Richard Posner on the Goldman Sachs Bonuses

Judge Posner, who in addition to being the co-author, with his Nobel Laureate friend, of the Becker-Posner blog is an Atlantic correspondent, has this piece today on the Atlantic's website about the Goldman bonuses. Worth reading the whole thing, but here's an excerpt:

Goldman Sachs, we learned earlier this month, may end up paying more than $20 billion in bonuses to its employees in 2009. The controversial bonuses that American Insurance Group (AIG) had wanted to pay had been intended to reward performance before the company collapsed, and most of the recipients appear to have had no involvement in the decisions that precipitated the collapse.

The Goldman bonuses, in contrast, were intended to reward Goldman's employees for their outstanding performance during the economic crisis. The performance was made possible by the government's having bailed out Goldman in September 2008, when it is believed that, upon Lehman's declaring bankruptcy, Morgan Stanley was 24 hours away from following suit--and Goldman Sachs 72 hours. It was saved by receipt of bailout money and, more important, by being permitted to convert from a broker-dealer to a bank holding company. That entitled it to borrow from the Federal Reserve -- unlike Lehman Brothers, which was denied a Fed loan because it was a non-bank. That was not a sound basis for denying it a loan, but Goldman would have been in the same boat, had it not converted.

So the argument goes: Without government aid then, no $20 billion-plus in bonuses for Goldman Sachs's employees in 2009? Maybe zero in bonuses, maybe indeed, no Goldman Sachs at all. Against that background, the bonuses seem egregious. It seems that the government drove a bad bargain when it bailed out Goldman, that it should have demanded a big chunk of Goldman's future profits.

Posner goes on to note that the majority of the firm's profits in the last year came from proprietary trading, an activity, he argues, that is of limited societal value. Posner posits some negative political and economic consequences of this.

The image above accompanied Posner's Atlantic essay and was credited to Chris Hondros/Getty Images.

China's New, Self-Propelled Economy

A few months ago, we mentioned James Kynge's 'China Continental' thesis. In that post, we excerpted an essay Kynge had written in the Financial Times explicating his thesis for China's continuing growth in the wake of declining exports. This was the excerpt we quoted from Kynge's essay:

China is going continental. Just as the US during the 19th century underwent a transition from export-oriented growth to a greater reliance on inner dynamism, so China is looking inwards for the engine to drive its economy.

In China’s case it is still early days, but evidence suggests the conventional view of an export-dependent, river delta-driven economy no longer matches the reality. The argument here is not that trade has somehow become unimportant to China, but rather that the energy generating the world’s fastest economic growth rate this year is increasingly coming from within.

A series of indicators reveals the shift to “China Continental” – the transition of the world’s most populous country into an increasingly self-propelling economic force.

A couple of items that appeared earlier this week in the Financial Times suggest that Kynge's thesis may have been correct. This item from Monday's Lex column, "China's Stimulus" is one, and Martin Wolf's column from Monday's FT, "Wheel of fortune turns as China outdoes west", is another. Here are a couple of brief excerpts from both.

Lex:

There is no precise breakdown of stimulus spending by geography. But $366bn falls under the heading of infrastructure and post-quake recovery; another $113bn under public housing and rural development. Only a small slice – $54bn to stimulate “technological innovation” – seems to explicitly favour developed regions. Output in 12 western provinces grew an average 8 per cent in the first half – a whole percentage point better than 11 provinces in the east.

This structural shift was evident in first-half figures from ICBC, China’s largest commercial lender. Its year-on-year percentage increase in operating income in the Yangtze and Pearl river deltas fell, but rose in central and western regions. In short, China would rather finance roads in Chengdu than sweatshops in Guangdong. Many private, export-led companies in coastal areas, lacking collateral in the form of land or government relationships, are still struggling for funds. Trade data on Friday showed exports and imports falling for the 10th month, year-on-year. Weak external demand is not the only cause; this is an unabashed internalisation of growth.

Martin Wolf:

China has emerged as the most significant winner from the financial and economic crisis. At the end of 2008, many questioned whether China would achieve its growth target of 8 per cent in 2009. Who now dares to do so?

Cushioned by its more than $2,100bn (€1,440bn, £1,260bn) of foreign currency reserves, huge trade and current account surpluses and a robust fiscal position, Beijing has been able to deploy all its levers over the financial system and the economy.

[...]

Three immediate questions arise. How has China responded to the crisis? Is its resurgent growth sustainable? How far will its recovery help the world economy?

The answer to the first question is: astonishingly. According to data reported at the end of last week, industrial output expanded 12.3 per cent in the 12 months to August, up from a 10.8 per cent increase in July. This is the fastest growth for a year.

[...]

Is this growth surge sustainable? In a word, yes. Inevitably, the torrid growth of bank credit and money is spilling over into asset prices, particularly equities. But there is little danger of excessive inflation in an economy with an appreciating currency, fully embedded in a world economy still threatened more by deflation than by inflation, at least in the near term. Moreover, the government is solvent. As premier Wen Jiabao noted in Dalian, "we . . . kept budget deficit and government debt at around 3 per cent and 20 per cent of the GDP respectively". Should bad loans increase, China is well able to recapitalise its financial system.

This is good news, of course, for companies selling raw materials to China, for vendors to those companies (e.g., Alloy Steel International), and, more broadly, for countries such as Australia and Brazil that export significant amounts of raw materials to China.

Dean Kamen on Health Care

From an interview with the prolific inventor in Popular Mechanics (HT: Megan McCardle):

Popular Mechanics: Yet health-care costs do keep rising. Is there a point at which we simply can't afford the most advanced treatments?

Kamen: Diabetes alone, if you include all of the long-term, insidious consequences of a lifetime of diabetes, is responsible for about 30 percent of the federal reimbursement for healthcare. Taking care of the diabetic every day is a small piece of it. But what if tomorrow we could wipe out diabetes, suddenly everybody takes a pill and it cures the people that have it, and it inoculates the other people so they'll never have it? Forgetting what a great life that would give people and their families, you take care of 30 percent of what now we project as this insurmountable problem of healthcare, which they project is going to kill us.

