and involved highly screened people with a lot of support. And it seems to have suffered from publication bias--the most spectacular results got the most attention, even though these might just have been outliers.

This is distressingly common--not just in government or social-do-gooding research, but in organizations of all kinds--including corporations.  (Hello, Pepsi Clear!)

However, I'm a skeptic of the health care bill, so naturally, I'm going to be skeptical of the potential of pilot programs.  I can understand why those who supported the bill would rather wait for data.

Well, today we have some.  The Congressional Budget Office has evaluated 10 demonstration projects aimed at reducing costs and improving quality of care through paying for performance, and better co-ordination of disease management for chronic patients.  The results?

The evaluations show that most programs have not reduced Medicare spending: In nearly every program involving disease management and care coordination, spending was either unchanged or increased relative to the spending that would have occurred in the absence of the program, when the fees paid to the participating orga- nizations were considered. Programs in which care man- agers had substantial direct interaction with physicians and significant in-person interaction with patients were more likely to reduce Medicare spending than other pro- grams, but on average even those programs did not achieve enough savings to offset their fees.

Results from demonstrations of value-based payment sys- tems were mixed. In one of the four demonstrations examined, Medicare made bundled payments that covered all hospital and physician services for heart bypass surgeries; Medicare's spending for those services was reduced by about 10 percent under the demonstration. Other demonstrations of value-based payment appear to have produced little or no savings for Medicare.
Nor is this a case of "spending more but getting more":
  
The 34 programs did not have systematic effects on mea- sures of the process of delivering health care. Those measures varied from one demonstration to another but typically included the percentage of beneficiaries who received general preventive services (such as influenza vaccinations) and services recommended for people with a given condition (such as annual eye examinations for people with diabetes). Although the programs increased the percentage of beneficiaries who reported being taught self-management skills, they had little or no effect on the percentage who reported that they were adhering to prescribed self-care regimens.
In fact, the report is incredibly depressing. Some measures do seem to have controlled hospital admissions and spending--but they cost more money than they saved.  It's always tempting to celebrate being right, but in this case, there's nothing to be happy about.  What this report really says is that we're on a crash course towards fiscal disaster, and the steering wheel's broken.

Income Mobility Means Some People Have to Lose Everything

Business Jan 18 2012, 1:29 PM ET
Like Ross Douthat, I've been following the recent blog conversation about income inequality and income mobility.  I'm not going to summarize the arguments about how closely they're connected--you should read Ross's excellent post for a good overview.  And I'm certainly not going to insert myself into an argument between two very smart economists who spend a lot of time studying this question.  But I was struck by a very troubling thought while I was reading through these debates:  only one of these problems matters, and it's the problem that we can't solve.  No, strike that.  I'm not sure whether the problem can be solved or not.  What I am very sure of is that we do not want to solve it, and that for that reason, we are very probably not going to.

I've said before that I don't care about income inequality per se, and that focusing on it seems more like institutionalized envy than sound policy.  I care about the absolute condition of the poor--do they have the basics of a decent life?  And I care about whether income inequality itself produces some sort of structural advantage in the political system.  (I'm skeptical).  But I don't care whether Bill Gates lives in a giant robot house that cost eighteen-squintillion dollars.  What I care about is whether some kid is growing up in a roach infested shack with no heat--something that has basically nothing to do with the size of Gates' fortune.

On the other hand, income mobility is a very important issue.  Regardless of how far the top is from the bottom, children born in America should have an equal chance to move from the latter to the former.  This is especially important given that so many of the highest-paid jobs are also the most pleasant.

Many people apparently agree with me: the issue of income mobility has become more prominent in policy debates over the last few years.  And yet I submit that this agreement is entirely theoretical.  How many of the people reading this blog would actually tolerate a one-in-five chance that their children would end up poor?

Because that's what income mobility actually means.  It doesn't just mean giving a lift to the folks at the bottom--superior health care, better K-12 education.  Everyone in the country cannot be above average.  For the poor to have a better shot at ending up in the top quintiles, the folks in the top few quintiles have to run the risk of ending up in the lowest.

Who among the parents fighting so hard to get their kids into a good school is going to volunteer to have their kid give up the slot in the upper middle class?  People are willing to accept a certain amount of slippage, but only as long as it comes with added job security (government) or special fulfillment (the ministry, the arts)--and even in the latter cases, Mom and Dad will often be strenuously arguing against following your calling.  But how many doctors and lawyers would simply glumly accept it if you told them that sorry, junior's going to be an intermittently employed long-haul trucker, and your darling daughter is going to work the supermarket checkout, because all the more lucrative and interesting slots went to smarter and more talented people?

To a first approximation, none.  Oh, of course, middle class families do have those spectacular screw-ups who end up stuck in dead-end jobs, and they don't expel them or anything.  But they would not cooperate with any system that made such a result fairly likely--and that is what we're actually talking about, when we're talking about rising income mobility. Someone in society is going to end up doing crappy jobs, because trash needs to be hauled and Alzheimer's patients need to have their diapers changed.  The primary job of a middle class parent is to ensure that their children are not those people.  

One of the reasons this is so hard is that so many of the problems poor people deal with are created by living near other poor people.  Most poor people are not criminals, but most criminals are poor people, because crime actually doesn't pay (very well).  Most poor people take out their trash, maintain their homes, and stay off drugs--but the kind of people who don't do those things are disproportionately likely to end up in poverty.  Which is to say, in your neighborhood, if you are poor--shooting at each other and hitting bystanders, breeding vermin that migrate into your living space, pilfering your stuff to support their drug habit.

Someone has to live near those people; whatever your expectations for antipoverty policy, it surely does not include the end of drug addiction and slovenly habits.  But should it be your kid? Would you want them to have a one-in-five chance of living in those conditions?  (Or the different, but not necessarily less miserable, conditions of rural poverty?)  Of course not.  You'd do anything you had to in order to keep that from happening.

And so middle class parents do.  They pay lip service to mobility, but they work damn hard to make sure that their kids don't get exposed to a peer group that might normalize dropping out and working low-wage, dead end jobs, or going on welfare.  

No matter how deeply ideologically committed you are to public education and income mobility, you will not leave your kid in a high-poverty school where gangs are valorized and college is not--or even in a working class school that will close off the chances for admission to Harvard.  You'll agitate against zoning that would bring poor people in (though of course, not because of the poor people, it's just that, you know, the character of the town is quiet single family houses and the infrastructure won't support multi-family plus we don't really have the social services here and they'd be much better off in Camden, actually.)  With other like-minded parents, you'll take over the school and reshape its priorities to match those of the upper-middle class.  Or you'll move to a different school system, naturally talking about the enrichment programs rather than the more affluent, education-focused peer group you're buying for your kids.  