Well, it would kill us if we look at the 30-year actuarial data based on our 19th century confidence in technology. But I'm sure in 1920 if you asked actuaries to say what percentage of our GDP are we going to spend taking care of people with polio, they'd say: "They get polio, it goes to their lungs, they sit in iron lung machines, they could live a whole lifetime with three people watching over them. We can't support them all."

But what did it cost to deal with everybody with polio? Oh, $2 apiece. We gave them the Salk vaccine. But in the 1920s Salk wasn't around yet.

I'm with Kamen on the importance of market incentives in spurring innovation in health care, but I don't know if the Polio vaccine was the best example for him to use here: Salk refused to patent it¹. Nevertheless, even if he had patented it, the cost of the vaccine could still have been far less than the cost of keeping people alive in iron lungs, so Kamen's point still stands. He could have used a better example though to support his point. Back to the interview:

PM: In other words, R&D spending now may save money later?

Kamen: If you project forward these horrific costs of treating everybody and you want to assume we are not going to respond to that by making the therapies better, simpler and cheaper and in some cases completely wiping out the [diseases], well you know what? We might actually get to that situation—if we stop investing in technology, if we stop believing that the future ought to be better than the past.

If we want to sit here and keep assuming we should be fighting, and that we should be striving to spend less of our intellectual power and our money on great achievements to come in healthcare—that we should be fighting to make it a smaller piece of our economy—I want to know what you want to make a bigger piece of our economy. What do you want to see the future look like?

I think this debate shows a fundamental lack of vision, a lack of confidence, a lack of understanding of what's possible.

Coincidentally, Tim Ferriss blogged about Kamen today, and in the comment thread I mentioned that Kamen was featured on an episode of the Sundance Channel series Iconoclasts (he was paired with Isabella Rossellini). Kamen is a fascinating character, which made this a fascinating episode to watch. Here is a brief clip from that episode.

The photo above of Dean Kamen accompanied the Popular Mechanics article.

¹If Salk's research weren't funded by the University of Pittsburgh and National Foundation for Infantile Paralysis -- if, say, he had been the founder of a start-up pharma company -- he would have had to patent the vaccine in order to recoup his and his investors' investment in the drug's development.

The Top Earning Degrees

A CNN Money article today lists the most lucrative undergraduate degrees (see the graphic above) and notes that, unsurprisingly, they all require math skills. A couple of thoughts on this. First, take a look at the first and third highest-paying degrees (petroleum and mining engineering, respectively). I've argued in the past for the economic benefits of facilitating more domestic natural resources production (e.g., here and here). One of the benefits I've noted is that natural resources extraction tends to create a lot of high-paying blue collar jobs. As this CNN article notes, it also creates high-paying professional jobs, which is another benefit.

Consider the benefits to California, for example, if it dropped its opposition to expanding offshore drilling. For one thing, it might improve the state's environment by reducing natural oil seepage. It would also generate much-needed royalty revenue for the state (in fact, the state could capture that revenue up front by issuing revenue bonds backed by those future royalty income streams). In addition, how many jobs would it create for petroleum engineers and oil rig workers? Couldn't California use the additional net tax payers and potential home buyers these workers would represent?

Another thought: given that the fifteen most lucrative college majors require math aptitude, does it make sense that the SAT has reduced the relative weight of its math section in the total SAT score from one half to one third (by adding an equal-weighed essay section to the math and verbal sections)?

"Tilting at Green Windmills"

In a post last fall ("A Green New Deal?"), we mentioned Van Jones's explication of the idea, advocated by many progressives, that government subsidies for solar and wind energy would spur job creation. In his Washington Post column yesterday ("Tilting at Green Windmills"), George Will draws on research from a Spanish economist who suggests otherwise. An excerpt:

WASHINGTON -- The Spanish professor is puzzled. Why, Gabriel Calzada wonders, is the U.S. president recommending that America emulate the Spanish model for creating "green jobs" in "alternative energy" even though Spain's unemployment rate is 18.1 percent -- more than double the European Union average -- partly because of spending on such jobs?

Calzada, 36, an economics professor at Universidad Rey Juan Carlos, has produced a report which, if true, is inconvenient for the Obama administration's green agenda, and for some budget assumptions that are dependent upon it.

Calzada says Spain's torrential spending -- no other nation has so aggressively supported production of electricity from renewable sources -- on wind farms and other forms of alternative energy has indeed created jobs. But Calzada's report concludes that they often are temporary and have received $752,000 to $800,000 each in subsidies -- wind industry jobs cost even more, $1.4 million each. And each new job entails the loss of 2.2 other jobs that are either lost or not created in other industries because of the political allocation -- sub-optimum in terms of economic efficiency -- of capital. (European media regularly report "eco-corruption" leaving a "footprint of sleaze" -- gaming the subsidy systems, profiteering from land sales for wind farms, etc.) Calzada says the creation of jobs in alternative energy has subtracted about 110,000 jobs from elsewhere in Spain's economy.

John Mauldin's Latest

A few excerpts from this week's Thoughts from the Frontline newsletter, "Faith Based Economics":

On America's Fiscal Challenges:

The following headline caught my eye: "Obama Says US Long-Term Debt Load is 'Unsustainable.'" Yet they announced a $1.8 trillion deficit, which is really going to be at least $2 trillion, and are getting ready to pass health-care programs that will mean at least a trillion in deficits for as long as one can project.

How will they pay for it? Even getting rid of the Bush tax cuts will only produce a few hundred billion a year, which is nowhere near enough. They project much lower medical costs in the future, because they assume they are going to figure out ways to cut costs and make medical care more efficient¹. As if no one has ever tried that.

[...]

You cannot propose massive increases in spending without either creating crushing debt that the markets will simply not allow, pushing interest rates much higher and really slowing growth and hurting the economy. It is a simple fact that you cannot increase the debt-to-GDP ratio without limit.

We found the limit on personal and corporate debt this past year. We pushed the limits until the system crashed. And now the US government wants to basically do the same thing. They are planning to see where the limits on government debt-to-GDP will be. Unless cooler and more rational heads in the Democratic Party prevail, this is not going to be pretty. Sometime in the middle of the next decade we will hit the wall, and it will make the current crisis pale in comparison.

The only way to solve the problem is to grow GDP more rapidly than debt, and for that to happen you have to have policies which are shaped for the growth of the economy or massive savings by consumers. And right now we have neither. Cap and trade is hugely anti-growth. So are high corporate taxes, and Obama is proposing to effectively raise corporate taxes by closing loopholes for income earned outside the US. Much better would be to lower the overall corporate level to a competitive world rate and then require the offshore income to be taxed.

Some Potential Good News about Health Care:

This week I visited the Cleveland Clinic and went through their Executive Health Program (more on that below). I got to visit for several hours with my doctor, Michael Roizen, of YOU: The Owner's Manual fame (not to mention all his subsequent books). They have now sold over 20 million copies, and I highly recommend them.

I have long been a student of medical trends, and long-time readers know that I think the next really big boom will be in the biotech world. I asked Mike what three things he thought would have the biggest impact in the next five years in medicine. What he said gave me hope, because he thinks there may be some advances in medicine that could help solve some of the basic health issues we all face, and at the same time give us some relief from the high and rising costs of medical care. I was aware of most of the research, but did not know that we were as close as it appears we actually are.

Briefly, he feels there are three developments in late-stage trials that could have major impacts. The first is the development of sirtuin, which so far seems to be delaying the effects of diabetes but also seems to work for a host of diseases that are inflammatory in nature (including many heart-related issues). It essentially delays the symptoms for 30-40 years. While the current trials are for very specific diseases, he thinks sirtuin will have a wide applicability and that it could be huge, as inflammation is the cause of a number of diseases. This could prolong useful life and forestall a number of debilitating conditions.

Second, there is a late-stage-three trial due out soon that promises to increase muscle mass. I have been reading about such developments, but was not aware that something might be available within a few years. This promises to help people stay active a lot longer than currently possible, which will be a good thing if we are going to live longer.

And finally, there is a study and trial which shows that DHA may delay the onset of Alzheimer's disease, which eats up a significant portion of US medical budgets.

It would be a sad irony if pending universal health care legislation leads to price controls which dry up the funding for these potentially cost-saving advances.

¹Megan McArdle had a good post on this on her Atlantic blog earlier this week, "Medicare is going to bankrupt us, which is why we need universal health care". Excerpt:

Perhaps predictibly, someone showed up in the comments to my post on Medicare and Social Security to argue that liberal analysts have very serious plans to cut Medicare's costs, which is why we need universal coverage, so that we can implement those very serious plans.

I hear this argument quite often, and it's gibberish in a prom dress. Any cost savings you want to wring out of Medicare can be wrung out of Medicare right now: the program is large and powerful enough, and costly enough, that they are worth doing without adding a single new person to the mix. Conversely, if there is some political or institutional barrier which is preventing you from controlling Medicare cost inflation, than that barrier probably is not going away merely because the program covers more people.

John Mauldin, Best-Selling author and recognized financial
expert, is also editor of the free Thoughts From the Frontline
that goes to over 1 million readers each week. For more
information on John or his FREE weekly economic letter
go to: http://www.frontlinethoughts.com/learnmore

Following "Dutch" versus "Going Dutch"

Over the weekend, South Carolina Senator Jim DeMint, in an op/ed in the Wall Street Journal ("How Republicans Can Build a Big-Tent Party"), argued that small government, low tax conservatism (which he summarized as "freedom") should be the focus of Republicans as they work to expand the party:

[T]he organizing principle and the crucial alternative to the Democrats -- must be freedom. The federal government is too big, takes too much of our money, and makes too many of our decisions. If Republicans can't agree on that, elections are the least of our problems.

In other words, the GOP should advocate the policies of President Ronald "Dutch" Reagan today. The "freedom" agenda -- the smaller government, lower taxes, and fewer regulations¹ -- advocated by Reagan did (along with his spectacular political talents) win him the presidency, and a landslide reelection, but it's worth remembering that when he won the presidency in 1980, it was after decades of government overreach that built upon FDR's activist response to the Great Depression; during the Depression, Reagan himself voted for FDR.

Sen. DeMint continued:

If the American people want a European-style social democracy, the Democratic Party will give it to them. We can't win a bidding war with Democrats.

Coincidentally, the New York Times Magazine published an article on a European-style social democracy over the weekend, a report by Russel Shorto, an American ex-pat living in The Netherlands, on his experiences with the Dutch welfare state ("Going Dutch"). I'm going to address a few points from that article in another post, but first I'll make two meta-points.

The first meta-point is that Sen. DeMint's focus on freedom (with respect to economic policy) despite its merits, may be a tough sale today, given that we are in the longest post-WWII recession, unemployment is headed for double digits, and most Americans have seen the values of their homes and retirement accounts drop more steeply than they have in generations. I think a more common response to this sort of economic uncertainty is a desire for more security, not more freedom. If I were a Democratic political strategist, I'd have a field day with DeMint; the talking points almost write themselves. E.g., "We want to give you affordable health care; Sen DeMint and the Republicans want you to have the freedom to pay for it yourself." Certainly, Republicans ought to propose market-based alternatives where possible, but keeping in mind the current economic uncertainty, a better way to frame these alternatives might be to use a phrase such as "choice² and security".

The second meta-point is that, despite the views of hardcore libertarians, capitalism can and does coexist with welfare state policies of one form or another. Social democracies such as Denmark and The Netherlands score highly on the Heritage Foundation's Index of Economic Freedom (numbers 8 and 12, respectively, out of 179 countries ranked), and even Hong Kong and Singapore -- the highest rated countries on the index -- have social safety net policies (although they are based more on enforced savings than income redistribution). To his credit, Shorto makes a similar point in his New York Times Magazine article, noting that the Dutch have a long history of being innovative capitalists, and remain capitalists today.