The one thing you will not say--unless you are isolated in a rural area with exactly one school and no critical mass of similar parents--is, "Oh, well, I guess the best we can hope for is a third-tier state school."  It is no accident that the middle class bits of the New York City school system have managed to hijack the best resources for themselves, in the process building a pretty good public school system which exists cheek-by-jowl with a very lousy one.

Remember, this is the meritocratic system we're talking about.  This is the system that was supposed to break the spine of the old aristocracy of wealth and pull--and did, only to replace it with one that seems to be even more ruthlessly effective at shielding their children from competition.

And that's the optimistic case--the case that assumes that there is virtually no parental transmission of real economic virtues, through genetics, intensive nurturing, or through the learned behaviors and peer effects that conservatives bundle up as "culture".   Obviously, as you introduce those sorts of elements into the model, for which the sorts of interventions one can imagine run from horribly difficult to morally monstrous, the picture gets rather bleaker.

We should be talking about income mobility--it's probably the most important moral challenge facing our society.  But I very much doubt that we'll end up doing much more than talk.

What Would New York Look Like With a Smaller Financial Sector?

Business Jan 17 2012, 1:09 PM ET
After a disappointing year, the big banks are pulling back on their bonus pools.  A lot.  This is going to be hard on bankers whose salaries are usually a very small part of their overall compensation--and yes, yes, before you drag out the world's smallest violin, let me agree that they have no entitlement to anything more.  Nonetheless, people tend to build their life around their expected salaries, and in New York, this choice is particularly important.  You not only acquire a large mortgage that's often difficult to unload quickly (closings in New York take months at minimum, longer if it's a co-op), but also things like enormous school fees, higher food costs, and so forth.

Nor are the bankers the only ones who have built their lifestyle around a heavy flow of easy money.  Before the financial crisis, the industry payroll accounted for 20% of New York State's tax revenue.  It still accounts for about 13%, as well as a hefty chunk of the city's tax base.  Plus the Office of the State comptroller estimates that every job in the financial sector creates two additional jobs.

New Yorkers who do not work for banks spend a lot of time lamenting the existence of the bankers: buying up choice apartments for rates you can't afford, gentrifying your neighborhood retail into one teeming sea of Godiva Chocalatiers and L'Occitane en Provence body shops, bidding up the price of a private day school education to well north of college tuitions, and generally making things miserable for the rest of us.

But in a very real way, I think you can credit the financial industry for New York's revival.  Oh, one can point to all the vibrant creative arts and their near-cousins in advertising and publishing; one can sing paeans to the city's energy, its tremendous diversity, its nearly unmatched food culture.  But let those of us who lived there in the 1970s and the 1980s also recall that it was violent, crime ridden, and oh yes, depopulating.  (Between 1950 and 1980 the city lost more than 10% of its population). Its infrastructure was decaying, particularly the subway, and no one who had alternatives rode the subways after rush hour.  In the early 1970s, the city flirted with bankruptcy; after the 1977 blackout, it endured widespread looting that bordered on riots.

What turned this around was not the creative class, who were still flocking to rent-controlled apartments in the safer parts of town.  No, what made the difference was money.  Money bought peace among the city's various interest groups, repaired infrastructure that had been neglected for decades, and paid for more police.  It created jobs in construction and services and almost everything else you can imagine.  And where did that money come from?  Deregulation, and a 17-year bull market that inflated Wall Street salaries, and tax revenues right along with them.  Without the financial renaissance, these days New York might well look a lot more like Detroit or St. Louis.

So it's interesting to contemplate what it will look like, if the financial industry gets shrunk down to the size that many are hoping.  The last time that happened, in the 1930s-1960s, New York had a lot of other businesses: shipping, manufacturing, and for that matter, being the corporate headquarters for so many national businesses.  That's pretty much ended.  New York is now a specialist city: creative industries, finance, and tourism.

Could the creatives pay the bills if Wall Street stopped?  New York's bills are very hefty; about one in three people in the city (and one in five in the state) are on Medicaid, with the city paying half of that; the MTA has an operating budget of over $11 billion a year; and the city's annual pension bill runs about $7 billion.  New York's generous social services are what nearly bankrupted the city in the 1970s, until they finally found an industry that would just pay hefty taxes instead of moving south and west.

Raising that money from the creatives means, among other things, raising money from the less affluent--people who are less able to shrug off a tax increase as the cost of living in the Big Apple.  Creatives may also be a bit more mobile than folks who needed--until the last decade, anyway--proximity to a trading floor.

Post-Guiliani, New York has been a very good place to be rich, a very good place to be poor, and a very difficult place to be in between.  If the financial industry really did slim down to size, that might well reverse.  That might make it a more middle class city.  But it would be very difficult for a more middle class city to support New York City's cost structure.  Since it would be pretty hard to rip out the subways and bridges, and it's illegal to renege on your pension promises, I suspect that the welfare state would take most of the burden.  But not quietly.

Mayor Vincent Gray, Protector of Incumbents Everywhere (in D.C.)

Business Jan 13 2012, 3:09 PM ET
The 2010 primary election that unseated mayor Adrian Fenty in favor of former council chief Vincent Gray was mostly portrayed as gentrifiers versus the poor, black versus white.  But another key dynamic was "incumbent versus newcomer".  DC's absurd zone fare system used to be a way for taxi drivers who lived in the district to fleece affluent people who mostly didn't; the DC school system was viewed as a jobs program, as well as a way to educate kids.  Fenty threatened the incumbent stakeholders, and they, in turn, helped elect Vincent Gray.

Now Vincent Gray is delivering.  Uber.com, a service that allows people to hail limo cars via their smartphones, has become very popular during its month in DC.  John Hendel derides its fans as "a mix of socialites, transportation fanatics, and libertarians", but although I plead guilty to the last, I have another, rather simpler reason for loving Uber: there's nowhere that I can reliably get a cab near my house.  Having missed trains because the cab didn't show--and been reluctant to go out at night because of some rather tricky spots between my house and alcohol-safe transportation--I've been very glad of a service that let me call a car and know that it would be there within a few minutes.  The cars cost about twice what a cab does, and so of course, I use them very sparingly, but the option has definitely improved my life.

However, it has not improved the lives of cab drivers, so the DC government is moving in:

An Uber car was impounded and its driver was ticketed this morning as part of a sting operation, said the commission chairman, Ron Linton. The action comes two days after Linton said in a commission meeting that he considered the service to be operating illegally.

Linton played a role in the sting, hailing a Uber car from a smartphone then directing it to the Mayflower Hotel, where city hack inspectors were waiting. The driver, who was not identified, was ticketed for two violations, Linton said.

The first alleged violation was "incorrect hauling" -- because the driver and his car are licensed in Virginia, he is allowed to pick up a District passenger only if he is going to take the rider to Virginia; Linton's trip was completely within the District. The second was "improper charging" -- under city law, limousine trips must have a fare set in advance; Uber's system uses time-and-distance metering, and Linton said the driver refused to cite him a fare before the trip began.

"What they're trying to do is be both a taxi and a limousine," Linton said. "Under the way the law is written, it just can't be done."

The driver, Linton said, will have an opportunity to appeal his tickets, which carry hefty fines.
The complaint is that they don't have a license to do what they do.  Of course, there's no way to get a license to do what they do--it doesn't exist--and no one's come up with a very sound argument as to why it shouldn't exist.  I don't think I understand what scourge an Uber shutdown protects DC citizens from.

Meanwhile, also this week, the city decided to go after the food trucks that have blossomed around DC over the last year or so:

Over the past week, District officials have been visiting food trucks and telling them that beginning on Jan 13, 2012, they will be ticketing food trucks that don't have a line formed in front of them.  Specifically, if there is a lapse of more than 15 minutes between customers, the food truck will receive a $1000 fine!  UPDATE: I hate to report this, but the news is even worse.. District officials were allowing 15 minutes between customers, but starting tomorrow, they will have no time frame!  The fine is also set at $50, but escalates with every violation (so, I'm guessing that's where the $1000 figure comes from).  This means that if MPD rolls up and sees a truck with no line, they are immediately fined $50 and told to pack things up and go home.  To add insult to injury, if a truck racks up 17 of these violations in one year, they can have their license revoked.

As you may know, DC food trucks are operating under decades-old ice cream truck regulations.  District Mayor, Vincent Gray (eom@dc.gov), has new unpublished regulations sitting on his desk that would bring DC's laws up to date with the current times.  But, he is refusing to move forward with updating the food truck regulations, probably because he doesn't want to ruffle the feathers of the restaurant association. 

Apparently, at 5 pm yesterday, however, the mayor backed down and said no further enforcement actions were planned.

My personal interest in food trucks and reliable car service aside, it will be interesting to see how these things play out.  There's a lot of love for food trucks, and apparently, for Uber.  But the incumbents are very well organized, and probably prepared to do a lot more than tweet about their desires.

The Healthcare Rorschach Blot

Business Jan 13 2012, 12:42 PM ET
Part of Obamacare was a transitional "High Risk Pool" program to cover people who were unable to get insurance until the rest of the law's provisions kicked in in 2014.  The program allocated $5 billion.  Medicare's chief actuary assumed that it would attract 400,000 people; the CBO projected 200,000--but only because they assumed that HHS would use its authority to limit enrollment in order to keep the program below its budgetary cap.

The experience was not quite what had been expected.  By January 2011, 8,000 people had enrolled, a number that rose to 12,000 by April.  As of October 2011, by dramatically relaxing the requirements, lowering premiums, and paying brokers to enroll people, HHS had managed to get that number up to 41,000.  Where were all the people with pre-existing conditions who couldn't get insurance--the ones whose plight had been the impetus behind ObamaCare?  Like many observers, I was shocked by this development: I would have predicted the high-risk pools running over budget, but not that so few people would turn out to use them.

Well, it turns out I'd have been half right, anyway.  

Because nationwide enrollment has been far less than expected, federal funding for the program established under the health overhaul appears plentiful: $5 billion was set aside and less than $500 million has been spent in the first 16 months. The program is scheduled to end in 2014 when insurers can no longer deny people coverage for pre-existing health conditions.

But funding allotments for a few states are beginning to run low, largely because health costs have been higher than expected.

Officials in both California and New Hampshire feared they might start running out of funds by early next year. California, which was allotted $761 million initially, was given an additional $118 million.

New Hampshire, which was allotted $20 million, was given another $30 million. New Hampshire, which has 260 people enrolled in the program, had spent $12 million on the program through September. "The people who enrolled were sicker than anticipated," said Roland Lamy, assistant director of the New Hampshire Health Plan, a nonprofit group that is administering the high risk pool.
Given that half of the enrollment has come in the last 3-6 months, however, it's not all that comforting to hear that they haven't spent so much money--yet.

Sarah Kliff sees this as a problem of high cost patients:

This isn't exactly surprising: When the federal government created a new health insurance program catering to those who have had trouble obtaining insurance in the past, it makes sense that those who have very high medical costs would be first in line. It hasn't helped that the premiums have proved relatively pricey: In Montana, the monthly premium for the high risk pool is as high as $681. Anyone who enrolls in a plan with that kind of premium likely expects to have relatively expensive medical costs in the near future.
It's probably unsurprising, given that I opposed the law, that I am much more worried about what this means for the budget projections that were used to pass Obamacare.  Even after heroic efforts by HHS to boost enrollment, the headcount estimates seem to have been off by 80-90%.  But the cost estimates seem to have been off by much less: if we've already spent 10% of the money on 10-20% of the patients, and we still have two years to go, it's reasonable to assume that we're going to be spending at least twice as much as expected per patient, and probably much more.

This suggests a substantial risk of much higher cost for the law than we were promised by its authors.  The experience has not been salutory on this front: while the program certainly decreased the rate of uninsured by 50-60%, it did nothing to control costs.  Massachusetts premiums, which were already the highest in the nation, have soared even higher, as have the costs to the state.  So far, the state's answer to this has been to simply demand rate reductions by fiat--even though as far as I know, they never did find an actuary, not even one working for the state, to sign off on the changes.

Is Trademark Infringement Fraud?

Business Jan 12 2012, 7:00 PM ET
So, as I could have predicted, the comments section on my post about "non-rivalrous" goods and the nature of property rights has turned into a a rather contentious brawl.  It currently has 600 comments, and counting.

One of the most common responses has been "that's not theft, that's fraud"--for example, with regards to identity theft.

This simply isn't true.  As you can see, many of the relevant statutes in fact refer to "taking", "stealing", or "theft" of another person's identity--it's not just, as I was informed yesterday, a colloquialism.  Moreover, upon any reflection, I think it's clear that this is the correct interpretation.  Of course, identity theft usually involves another crime--a fraud--such as obtaining services or credit under a false name.  But the fraud is against the bank.  The person whose identity was used has not been defrauded.  

Instead, you've taken the reputation (usually financial) that they've spent a great deal of time and effort building up.  This taking is in some sense non-rivalrous--you can both use the identity, though of course, if you fail to make payments, you'll destroy the value of that asset.

They have suffered real harm from this non-rival appropriation of something that we generally recognize as their property: their good name.  Only they have the right to decide how it will be used.