¹Today, "regulation" often connotes a law designed to promote public safety, but it's worth remembering that a number of the regulations Reagan (and Carter before him) opposed were ones designed more to limit competition and fix prices (e.g., regulations on airfares and stock commissions).

²Conservative advocates of school vouchers have already co-opted the word "choice" from liberal advocates of unrestricted abortion by calling voucher plans "school choice".

Hatton v. Pacquiao

Here's the video of last night's fight, followed by a few thoughts by me below.



- I'm glad I didn't pay $49.95 to see this live.

- The outcome doesn't surprise me, though I wouldn't have expected it to end as soon as it did. Pacquiao's right hook that dropped Hatton the first time was a thing of beauty. It reminded me a little of the left hook Mayweather knocked out Hatton with in his fight; Hatton didn't see either of those punches coming.

- I have never been too impressed by Hatton. He's a busy, aggressive fighter, but that's about it. I was surprised to see him defeat Kostya Tszyu and Jose Luis Castillo¹ in previous -- two great fighters, but, in hindsight, Hatton fought them when they were past their primes.

- Pacquiao is now arguably the best pound-for-pound boxer in the world. That distinction has been Floyd Mayweather, Jr.'s for the last few years, but considering the way Pacquiao dispatched Hatton and Oscar De La Hoya -- with a second round knockout and and eighth round TKO, respectively -- versus Mayweather's 10th round knockout of Hatton and split decision over De La Hoya, Pacquiao looks more impressive right now. Of course, this sets up a huge pay-per-view fight between the still-undefeated Mayweather and Pacquiao.

- What was Hatton thinking hiring Floyd Mayweather, Sr. to train him for this fight? If you have seen Mayweather, Sr. (who is estranged from his son, the boxing champ mentioned above) on television, you'll know what I mean. He doesn't seem to be all there.

- If Hatton had a better chin, he might be able to look forward to a future as the Arturo Gatti² of Manchester: a club fighter who sells out local arenas while getting beaten soundly by top boxers.

- How long until someone in the media analogizes Hatton's boxing career -- which began its current downward trajectory in 2007, after a long streak of victories -- to the recent trajectory of Britain's economy? Maybe a British financial journalist will argue that, as with Hatton's early successes, there was less to Britain's finance- and real estate-fueled boom than met the eye.

¹Castillo fought two fights against Diego Corrales, the first of which might have been the best fight in the last decade. At the time of his defeat by Hatton, he may have been distracted by events outside the ring, including a lawsuit by the Corrales family (Castillo caused a third fight between the two to be delayed, and then Corrales was killed in a motorcycle accident before it could be rescheduled).

²Gatti has since retired, but before he did he fought a series of fights with Micky Ward, the first of which was about as good as Castillo vs. Corrales I.

Becoming Sweden

I'm not a frequent viewer of The Daily Show, but I have to give a little credit where credit is due. By suggesting that if certain liberal policies are enacted we'll be in danger of "turning into Sweden", some conservative commentators floated a big softball over the plate. The Daily Show took a swing at that softball with the video below. This is pretty funny, so let it play first. I'll leave a few more comments below the video.

The Daily Show With Jon Stewart	M - Th 11p / 10c
The Stockholm Syndrome
thedailyshow.com
Daily Show Full Episodes Economic Crisis First 100 Days

The conservative pundits warning about Sweden missed two obvious points. The first is that, as the video above shows, Sweden seems like a pretty nice place. Better to invoke the specter of a not-so-nice place when warning of the potential consequences of enacting liberal policies. The second point is that even if our tax burden and our government spending as a share of our economy were as high as Sweden's, that wouldn't make us like Sweden. Sweden is known for (among other things) honest, effective government. As Wolfgang Münchau of the Financial Times has noted, Italians have a tax burden similar to that of the Swedes, but get far less effective government from it. Similarly, invidious comparisons between us and Sweden (e.g., the international education comparisons brought up by The Atlantic when they posted on this Daily Show video) are specious because of the homogeneity of Sweden's population. There is a non-trivial number of Americans of Swedish ancestry; I'd bet they'd do fine in any objective comparison with their cousins in Sweden, if anyone wants to compare apples to apples.

Instead of ominously warning that we're in danger of turning into a pleasant European country if certain liberal policies are enacted, conservatives would be smarter to point out that, regardless of what policies are enacted here, we'll still be Americans, and this will still be America. We need to keep our differences in mind when considering policies: e.g., as we suggested in a recent post, the sort of energy policy that works for a small country that juts out into the North Sea might not work for another country that spans a continent.

Another thought: the bit at the end of the video with the Swedish pop star was a cleverly chosen example of Swedish egalitarianism, but it's worth noting that Sweden has produced its share of extreme wealth as well. For example, the Swede Ingvar Kamprad, the founder of Ikea, is listed as the fifth-richest man on this year's Forbes list of billionaires (Kamprad moved to Switzerland though, presumably at least partly for tax purposes). One nice touch in that video was the inclusion of the ominous theme from Dune. You can hear more of that theme at about 40 seconds into the trailer below:

John Hussman's Latest: "Money Doesn't Grow on Trees"

From Dr. Hussman's latest market commentary, "Money Doesn't Grow on Trees":

On the BofA/Merrill Lynch deal:

[I]nstead of Merrill Lynch's bondholders taking a loss on their bonds, or swapping their debt for BofA equity, those bondholders will now be made whole for all of the losses that Merrill incurred, with 100% principal and interest, right alongside of the bondholders of BofA that are being protected. That's what these bureaucrats want during their stint in government service, that's how they advise our elected officials, and then their revolving door takes them right back to Wall Street.

On what it would take for the banks to earn their way out of their losses:

[T]he earnings to recover the losses have to come from somewhere, which implies a redistribution away from where they were going before. Really, money doesn't grow on trees. We've got an economy running with outstanding debt of about 350% of GDP. Even a moderate percentage of that as loan losses will represent a significant share of GDP. To reallocate enough funds to fill that hole, we would have to keep deposit rates near zero, and corporate lending rates high, so that financial institutions would earn a persistently wide spread, or “net interest margin.” Over the short-term, that's what's been happening, so ironically, banks are more “profitable” today than they probably will ever be. Unfortunately, that “profitability” is an artifact of a) unsustainably wide net interest margins, and b) a failure to adequately book losses, at the encouragement of government bureaucrats.

[...]

In order for U.S. financial institutions to earn their way out of the losses, they will have to accrue and retain an amount on the order of 25% to 35% of GDP. From where will they reallocate that amount?

[...]

If banks were able to sustainably charge high interest rates on loans and pay low interest rates on deposits, the earnings of the banks would come at a cost to what would otherwise have been retained: corporate earnings and private savings. Essentially, savers will earn less, and corporate borrowers will pay more. To accrue 25-35% of GDP to cover the debt losses (which is a mainstream estimate, not a worst-case by any means), you would have to persistently depress non-financial corporate profits and personal savings by about 25% for well over a decade.

As Dr. Hussman goes on to reemphasize, this is a high price to pay to provide 100% protection to the bondholders of poorly-run financial institutions.

The Economics of Blogging

A Wall Street Journal column last week by the Democratic Political consultant Mark Penn, "America's Newest Profession: Bloggers for Hire", alleged that 452,000 Americans made their living by blogging. One professional blogger, Megan McCardle, explained on her Atlantic blog why this estimate was "addled" ("Blogging for Big Bucks"):

The estimates of professional bloggers seem wildly inflated--if you help update the company blog once a week as part of your marketing internship, you are not a paid professional blogger. And the numbers they themselves link to tell a much different tale from the article: most blogs bring in pitiful amounts of money for their owners.

This seems to follow the model of Mark Penn's book: find some bizarre number and mindlessly extrapolate it to an absurd conclusion. Yet I still don't understand why common sense did not keep him from publishing this article. Anecdotal evidence would suggest that almost all of us know many more computer programmers than professional bloggers--this is true of me even though I am a professional blogger, as are half my friends. Or he might have called some professional bloggers, who would have (sorrowfully) told him that no one is making $75K a year off of 100,000 pageviews a month, that being about how much traffic I pulled when I was starting up in 2002. Or, hell, he might have noticed that in the very BLS survey so nicely transformed into a table for his article, there is not entry for "blogger"--but that if you add up every writer, reporter, editor, PR person, technical writer, or "media and communications worker, other", there are only 499,890. Since Penn says that there are 452,000 paid bloggers, this implies that 9 out of every 10 communications workers are professional bloggers.

There may be one guy with some incredible niche--or moronic employer--making a ton of money with a modestely well-trafficked blog. But the plural of "anecdote" is not data.

Believe me, I'd love to think that blogging is a surefire path to riches and job security--but I'm afraid all most people get out of their blogs is the satisfaction of a job well done.

Coincidentally, a few days after reading Megan's post, I discovered the newest blog by Daniel Wahl, The Nearby Pen ("helps you live a happier and more productive life by sharing good art, reviewing good books, and explaining good thoughts") which included a post ("AdSense Pennies Make Dollars") that unintentionally supported Megan's point about the paucity of bloggers who make significant money from their blogs. In his post, Daniel mentioned the revenues he had generated from his three blogs over the last few months:

Not only will I not be making loads of money with Adsense, but at this stage of the game I should not expect to.

So why use Adsense? Quite simply, because--as the title suggests--pennies make dollars. Or to put it differently, a little bit of money adds up, even if little by little. And who knows, perhaps those pennies will grow faster with traffic at each site. In my view, it pays (at least a little) to learn more about how advertising on one's blog works while the blog is growing. I also think it is interesting. Here's the data for my first three months:

January...........4,291 page impressions...........$1.97 earned
February..........4,242 page impressions..........$3.62 earned
March.............4,411 page impressions..........$11.15 earned

This is no knock on Daniel -- I'm sure if I were using Google AdSense my ad revenues would be as low or lower (which is one reason why I never signed up for them) -- but it underlines Megan's point about why Mark Penn's estimates seem dubious. As for Daniel's point that pennies make dollars: sure, but time equals money, and, for most of us, there are much more remunerative uses of our time than blogging. So why do it? I mentioned one reason in my first post: to attract a few commenters I could get feedback from and bounce ideas off of. Another reason is the same reason most callers call talk radio stations, or letter writers write letters to the editor of newspapers: to express opinions. I have gotten a couple of ideas from writing this blog (or, more accurately, from observing the responses to a handful of posts), and one or two of those ideas could lead to a business opportunity down the road, so, in that sense, this blogging might end up being profitable as a form of brainstorming, but that remains to be seen.

How Not to Create Broad-Based Prosperity

I'd been meaning to comment on Matt Miller's op/ed column in last Monday's Financial Times ("Businesses must wake-up and take action") but haven't had a chance until now, so here goes. In his column, Miller, a management consultant and senior fellow at the liberal think tank Center for American Progress, suggests that, in order to keep the metaphorical pitchfork-wielding mobs at bay, business leaders need to,

[W]eigh in now on three subjects on which they have been notably absent: executive pay; the need for an updated “social contract” that fits 21st-century realities; and a strategy to make service jobs that cannot be offshored a path to the middle class.

On the first of those three subjects, Miller is on mostly solid ground; on the second two, not so much. On executive pay, he writes,

It is in the enlightened self-interest of business to acknowledge that it is both wrong and politically unsustainable to have chief executives routinely accumulating entrepreneurial-style wealth without taking entrepreneurial-style risk – or worse, while presiding over shoddy results or the actual demise of their companies.