The fact that identity theft usually involves another crime--fraud--does not mean that it is "really" fraud; many crimes often involve other crimes as well.  For example, burglary usually also involves either fraud on innocent buyers of the stolen objects, or (in the case of buyers who do know or suspect the provenance) unlawful receiving of stolen goods.

A more interesting case, however, has to do with trademark.  As is common in these debates, a lot of the pro-file-sharing group argued that IP protections were far from necessary to assure that new works would be created.  Instead, they pointed to other possible revenue streams:

  • Selling t-shirts and other band themed merchandise
  • Live performance (band concerts, speaking gigs)
  • Special editions with liner notes, calfskin binding, or whatever
  • Advertising-supported streaming
  • Selling book or song rights to the movies
  • Merchandising to McDonalds, BMW, or what have you
Of course, as many readers hastened to point out, with the exception of live performance, all of these things themselves rely on IP protection for other media.  While hard core fans might well only pay for authentic band t-shirts or signed editions, this is a tiny market.  The reason that bands can sell t-shirts to make money is that it is illegal for anyone else to slap their name and artwork on a piece of cotton.  McDonalds cannot put your song into an ad, or your character into a Happy Meal, unless you give them permission.  

Moreover, many of the industries that it is proposed they sell into in order to make up the sales lost in the consumer market are themselves creatures of robust IP protection--including McDonalds, which could not exist in its current form without ruthless trademark enforcement.

To which one commenter sensibly replied:

Trademarks are an entirely different type of IP. One that most weak-IPers don't have a problem with, because trademark infringement is essentially fraud.
As far as I know, it is true that most weak-IPers don't have a problem with trademark, perhaps because very few weak-IPers are interested in opening up retail establishments, insurance brokerages, or fast-food franchises.  And yet, I find this argument very interesting, because the person making it seems sincerely unaware that it is entirely circular.  Trademark protections are okay because trademark infringement is fraud.  But of course, trademark infringement is only fraud because trademark protection exists.

Imagine a parallel universe, entirely like our own except that there are no trademark protections.  I own a super-successful hamburger stand which, for the sake of convenience, we will call, "McMegan's".  McMegan's is actually a small regional chain--I have multiple locations, all with my signature "Golden M" right out front.  Everyone in town knows that due to my obsessive-compulsive quality control, no matter which McMegan's they go into, they will get an identical experience: clean restrooms, crispy fries, and one of my signature burgers, such as the "Big Mick".  

Probably, there's a better burger in every one of the towns where I operate.  But that's not my value proposition.  My value proposition is that you know exactly what you are going to get, and it's always better than okay.

So you go ahead and front run my next expansion, opening up your own McMegan's, complete with identical "Golden M" out front and the same menu.

(Even in our universe, this has frequently been a popular strategy--there's still a "Kennedy Fried Chicken" in Lynn, Massachusetts with a sign that looks suspiciously like the old Kentucky Fried Chicken logo.  Presumably the change to the new "KFC" signs with the colonel's picture were aimed at just these sorts of imitators.)

Are you committing fraud?  No, because in our alternative universe, no one has a reasonable expectation that a "McMegan's" with a golden M in front of it is actually run or franchised by my company.

Is my imitation a good thing?  Well, my behavior, replicated thousands and millions of times, will probably make it impossible to build the kind of national chain that we're all used to.  This would be good for some people--independent operators who don't want to operate chains, and the authors of travel guides--and bad for others, namely people who frequently travel outside of very small local geographic areas.  Going outside of your small town or neighborhood would be a lot like, well, like travelling used to be: anyone new to the area would be at the mercy of a lot of really terrible food, unreliable retail, and filthy hotels.  If you are older than 35, and you travelled on the interstates as a child, you know what I am talking about.

But whether you think that the absence of trademark would make the world better or worse, such copying would not be fraud.  No one could claim to have been unjustly deceived, any more than you think it's "fraud" for furniture stores to mark up their products 30% and then have a "sale".  

It makes no sense to argue that I want to erode IP laws, but of course not trademark, because that's fraud.  Like file sharing, trademark infringements are misappropriation only if law and custom say they are.  If you question the one, then you should also question the other.

Which goes to what I said yesterday: the rules of property are not written in indelible ink across the human heart.  It's a somewhat haphazard system that evolved over centuries.   And yet, we tend to assume that whatever bits of it we approve of are not merely well-functioning rules that enhance human flourishing, but instead, are fundamental moral laws.  Trademark infringement is obviously wrong because it's fraud.  File sharing is obviously right because no one's allowed to tell you that you can't lend your friend your book.

I actually think that this is necessary to a well-functioning system: norms have to have moral force.  Real moral force, where we actually believe--often quite angrily!--the violators are doing something very wrong.

But when circumstances change--when, for example, it becomes possible to make infinite, perfect copies of creative works to which we have purchased well-defined rights--this tends to make the discussions rather lively.

Update:  A reader writes

Good post, but I have a nitpick: McDonalds absolutely •can• put your song in their ad without your permission: this is what "compulsory licensing" discusses. However, use of the compulsory license is expensive. What McD can't do is use your song without either (1) getting your permission and negotiating a rate or (2) paying the (much higher) c. license fee.

This changes nothing in the argument, but it is often misunderstood, even by many in the music industry. Weird Al gets permission because he's nice, not because he has to.
Update II:  Another reader says:

Live performances would also be hurt without an IP regime. Lots of oldies bands already have this problem because they didn't properly protect themselves back in the day and so you have no idea who it is performing while claiming to be "Sha-Na-Na."
Interesting. I had no idea that was an issue.

How Much Does File Sharing Resemble Stealing—and Does it Matter?

Business Jan 11 2012, 2:02 PM ET
Kevin Drum takes a courageous and rare stand on the internet, arguing that yes, downloading millions of files from JSTOR while evading attempts by both JSTOR, and the owner of the network you're using, to stop you, is, well, pretty close to stealing:

This affair has raised a lot of hackles among the infovore set, but I'm a little stumped about why I should be outraged. As James Joyner says, maybe this should have been a civil matter, not a criminal one (though Swartz did break into an MIT network closet to do all this), but beyond that does anyone really think JSTOR should just sit idly by as their entire archive is downloaded? Would the librarians at Stanford sit idly by if someone backed up a semi and started shoveling hundreds of thousands of books into it? Sure, there's no evidence that you're planning to steal the books. Maybe you intend to return them all in two weeks. But come on. Are we really all expected to be that stupid?

Likewise, Swartz may say that he had no intention of putting his 4.8 million documents online, but come on. It's a pretty safe assumption, no? Swartz's suggestion that he just wanted to perform a research project is a wee bit improbable.

As near as I can tell, Swartz is basically engaging in civil disobedience, publicly breaking a law that he considers unjust in order to generate publicity. Fine. But one of the tenets of civil disobedience is that you accept that you're breaking the law and accept the consequences. Now he is.
Naturally, Kevin's readers lay into him, saying that this is completely not a good analogy, because of course, when you download JSTOR's files, JSTOR still has the files.

This is a concept that economists call "non-rivalrous goods", and it's very important to file-sharing advocates.  I don't think it's going to far to say that for many proponents, it's at the very heart of their case.

And yet, it's not clear to me why this is supposed to be a devastating rejoinder--why rivalrousness is so fundamental to property that we should not have property rights over non-rivalrous goods.  I get the sense that people find it intuitive that many people think property is, at its heart, a system for deciding how to allocate a limited and fixed set of stuff.

And, of course, it is that.  But it's not just that.  Property rights serve a lot of functions in our society, and property rights can attach to things that are quite nebulous indeed, like accounting entries in computers that exist in a physical space not visible to the naked eye.  They are highly contingent in ways we rarely think about.  I'm not sure how we settled on "it's non-rivalrous" as the reason that file sharing is a) not stealing and b) okay.

I've asked a bunch of libertarians this question, since they usually believe in very strong property rights as both a moral and an economic imperative--but also display a somewhat disproportionate aversion to strong intellectual property protections.  So far, I don't feel as if I've gotten a lot of satisfying answers as to why people who support strong real estate protections and weak IP protections think that  this particular argument matters so much. I have heard a lot of restatements of the definition of non-rivalrous goods, gotten many elaborations on why rivalrousness is different from non-rivalrousity, been told what the implications are for various markets and so forth.  But they haven't, to me, advanced a theory of property--either moral or economic--to which the property "rivalrous" is really so obviously fundamental that in its absence, we're no longer dealing with property.

Reading through the comments to Kevin's post, it occurred to me how many of the analogies seem to have been designed by and for college students.  Which is to say, they are reasoning from a pretty simple version of property, appropriate to someone who doesn't really engage in much commerce.  The important aspect of property in these arguments is personal use.  And of course it is true that if I have a JSTOR article, your copying that article does not deprive me of it.

But personal use is far from the only function of property in a modern economy.  If you think about uses beyond what might happen in a dorm room or professor's office, these answers to Kevin's analogy seem less apt.

Think about a bookstore, for example.  Why isn't it okay to take their books?

Because, unlike with file-sharing, I haven't deprived them of the use of the book, you will say.

But in the sense that file-sharers are talking about, Barnes and Noble is not using the book.  They want to make money off of it, but they are not interested in reading it, or using it to prop up a shaky table leg, or impressing people who see it left on the coffee table.  In fact, holding onto that copy of the book is costing them money.  

Stealing the book doesn't deprive them of the use of the item, in the primitive way that most of the analogies offered by file sharers seem to me to depend on.  What it does is deprives them of one very particular use: the ability to sell the book for its set price.

But isn't this exactly the use of which you deprive musicians of when you download an album that you otherwise would have bought?  Once you download it for free, they can't sell it to you.

But other people can't use that book either, you will say.

Not that particular book, no, but who cares?  In all important aspects, that particular book is identical to thousands of other books with the same words on the cover.  It is very unlikely that anyone who shows up at Barnes and Noble with the purchase price of a book will be denied the opportunity to walk home with all the words, illustrations, and page numbers that you "stole".  Barnes and Noble stocks many, many copies of the books they sell, and if their stock dips below the amount they want to hold, they will automatically order more.  

There is perhaps some hypothetical case in which someone wants a rare book you have stolen right now and cannot get a hold of it for two days because of your actions, but these cases are going to be extremely rare: by definition, if Barnes and Noble does not have extra copies of a book around, it is because almost no one buys it.  We probably should not construct a whole system of property rights around extremely rare boundary cases.

Moreover, no book sells every copy that the bookstore has.  They get damaged, lost, and eventually remaindered--sent back to the publisher.  One could plausibly argue that an individual book-thief is simply slightly lowering the eventual supply of remaindered books.  Which is to say, the supply of nothing: some of those books used to be sold in remainder bookshops, but with the economics of bookselling being what they are, these days, as I understand it, they're mostly just destroyed.  So really, you're not stealing a book: you're saving it from being pulped.

But the book cost them money

That's true.  But it cost them a pretty small amount of money.  You probably cost them more if you leave a mess in their public bathrooms, or mumble your latte order so that the clerk gets it wrong and has to do it over, but we don't give Barnes and Noble property rights in those things.  

More to the point, this doesn't have anything to do with whether a good is rivalrous or not.  It has to do with whether the good has a low marginal cost.  Making records costs money too.

But not for the individual copy.  Electronic files have zero marginal costs.

But hotel rooms and airplane seats also have near-zero marginal costs.  Is it therefore okay to sneak into a hotel room, as long as you make the bed perfectly before you leave?

This brings us to the issue of trespass, which--despite the fact that it is often, maybe even usually, non-rivalrous, most libertarians don't support.   If you own a cabin in a snowy and distant mountain, and I know for a fact that you cannot leave town for the weekend, is it okay to pick the lock and use my house?

You might break things.

Is it okay if I am very careful, or only occupy a small portion of the home filled with things that are not breakable?

I might change my mind and want to come.

The partners said everyone in your group has to work all weekend.  Your wife is dying in a hospital bed, surrounded by all your friends and family.  For whatever reason, I can be reasonably quite sure that you are not going to use this property this weekend.  Is it okay, morally, for me to use it?  Should you have legal rights against me if you find out?  How about camping on a part of your property that you haven't trod in ten years?

Even if you clean up, you'll change things.

Seriously?  We're arguing for a system of property rights because I disturbed some leaves on your property?

You might frighten away deer I hunt.  You can't know whether you're damaging my property, or whether I might want to use it, which is why I should be able to decide whether I want you to change things.

But this is the argument of publishing houses, and increasingly, artists: they should be able to decide whether you get to make non-rivalrous use of what they created, and whether your use damages them.

Also, you could make the law clear that you had to be really, really sure that they wouldn't come, or you wouldn't break things, before you could use peoples' stuff.  Law makes fine distinctions like this all the time.

(For that matter, as I understand it, the law actually does give me a right to trespass if, say, I am lost in a storm and am clearly going to freeze to death unless I break into your cabin.  I may have to pay you for any damage I do, but I'm not legally in the wrong simply for entering your property.)