Tough to argue with that, though I would have added that it's in the interests of society for entrepreneurial-style wealth to go to those who not only take entrepreneurial-style risk, but make entrepreneurial-style contributions (in terms of creating new products or services, creating new jobs, etc.). I'd also disagree with Miller's proposed solution, which relies on self-interested restraint on executive pay by corporate boards and CEOs. I think we'd be better off with more-empowered shareholders. Since mutual fund managers tend to vote their shares in lockstep with corporate boards, one way to strengthen the voice of retail shareholders might be to require mutual funds to aggregate the votes of their retail shareholders on, say, the funds' top 5 or 10 holdings, and then vote their proxies accordingly. Warren Buffett put his finger on the main cause of excessive executive pay in a Berkshire shareholder letter we excerpted in a recent post ("Revisiting Warren Buffett's Criteria for Selecting Corporate Directors"): directors who aren't "owner-oriented" or "truly independent". As Buffett wrote,

[M]any directors who are now deemed independent by various authorities and observers are far from that, relying heavily as they do on directors’ fees to maintain their standard of living. These payments, which come in many forms, often range between $150,000 and $250,000 annually, compensation that may approach or even exceed all other income of the “independent” director.

Clearly, a director who gets more money from her director fees than from her day job isn't going to rock the boat on behalf of shareholders to try to rein in executive pay -- why risk losing her high-paying directorship? It's worth noting, though, that this sort of thing is mostly just an issue at the very largest companies. There are thousands of small publicly-traded companies where executive comp isn't excessive, and directors don't face such big conflicts of interest (mainly because director fees are so much lower, and also because fewer directors are selected for non-business reasons).

On to Matt Miller's other two subjects. On the need for a new social contract, he writes,

A visionary business agenda would make sure average workers feel more secure in an era of accelerating change; this is the only way to avoid a backlash against trade and economic dynamism altogether.

A fair point, though Miller seems to have no idea of how to do this. He gestures vaguely in the direction of universal health care, arguing that,

American business must rethink its odd, outsized role in the provision of health coverage, which may have made sense 50 years ago but which today leaves millions of families falling though the cracks...

It's worth noting here, since Miller didn't, that American business's "odd, outsized role" in health coverage was a direct response to a government policy, specifically FDR's wartime wage controls, which led companies to increase forms of non-cash contribution (such as health care coverage) to attract workers in a tight labor market. That said, there's nothing original about wanting to sever the link between employers and health insurance -- Milton Friedman advocated that, as did even John McCain's advisers during the general election campaign.

Miller is most off-base on his third subject, making service jobs that cannot be offshored a path to the middle class. On this, he writes,

[G]rowing numbers of jobs in the US face effective wage caps because they can be done for less, and often better, overseas. Yet in-person service jobs – such as teaching, home health services or hospice care, for example – cannot be offshored. How can the US turn this kind of work into jobs that can sustain a family?

Where to begin with this one? First, teaching is already a job that can sustain a family. Teachers tend to be paid solid, middle class wages with excellent benefits and job security. This is true as well of many skilled jobs in health care, such as nursing, physical therapy, etc. (though it may become less true if we transition to fully-socialized medicine). Second, although these jobs can't be outsourced, they can be performed by immigrant laborers, and in fact are. My guess is that Matt Miller is a smart fellow, but is relatively young and has little life experience related to the health care of senior citizens. Otherwise, he'd know that many nursing home, hospice, and home health care aids are female immigrants from the Caribbean or the Philippines. If Miller knew this, would he advocate restricting immigration? Somehow, I doubt that.

More broadly, the idea that a broad-based prosperity and a strong middle class can be built on teaching, home health care and the like seems daft. These are important jobs, to be sure, but ultimately the private sector has to earn the money to pay the taxes to support public sector jobs such as those of public school teachers. As for home health aids, in the private sector, the salaries of workers ultimately come from the sale of some product or service; a home health care agency that pays its unskilled health aids as if they were registered nurses won't be able to sell its home health care services at a competitive price. This isn't the way to create high-paying blue collar jobs. The way to do that is to facilitate industries that have high enough margins that they can pay their blue collar employees well -- industries such as natural resources and manufacturing.

The problem is that liberal think tanks such as the Center for American Progress -- although they support the goal of a strong middle class in the abstract -- advocate policies that work against this goal in reality. They oppose most manufacturing and natural resource industries out of concerns about carbon and global warming; they advocate policies that will make energy (and thus energy-intensive industries such as manufacturing) more expensive, for similar reasons; they oppose the vocational tracking that would support a strong manufacturing base, out of egalitarian educational ideals; and they support unskilled immigration, which lowers the wages of blue collar workers in industries such as construction.

The photo above, of oil industry worker who I'm sure earns enough to support a family, comes from the Department of Labor, courtesy of Exxon Mobil.

Has Greg Mankiw Jumped the Shark?

You be the judge. From his "Economic View" column in the New York Times yesterday, "It May Be Time for the Fed to Go Negative":

Imagine that the Fed were to announce that, a year from today, it would pick a digit from zero to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent.

That move would free the Fed to cut interest rates below zero. People would be delighted to lend money at negative 3 percent, since losing 3 percent is better than losing 10.

Of course, some people might decide that at those rates, they would rather spend the money — for example, by buying a new car. But because expanding aggregate demand is precisely the goal of the interest rate cut, such an incentive isn’t a flaw — it’s a benefit.

Would your first response to this scenario be to buy a new car? I bet a lot of people would decide instead to buy gold, or to exchange their U.S. dollars for the currency of a country less likely to pick a number out of a hat and invalidate a tenth of its currency.

Later in his column, Mankiw offers a more reasonable way that the Fed could create negative real interest rates, by committing to a certain level of inflation (presumably one higher than the Fed's current 2% target). Is this the best way to spur aggregate demand though? If this is a balance sheet driven recession, as some observers have termed it, and the problem is that many consumers can't service their debts, why not deal with that more directly?