On the other hand, there are plenty of rivalrous uses that do not have clearly defined property rights, like how loud parties can be, how much smell or visual blight can be inflicted on a neighbor, how much care I have to take to keep the rat population down, how to allocate responsibilities and rights over common resources like ponds and trees that span property lines, and so forth.  These questions are adjudicated differently in different jurisdictions, or by negotiation between neighbors, because no one has a particularly well developed theory of how such rivalrous uses should be allocated.

Now go back to those accounting entries at our bank.  They do not take up any meaningful physical space, and they're non-rivalrous: if I copy them and pretend they're mine, you can still use yours.

To the extent that they're rivalrous at all, it's only because--as with intellectual property!--we have a social convention, and a very strong legal regime, that makes it that way.  There's nothing inherent about the computer entries that makes it so we couldn't both claim to have the money in your bank account--and both be right, if the government and our neighbors would just agree with us.

And yet most of us think that counterfeiting is a very, very bad thing to do--that it is a next door neighbor to stealing, if not living in the same house.  They think this even if the counterfeiting is so good as to be undetectable.   Most people support the treasury's efforts to fight counterfeiting, rather than arguing that we should simply stay with the old, easy-to-counterfeit currency so that we could all enjoy the bounty of increased money supply.

Fine, counterfeiting is bad, but it's not stealing, you may say--it's only stealing if it's rivalrous.

I think the argument about whether file sharing is "stealing" or some other word is really tedious and beside the point, and ends up in circles where you say that maybe it's wrong and it's not stealing and when your opponent concedes the point you argue that it's not wrong because after all, it's not like stealing and no one has less stuff . . .

But I digress.  Let's talk about this distinction.

Why do we oppose counterfeiting, if it doesn't deprive people of anything?  The answer is that it is stealing: by increasing the amount of currency in circulation, it makes everyone else's money worth just a little bit less.  It's just stealing from everyone, instead of one specific person.  Nor am I just playing with words; this has always been a historic justification for laws against counterfeiting, usually the most important one besides a bunch of puffery about the majesty of the state.  

It's also, I'd note, the language used by a lot of libertarians about governments who print money in order to make their debts easier to pay back.  And it's not really an unfair usage of the word.

It's important to note that most people who think about it agree that counterfeiting is basically like stealing even though no one counterfeiter is likely to have much impact on the money supply (with the possible exception of the government of North Korea, which was allegedly printing US bills on an industrial scale for a while).  Even if you're having a tiny effect that only becomes really problematic in aggregate, I think the common intuition is that it's wrong to deprive people of even a tiny fraction of the full use of their money.  If I made a perfect copy of your AT&T shares and sold them, no one would much care if I pointed out that you still had the physical certificates.

Or to take an example offered by Kevin Drum some time back:

But if he had a draft magazine article stored on his hard drive, and his girlfriend copied it and sold it somewhere without his knowledge, I'll bet he'd consider it stolen -- possibly with the word emphasized by hurled crockery and intemperate language. He'd consider it stolen even though, technically, he still has a copy too. And he'd be right to. Before the theft, he had the potential to earn a certain amount of money by selling the publishing rights to his work. Afterward, he didn't. That potential may not be a tangible physical object, but that doesn't make it a nonrival good. Once it's gone, it's gone.
We could argue about whether this is stealing or plagiarism, but who cares?  We'd all agree it's really, fundamentally wrong.  And not just because she's passing off someone else's work as her own, though of course that's part of it.  I think most people would agree that it is much more wrong to plagiarize and publish an article that hasn't been sold yet, thereby depriving the author of the income they would earn, than to say turn in a column that was a straight lift from Montaigne.

All of which is to say that we don't, in fact, seem to think that rivalrousness is actually a fundamental property of property--we think that property rights still apply even when we're not using our property, and have no intention of doing so.  We think that depriving Barnes and Noble, or the publisher, of the revenue from a book we stole is wrong--and that depriving a friend, or even a stranger, of the revenue from an article they wrote is also wrong even if no physical object is involved.  We think that counterfeiting is very close to stealing, but more fundamentally, that property rights inhere in all sorts of things that are rivalrous only by the mandate of the state.

None of this establishes that we should have strong IP, of course--only that I don't think you can make a good case against strong IP by pointing out that Rihanna can still listen to "Pon the Replay" any time she wants.  Or that copying is super cheap.  Or that no individual file-sharer costs the owner of the rights very much money.

But of course, no system of property rights is built from first principles. Nor did property rights spring full-blown from the head of Zeus at the dawn of the universe.  It's a highly contingent system that evolved over centuries, with all sorts of weird principles that we'd never have thought of if we'd been designing the thing from scratch.  (For example, read the chapter in Moby Dick about the system for allocating rights over hunted whales.  A lawyer once told me that in law school, his class was assigned to come up with a system to solve the problem.  No one came up with anything that looked like what actually evolved; the only justification for the real system was that it worked.)  That's why I don't find these heroic invocations of very simple principles nearly as convincing as, well, most of the avid file sharers I know.

As to whether we should have strong or weak IP rights, I'll leave that for another day, since I've gone on quite long enough.





What Did Romney Do at Bain?

Business Jan 10 2012, 4:52 PM ET
At any time, the Wall Street Journal's article on the fate of companies that Bain Capital invested in during Romney's tenure would have probably made a splash.  But luckily for the commentariat, Romney gave the story a nice push by making a really incredibly stupid gaffe--remarkably, the biggest one he's made in months of hard campaigning.

The result has been predictable: the left (and some of his opponents) are accusing Romney of exemplifying predatory capitalism that destroys firms, jobs, and lives, while the right defends his work as creative destruction.  What's the truth?

First, the particulars.  From the WSJ:

Amid anecdotal evidence on both sides, the full record has largely escaped a close look, because so many transactions are involved. The Wall Street Journal, aiming for a comprehensive assessment, examined 77 businesses Bain invested in while Mr. Romney led the firm from its 1984 start until early 1999, to see how they fared during Bain's involvement and shortly afterward.

Among the findings: 22% either filed for bankruptcy reorganization or closed their doors by the end of the eighth year after Bain first invested, sometimes with substantial job losses. An additional 8% ran into so much trouble that all of the money Bain invested was lost.

Another finding was that Bain produced stellar returns for its investors--yet the bulk of these came from just a small number of its investments. Ten deals produced more than 70% of the dollar gains.

Some of those companies, too, later ran into trouble. Of the 10 businesses on which Bain investors scored their biggest gains, four later landed in bankruptcy court.
I think you can tell two stories from this data--and without looking at each individual case in depth, it's really hard to tell which story is right.