For those whose mortgages are underwater, restructuring them using John Hussman's idea of property appreciation rights might make make sense. That would lower monthly borrowing costs for those mortgagers and enable them to increase their discretionary spending. For mortgagers who aren't currently underwater, the idea of Glenn Hubbard and Christopher Mayer, to use the GSEs to lower mortgage rates down to their historic spread of about 1.6% above 10-year Treasuries might make sense. According to Yahoo! Finance, the average rate on 30-year fixed rate, conforming mortgages today is 4.88%; since 10-year Treasuries currently yield 2.75%, under the Mayer and Hubbard plan mortgage rates might average 4.35%. Refinancing higher-rate mortgages at 4.35% would also lower borrowing costs and enable tens of millions of Americans to increase their discretionary spending.

The image above, of the Happy Days character Fonzie (played by Henry Winkler) jumping the shark¹ comes from Media Bistro.

¹For those unfamiliar with the phrase, see the Urban Dictionary's definition of "jumping the shark".

Ross Douthat on the Tea Parties

From what appears to be Ross Douthat's penultimate post on his Atlantic blog, before his move to the New York Times op/ed page ("The Tea Parties"):

They resemble nothing so much as the anti-war protests during Bush's first term. The claim that they don't have an organizing premise strikes me as obviously wrong: They're anti-bailout, anti-stimulus, anti-deficit, and anti- the tax increases that will eventually be required to pay for the current spending spree, and complaining that they don't also have a ten-point plan for reforming Medicare and Social Security reflects a misunderstanding of the nature of protest marches, I think. The claim that they're hypocritical and partisan is a bit stronger - where were they when Bush was running up the deficit, etc. - but in fairness, many of the organizing figures were anti-TARP from the beginning, and there's something slightly odd about saying that if you didn't take to the streets to protests a $300 billion deficit you aren't allowed to protest a $1 trillion deficit. The numbers matter, surely ...

But they do have all of the weaknesses of the anti-war marches: Their message is intertwined with a sense of disenfranchisement and all kinds of inchoate cultural resentments, they've brought various wacky extremists out of the woodwork (you know, like Glenn Beck), and just as George W. Bush benefited from having opposition to his policies identified with peacenik marchers in Berkeley and Ann Arbor, so Barack Obama probably benefits from having the opposition (such as it is) associated with a bunch of Fox News fans marching through the streets on Tax Day, parroting talk radio tropes and shouting about socialism.

In those two paragraphs we may have the case for Douthat as a New York Times token conservative columnist distilled. In the first paragraph Douthat makes a gesture of standing athwart the spending tsunami and... noting that it's troubling; in the second paragraph he expresses his disdain for the grassroots conservative rabble that has been protesting this same spending tsunami. For good measure, Douthat finishes with a soupçon of hypocrisy in that last sentence, where he parrots the snark of the Washington Insider's David Weigel (see the caption below the third photo), while mocking protesters for "parroting talk radio tropes".

The handy graphic above comes from Douthat's post.

A Canadian's Comment on Health Care

Interesting comment from Tom West on a health care post on Megan McCardle's Atlantic blog:

Boy, the more I read, the guiltier I feel about living in Canada. We sort of have the ideal position.

We're large enough that most of us don't see the direct comparison with the American system, (which is nice, but three times the price). America operates as our second tier which is close enough that the rich aren't upset about going there for expensive health-care, but far enough away that the even the moderately well-to-do don't look at it as a serious alternative.

We're insulated enough so that when the doctors say "there's nothing we can do", you can believe it without feeling guilty about not destroying your family's finances to pay for some sliver of hope. We benefit from the American innovations when they're finally brought down to a cost that our bureaucrats consider acceptable¹. The doctors don't have to cater to ridiculous demands for unnecessary tests, and have no incentive to give them.

We have a Corolla health-care system as opposed to the American Lexus, but it does a decent job for most of us, and ends up being an element of society that binds most Canadians together rather than becomes a source of resentment and distrust. (Tommy Douglas who introduced our health-care system was recently selected as Greatest Canadian ever by viewing audiences.)

That said, sadly for those few Americans that look at our health-care system as a model, I'm afraid it wouldn't work for you. You'd be missing the one ingredient that helps it work as well as it does... You.

¹Tom uses the passive voice here, but Canadian bureaucrats often actively lower drug costs by imposing price controls.

Son of TARP

The Wall Street Journal explains the Obama Administration's new plan to buy bad assets off of the books of banks ("U.S. Sets Plan for Toxic Assets"). Economist and New York Times columnist Paul Krugman criticizes it ("Despair of Financial Policy"), and criticizes it again ("More on the bank plan"); economist Brad DeLong defends it ("The Geithner Plan FAQ" -- Hat Tip: Matt Yglesias), and Krugman responds to Brad DeLong's defense ("Brad DeLong's Defense of Geithner").

Since this new plan is, essentially, a return to the original, rejected, tack of the TARP plan last fall, it's also worth revisiting John Hussman's objections to the original TARP plan, ("You can't rescue the financial system if you can't read a balance sheet"). I suspect Dr. Hussman will reiterate some of those objections in his market commentary this week.

Buffett's Turn to Face Some Heat

In a recent post ("More Obama Supporters Concerned by the President's Recent Actions") we noted that Warren Buffett and Jim Cramer had made essentially the same criticism of Obama's recent handling of the economy: in an economic emergency, the president's primary focus ought to be dealing with that emergency, not trying to enact other policy priorities. Last week, Jim Cramer and his network, CNBC, became the targets of liberal comedian Jon Stewart. Stewart's criticisms of Cramer, some of which had merit, related mainly to Cramer's actions last year and earlier (e.g., Cramer's comments regarding Bear Stearns prior to that firm's collapse). Why bring that up now? As I speculated elsewhere recently (for example, in a comment on Dr. Mark Perry's Carpe Diem blog), Cramer seemed to be targeted because of his recent criticisms of President Obama -- particularly since he made an easier target than some other Obama supporters who recently criticized the President, e.g., Warren Buffett.