Certainly, there are private equity deals--and maybe firms--that don't add social value.  They cash out existing shareholders by burdening the company with a lot of debt, and then either take the company public again or take it into bankruptcy.  I've heard it suggested that to the extent these deals unlock value, they do so by getting cooperation from management insiders--which sounds suspiciously like either "collusion" or "bribing them to do their jobs".

On the other hand, private equity deals can shake loose dysfunctional managements that have been systematically running the company into the ground, provide capital and management advice to struggling firms, or give fledgeling companies the push they need to soar.

Either of these stories works with the facts laid out by the Journal.  There's a broad spectrum of private equity strategies, from pure cash-flow plays that sell off underperforming assets, to something more akin to a corporate turnaround specialist.  Bain is closer to the latter than the former--their "special sauce" is that they have a sort of consulting approach to financial problems (and often, the cream of Bain Consulting's talent, from which they recruit heavily.)  

Turnaround situations, and new firms--both of which Bain says it focuses on--probably have a higher failure rate than "sell off an obviously undervalued asset" or "fix a simple cash flow problem".  Which could also explain a high failure rate.  It's probably a somewhat simpler operation to predict whether you can sell off a division, than whether you can revamp the product line to make it sell to the tween segment.

Largely, I expect people are going to believe what they want to believe; if you're invested in the notion that finance is useless and predatory, you'll see Romney as a predator; if you valorize markets and business, you'll tend to see Bain's record as admirable.

Me, I don't know.  Pending more information, I'm suspending judgement.

How to Stay Healthy: Don't Get Old

Health Jan 10 2012, 4:45 PM ET
In response to my post on silly hypertension advice, commenter Edgehopper has a great point:

This is something that gets obscured in today's medical reporting--everyone, as they get older, will get sick for some reason and die at some point. The biggest risk factor for heart disease and cancer isn't BMI, cholesterol, blood pressure, etc....it's age. And to a large extent, the incidence of those diseases is random; doing everything right lowers your risk of disease, but not to zero, and usually not to that small a fraction of the risk for the general population. There is no magic set of behavior that will prevent disease; the closest is obvious behavior to prevent cancer like "don't smoke" and "don't zap yourself with radiation on a daily basis."

But there's a big difference in confirmation bias. When a person with good habits and numbers has a random heart attack at age 60, people will be shocked and sympathetic, thinking it's abnormal. When a fat person has a random heart attack at age 60, people will think it's entirely the fat person's fault. In reality, the fat person's risk of heart attack is only slightly higher; most people think that his risk is drastically higher, and his heart attack will confirm the bias while a "healthy" person's heart attack will be discounted as not fitting the pattern.

Medical Advice for the New Year: Don't Get Sick

Health Jan 10 2012, 3:32 PM ET
I have a family history of high blood pressure, so naturally when I saw that the Wall Street Journal had a piece up on "starting early for cardiovascular health", I clicked through.  This is what I found:

In a report published last week in the journal Circulation, Dr. Allen and her team analyzed more than 60,000 patient records using data collected in other research studies spanning 60 years. The researchers compared blood-pressure measurements for each patient taken on average at 41 years of age and again at 55. The team then tracked whether the patients suffered strokes, coronary heart disease or cardiovascular diseases over the next few decades of their lives.

The conclusion: Bringing high blood pressure under control at any time reduces risk of disease. But not letting it creep up in the first place can be even better. For example, men with high blood pressure--above 140/90--in their 40s who reduced the measurement to between 120/80 and 139/89, a moderately elevated level, lowered their risk of cardiovascular disease by their mid-50s to 59% from 65%.

By comparison, men who maintained moderately elevated blood pressure during the study period had a 51% chance of cardiovascular disease in the remaining years of their life. And men with consistently low blood pressure, below 120/80, had a 41% risk. But risk for cardiovascular disease jumped to 69% for men who had low blood pressure in their 40s and ended up with hypertension.
Emphasis mine.

I emphasize because you'd really be surprised to learn how little control hypertension patients have over their condition. Yes, there are risk factors.  But without medication, my blood pressure routinely spikes over 155 even though I have a perfectly normal BMI.  It began creeping up in my mid-thirties for no obvious reason.

That did not stop my doctor from offering ridiculous suggestions as to how I might control it.  In her defense, she was a resident in internal medicine, and was presumably required to give me ludicrous advice by whatever shadowy figure was supervising her and actually making the decisions.  First she came back and told me that a glass of wine with dinner more nights than not was "really a lot" of drinking, in a tone that would have been more appropriate had I confessed that I frequently woke up on the floor of our living room, surrounded by empty scotch bottles that I couldn't remember having purchased.

Then, after another trip to consult her dark overlord attending, she told me that I should cut down on my salt intake by eschewing pretzels, potato chips, and that sort of thing.  The following dialogue is an approximation of our discussion.

"I don't eat chips more than once a month."

"Maybe it's your lunches, and your dinners out, then.  Restaurant meals use a lot of salt."

"95% of my meals come from my own kitchen."

"And of course, the cold cuts  you buy in the grocery store . . . "

"I don't like sandwiches."

"Well, processed foods in general have high sodium.  You should cut them out."

"You want me to make everything I eat from scratch?"  I asked. 

"It's much healthier," she said weakly.

"Do you make everything you eat from scratch?" I asked, somewhat incredulously.

"I work eighty hours a week," she explained.

I decided that it wasn't really worth telling her that no, really, some of the rest of us have demanding jobs and travel schedules too.  It made more sense just to ignore her advice, as I'm sure that everyone else she gave it to did.  (And with good reason: the evidence that reducing your salt intake has a big impact on your blood pressure is pretty mixed.)

I am sure that it would, in theory, have been better for me to not have developed high blood pressure in the first place.  It might also have been better for me to be 5'10 instead of 6'2--and unfortunately, I have no idea how I could have achieved either stunt.  

Nor did most of the people in the study cited by the WSJ; according to the authors: "The prevalence of hypertension treatment in this study is low because of the time period during which these cohorts were initiated".  The Journal compresses this to "patients who curbed their levels in the Circulation study did so only with lifestyle changes " but that is not actually what the authors said.  Rather, they said that they don't know why people's blood pressure fell.  People whose blood pressure fell did see smaller increases in body mass index and cholesterol than those whose blood pressure rose.  But those things were still increasing, not decreasing.  So:

Decreases in BP may have been due to lifestyle changes, as suggested by the changes in body mass index and total cholesterol, although it is possible that differences were due to random variation or regression to the mean.
So what we really know is that if your blood pressure is high, and then falls, it is better than if it just stays high--and it's even better if it doesn't get high in the first place.  Except we knew that before.  Having high blood pressure is bad for you.  So is getting Lou Gehrig's disease.  But it is not very useful to tell people that they will be better off not contracting these conditions.

You can treat the condition, of course--but to my chagrin, even well-controlled hypertension is not the same thing as having normal blood pressure.  Whatever underlying process is causing my blood pressure to rise is also probably damaging my cardiovascular system, even when the blood-pressure itself reads normal.  Moreover, at least as far as I know, doctors don't give you blood pressure meds when your BP hits 121.  They wait until you're, well, hypertensive, or close to it.  That's because there's substantial error in blood pressure readings (you're having a bad day, you were late and ran up the stairs, you're scared of hospitals).  They don't want to put you on diuretics for years to treat that rumor you heard that your company might be having layoffs.

Of course, you should exercise--but research seems to indicate that it's good for a few points, not a drop from "Stage 2 hypertension" to "normal".  And you should quit smoking--but much to my surprise, smoking apparently doesn't cause high blood pressure.  Maybe you should eat less salt, too, but the evidence that this will improve your hypertension is not all that convincing.  Even losing weight, the most plausible intervention, seems to generate modest improvement, not radical reduction. All of these things together, at the most generous estimates, would not have reduced my blood pressure below 120/80.

Don't get me wrong: hypertension is a serious condition; it's imperative to treat it, and it would be even better if we could avoid it entirely.  But I only know one sure-fire way to keep your blood pressure from rising, and that's to avoid reading articles telling you that you really shouldn't have become hypertensive in the first place.

Round 2 on Predatory Lending: What Are Credit Unions Good For?

Business Jan 9 2012, 1:40 PM ET
On Friday I wrote that I doubted that credit unions were going to be able to provide a painless substitute for payday loans.  Felix Salmon has responded at length, making three core arguments:

1.  Credit unions already pay their overhead with current operations, so adding on a payday lending service should give them a cost advantage over payday lenders

2.  Credit unions have a very low cost of funds, particularly in today's environment, where savings accounts might as well be paying interest in sticks of chewing gum.

3.  If customers want these loans, credit unions should offer them.

As I said in the post, I don't think arguments from the fact that almost no one seems to be doing this should be definitive--all innovations consist of something that no one was doing before.  But I will suggest some additional reasons for skepticism.

On the first point, as Felix in fact notes in his post, payday borrowers are looking in part for convenience.  They want many locations and extended hours so that they can go after whatever shift they're working.

Credit unions, being small, do not work this way.  My father-in-law used to drive something like 40 minutes to deposit checks at his credit union, and that's not all that unusual.  That's not somewhere you want to have to go in an emergency--particularly if you're a shift worker, instead of a college professor.

At the very least, to provide that level of availability, most credit unions would have to add shifts.  That's going to eat up some of your profitability--particularly since you'd get other customers coming in for other types of service, and because your location is likely to be nicer (read: more expensive to operate) than a typical payday lender or check cashing place.

On the second and third points, Felix and I see this a little differently.  Of course credit unions should strive to serve their members.  But they have obligations to their depositors, and to other borrowers, as well as to the people who want payday loans.

The reason that their cost of funds is really low is that they're funded by thousands of small savers who are willing to trade away interest earnings in exchange for peace of mind.  You shouldn't put that money into very risky loans--especially if you aren't planning on charging a rate of interest that makes up for that risk.  For the same reason that people shouldn't use their emergency fund to speculate on the currency markets, credit unions should think twice before getting into a high-risk loan business.

Ah, but those deposits are insured by the federal government, you will say.  And that is true.  But just as savings accounts should not be used for speculation, taxpayer dollars should not be used to backstop financially dubious lending operations.

A couple of further thoughts.  It's not clear to me how much synergy there is between payday lending and credit union operations.  To be sure, they are both in the business of lending.  But McDonalds and Per Se are both in the business of delivering food, and no one suggests that McD's should start a fine dining section--or that Per Se should start shoveling out mass-produced finger food.

Most obviously, this would confuse the brand--people who expected McDonalds to be fast, or Per Se to be exquisitely perfect, would be really upset with their experience.  But also, there's not actually that much overlap in what they do, except insofar as both involve fire and food.

Similarly, people who used their credit union for payday loans might have a different attitude towards their credit union afterwards--but also, staff and internal processes that are geared towards carefully disbursing funds with lots of oversight and attention to household budgets might not actually be very good at doing payday loans.  And if they got good at doing the payday loans, they might not be that great at their current core business of annoying the hell out of anyone who has ever tried to get a loan out of a credit union.  (When we bought a house, using in part some cash gifts we'd gotten for our wedding, I not only had to sign an affidavit swearing as to the provenance of those funds, but also had to provide them with--I kid you not--one of our invitations, along with a copy of our marriage license, and of the announcement in the newspaper.  Navy Federal provides great service.  But it is not speedy service.)

Along those lines, I've been thinking about the loan product that Felix Salmon has been touting as an alternative to payday loans.

Megan wonders whether it's only possible because state employees' paychecks are particularly reliable, but the structure of payday loans makes them all relatively safe: they're fully collateralized by the money coming at the next payday. You can only get one of these loans if you're employed, and you can demonstrate how much your next paycheck is going to be.

The NCSECU product is very well put together. It involves financial counseling; the creation of a savings account; and a modest interest rate of either 5% or 7%. It lacks the convenience of most payday loans: the credit union surely has shorter office hours than most payday lenders, and the product is more complicated. But the interest charged is so much lower that taking out one of these loans is always going to be a better idea than going to a payday lender who might charge upwards off 400% APR.
But this isn't quite right, I think.  First of all the NCSECU product requires direct deposit--which is to say that they demand to know, beyond a doubt, that they are going to have first crack at your paycheck. 

That's not true of payday lenders.  You can close the bank account between now and payday.  Or you can write another check that will clear before theirs.  Doing it the NCSECU way lowers the risk to the bank--but it raises the risk for the borrower because it's harder for them to default.  (Not impossible: they could, frex, get fired for cause and not have a paycheck less time around.  I suspect that this risk is why the product is offered by . . . a state employees' credit union, where it is literally impossible that the member is going to be fired without pay in the next two weeks).

Someone who's budget is stretched really tight might find that the bank gets paid but the electric bill doesn't.  Good for the bank, bad for the person whose lights have been turned off.

There are undoubtedly some people who are better off with the NCSECU product.  Which actually raises an interesting question: if they became widespread, what would these products do to the market?

Presumably they would skim off the most stable customers whose finances were least in crisis.  But there would be some people for whom this was not a good product: they need the money RIGHT NOW, they need the option of defaulting.  Would the rest of the loan market collapse?  Or would it simply move to even higher interest rates?  In effect you'd see a miniature version of what happens in financial markets as a whole: the best off customers for payday loan services would be made better off, while everyone else became worse off.
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