Yesterday, apparently, was Buffett's turn. An article in the business section of Wednesday's New York Times ("Buffett Is Unusually Silent on Rating Agencies") criticized Buffett for not using his influence (since he owns 20% of the company via Berkshire Hathaway) to get Moody's to clean up the way it assigns credit ratings. Now, this is a legitimate criticism of Buffett; in fact, it's one I've made myself¹. But the timing of it seems a little odd, if you don't take into account Buffett's recent criticism of Obama. After all, Berkshire Hathaway has been a major holder of Moody's for years, and the role Moody's and the rest of the ratings oligopoly played in the credit crisis has been common knowledge since at least 2007. Can it be a coincidence that Buffett is getting criticized for this now, a week after he expressed concerns about Obama's handling of the economy on CNBC?

The illustration of Buffett above was credited to Minh Uong, and accompanied the New York Times article.

¹For example, on June 12th last year, on GuruFocus I wrote,

Before we begin the ritualistic praise of Buffett here, let's remember that a company in which he was the largest shareholder through BRK, Moody's, facilitated these excesses by slapping triple-A ratings on so many of those CDOs. When you own ~19% of a company, you have a lot of access to what's going on there, if you want it. It's too bad that Buffett didn't exercise more oversight of Moody's during the credit boom.

Health Care in the U.S. versus Single-Payer Systems in Europe and Canada

Since one of President Obama's three main policy priorities is reforming health care, and since progressive pundits often make invidious comparisons between health care in the U.S. and the single-payer health care systems of Europe and Canada, it's worth revisiting an Investor's Business Daily op/ed on this topic written by former Canadian physician Dr. David Gratzer in 2007. Below is an excerpt:

One often-heard argument, voiced by the New York Times' Paul Krugman and others, is that America lags behind other countries in crude health outcomes. But such outcomes reflect a mosaic of factors, such as diet, lifestyle, drug use and cultural values. It pains me as a doctor to say this, but health care is just one factor in health.

Americans live 75.3 years on average, fewer than Canadians (77.3) or the French (76.6) or the citizens of any Western European nation save Portugal. Health care influences life expectancy, of course. But a life can end because of a murder, a fall or a car accident. Such factors aren't academic — homicide rates in the U.S. are much higher than in other countries.

In The Business of Health, Robert Ohsfeldt and John Schneider factor out intentional and unintentional injuries from life-expectancy statistics and find that Americans who don't die in car crashes or homicides outlive people in any other Western country.

And if we measure a health care system by how well it serves its sick citizens, American medicine excels. Five-year cancer survival rates bear this out. For leukemia, the American survival rate is almost 50%; the European rate is just 35%. Esophageal carcinoma: 12% in the U.S., 6% in Europe. The survival rate for prostate cancer is 81.2% here, yet 61.7% in France and down to 44.3% in England — a striking variation.

Like many critics of American health care, though, Krugman argues that the costs are just too high: health care spending in Canada and Britain, he notes, is a small fraction of what Americans pay. Again, the picture isn't quite as clear as he suggests. Because the U.S. is so much wealthier than other countries, it isn't unreasonable for it to spend more on health care. Take America's high spending on research and development. M.D. Anderson in Texas, a prominent cancer center, spends more on research than Canada does.

Dr. Gratzer doesn't make this point explicitly, but it's also true that patients in other countries benefit from the research and development financed by the American health care system. It's worth reading the rest of his column.

The photo above, of the Proton Therapy Center at M.D. Anderson, comes from M.D. Anderson's website.

More Buyer's Remorse

From Stewart Taylor's essay in the National Journal ("Obama's Left Turn"):

Having praised President Obama's job performance in two recent columns, it is with regret that I now worry that he may be deepening what looks more and more like a depression and may engineer so much spending, debt, and government control of the economy as to leave most Americans permanently less prosperous and less free.

Other Obama-admiring centrists have expressed similar concerns. Like them, I would like to be proved wrong.

[...]

But with the nation already plunging deep into probably necessary debt to rescue the crippled financial system and stimulate the economy, Obama's proposals for many hundreds of billions in additional spending on universal health care, universal postsecondary education, a massive overhaul of the energy economy, and other liberal programs seem grandiose and unaffordable.

[...]

The markets have also been deeply shaken by Obama's alarming failure to come up with a clear plan for fixing the crippled financial system -- which has loomed since his election four months ago as by far his most urgent challenge -- or for working with foreign leaders to arrest the meltdown of the world economy.

Perhaps President Obama will come to some agreement with foreign leaders on constructive action during the upcoming G-20 meeting in London.

Buyer's Remorse

From Jim Cramer's open letter to the White House yesterday:

I favored Obama over McCain because I thought Obama to be a middle-of-the-road Democrat, exactly the kind I have supported all my adult life, although I will admit to being far more left-wing during my teenage years and early 20s.

To be totally out of the closet, I actually embrace every part of Obama’s agenda, right down to the increase on personal taxes and the mortgage deduction. I am a fierce environmentalist who has donated multiple acres to the state of New Jersey to keep forever wild. I believe in cap and trade. I favor playing hardball with drug companies that hold up the U.S. government with me-too products.

But these are issues that we have no time for now, on the verge of a second Great Depression. This is an agenda that must be held back for better times. It is an agenda that at this moment is radical vs. what is called for. I am proud to have voted for the Obama who I thought understood the need to get us on the right path, and create jobs and wealth before taxing it and making moves that hurt job creation — certainly ones that will outweigh the meager number of jobs he’s creating.

Most important, I believe his agenda is crushing nest eggs around the nation in loud ways, like the decline in the averages, and in soft but dangerous ways, like in the annuities that can’t be paid and the insurance benefits that will be challenging to deliver on.

So I will fight the fight against that agenda. I will stand up for what I believe and for what I have always believed: Every person has a right to be rich in this country and I want to help them get there. And when they get there, if times are good, we can have them give back or pay higher taxes. Until they get there, I don’t want them shackled or scared or paralyzed. That’s what I see now.

The photo of Jim Cramer accompanied his essay on his Mainstreet.com site.